Tech/a, I don't think that valuation alone was the key to the best value-investors whose records have been published. Most of them found a field of competence, honed their business skills within this field, and knew opportunity when it smacked them in the face. Much like your line of discussion in the property thread of late.
Robusta fundamental, leveraged investments
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But using a simple metric of value (P/E, P/B etc) will produce superior returns over the long term. Infact, from what I've read of tech/a's investing style in the property thread, he sounds like the archetypal value investor.
The most important part of value investing is the admission that your valuation will be wrong and applying an appropriate margin of safety. I laugh whenever I read a broker report that has XYZ as a buy because they have upgraded their valuation from $2 to $2.10 and the company's shares are trading at $2.05
Tech/a
Which reports do you want? I suspect you are probably more interested in the Momentum ones than the Value ones.
http://scholar.google.com.au/scholar?hl=en&q=investment+Momentum+Jegadeesh+Titman&btnG=Search&as_sdt=0%2C5&as_ylo=&as_vis=0
Jegadeesh & Titman are the most cited papers on Momentum but there is heaps as you will see by the link. If you want valuation investing papers just type the search into the search – again there is heaps.
I suspect you don’t really want the papers – but are trying to make some other point. If that point is that fundamentals can’t produce a positive probability – I disagree.
If your point is that many Fundamental investors don’t know how to implement a positive probability then I do agree. (the same is true however of many TA traders)
The fundamentals are just one part of the whole investment system – one which needs a mathematical expectation of success. Most investors kill their F/A edge by their execution.
The academic papers are not so much the problem (though some are not robust and others have limiting non-real world assumptions to set boundaries for the study) Usually the papers them self point out the assumptions and scope that may undermine their usefulness in real life but that often gets lost in the retelling.
Pretty much - buying good businesses, with ROE that exceeds the long-run rate of return on equities, that are being sold on market price multiples that are well below long-term averages. The biggest risk is that the short-term instability in earnings, or other challenges being faced by the business in their industry, that the market has priced in become a long-term reality. You're betting against the grain; so you need both vision and conviction in your decision. This strategy isn't popular, and the price often takes so long to gain traction because the short to medium term action is guided by those who want to make a quick buck. Impatience or fear in the face of adverse price action (in the short to medium term) often gets the best of most "value-investors" which is why the philosophy gets such a bad name at times.
Do you think it is easier to pull the trigger when the whole market looks like it is on the verge of collapse (ie GFC) or a solitary (great) business is having short-term "growing pains" and the market has gone to town on its share price?
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Hmmm...I think it depends. I'm not so arrogant that I always think I'm right (although, thankfully I'm right more often than wrong). When the market was tanking last year, even though I thought it was all a bit overdone, I will admit reading everyone's doom and gloom got me thinking maybe I was completely wrong.
Then again sometimes businesses are really easy to understand and are completely oversold, then it's not so hard.
tech/a
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CRAFT
I agree to a degree.
Fundamental and Technical traders by and large don't know how to apply their analysis
Into a long term profitable trading or investment model.
At best they will have a set of rules they "believe" will return them a profit over the long run. They don know for sure but their "plan" always makes sense and is logical
--- to them.
I see it here on ASF all the time.
There are a few here like me hat can tell from people's postings if they trade or not and of those if they are profitable .
Often names are quoted as irrefutable evidence that someone's beliefs are validated.
Infact many of those names have offices full of researchers and quants.
Where they all fall short----- is that even those ideas bandied around by many book Authors
Haven't been verified as profitable.
PAPERS
I've read quite a few those I have read are often in conclusive and based around ideas which
In many cases if shown to a trader who knows how to be consistently profitable--- would save the researchers a lot of time!
What's needed is a combination of successful traders and academic research
It's not easy to turn a Consistent profit ---- even though many would have you believe different.
A set of conditions which are ticked off---- if met---and lead to an investment doesn't guarantee profit.
So profitable practical application is indeed a rare insight.
I agree to a degree.
Fundamental and Technical traders by and large don't know how to apply their analysis
Into a long term profitable trading or investment model.
At best they will have a set of rules they "believe" will return them a profit over the long run. They don know for sure but their "plan" always makes sense and is logical
--- to them.
I see it here on ASF all the time.
There are a few here like me hat can tell from people's postings if they trade or not and of those if they are profitable .
Often names are quoted as irrefutable evidence that someone's beliefs are validated.
Infact many of those names have offices full of researchers and quants.
Where they all fall short----- is that even those ideas bandied around by many book Authors
Haven't been verified as profitable.
PAPERS
I've read quite a few those I have read are often in conclusive and based around ideas which
In many cases if shown to a trader who knows how to be consistently profitable--- would save the researchers a lot of time!
What's needed is a combination of successful traders and academic research
It's not easy to turn a Consistent profit ---- even though many would have you believe different.
A set of conditions which are ticked off---- if met---and lead to an investment doesn't guarantee profit.
So profitable practical application is indeed a rare insight.
Tech/a
you've got me beat, what exactly is it that you are agreeing to disagree about?
I'm a bit thick - is this directed at me?
tech/a
No Ordinary Duck
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I agree with all below****
The disagree is all traders not just fundamental traders.
My comment is directed at many traders I see commenting
Here at ASF. Ive made no judgement with yourself.
I once read a comment made by Joel Greenblatt about his magic formula. He stated that investors got frustrated by the magic formula lacklustre performance over short time frames, this frustration led to investors "optimising" the portfolio which subsequently brought about worse returns than if they had just stuck with the magic formula for the full period so it can work the "magic". Brilliant.
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A lot of people do the same with net-nets. They bail as soon as the price moves up. As with almost all value strategies, it takes time.
tech/a
No Ordinary Duck
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Not arguing that at all.
It mirrors every Financial Planners words to all of his clients in any downturn.
What I am saying though is this.
Show me some papers or research which clearly shows that "Value" investing when applied over x time period generates x return.
Its a widely accepted way of investing but Ive never seen evidence that the "theory" works-----regardless of time frame.
Infact Id argue that results would get worse over time---as "value" shifts ---along with its determination and definition.
Why--Because its subjective.
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It won't work over any timeframe. It's a long term thing.
Anyway, here's some evidence.
http://www4.gsb.columbia.edu/null/V...e=filemgr.download&file_id=646514&showthumb=0
I will just highlight two words in the paragraph you seem to disagree with.
We probably don’t actually disagree here that much – once you realize I’m talking probability.
Yes a lot of FA is subjective but so too is discretionary TA, so I hope you will not be discrediting its potential on that basis.
Here’s a link for you to consider.
http://www.tilsonfunds.com/superinvestors.html
I haven’t got a lot of time right now but don’t go away – A lot of FA traders need to hear what you have to say about turning a positive probability into a successful system.
Hopefully we won’t get bogged down in TA vs. FA rubbish.
There are a lot of those papers tech, before financial scientists 'accepted' momentum as real, almost all the papers written are using valuation or growth metrics with outsized returns that cannot be explained by transaction costs or liquidity alone...just like momentum.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=249455
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1302772
These days since 2008 'value' underperforms 'growth' AFAIK, but 'growth' is just another FA metric.
Here is my 2c
The key to a mechanical value investing strategy is removing the human element! However I do not believe a mechanical value investing strategy can be applied on the ASX due to the size of the market, you need sufficient diversity in the portfolio to account for the occasional bomb. Therefore to be successful using FA only, IMO an investor is best to split FA into three opportunity streams to go fishing from:-
1. Extraordinary business stream. The buy and hold forever. Holding timeframe decades.
2. Long term survival stream. Mispricing by the market on the long term survival of the business. I would apply a discount rate of 12.4% and growth rate of 3% to ground any valuation to long term historic returns. Focus on operating history over last 5 - 10 years and product. Holding timeframe 1 – 2 years.
3. Short term success stream. Relative valuation (still do not overpay though) and catalysts such as company announcements. Read Joel Greenblatts “How to be a stock market genius” cover to cover ten times. Holding timeframe: weeks/months.
I personally like 2. as it suits me. A 15-20% capital growth and a dividend or two is enough for me over the holding timeframe of a year.
How does an investor make approach 2. into a successful profitable system?
- Holding period. 1 to 2 years. My research to date seems to indicate this is the ‘right’ holding period for this type of approach.
- Position size. The more discount to a conservative IV then the more you buy. Do not be afraid to take large postions.
- Sell. Either on earnings downgrade or when it reaches a fair price. Personally I do not worry about +23% or +27%, the closer the price moves to a fair price the more risk I take on therefore I want to sell.
- Active management. This is not buy and hold forever.
What do I think could improve the returns on 2?
- Some form of momentum component. Moving averages or 52 week high.
- Some form of overall market valuation. Maybe screen for PE < Long term average PE. The more there is then the more likely undervalued the whole market is.
As for probability, one day I was bored and created a spreadsheet to calculate the expected value of my portfolio then I realised it was pointless, approach 2. is not about +/- 1% and buying/selling a few shares here and there rebalancing portfolio it is about seeing a clear +30-50% upside. You do not need a spreadsheet for that! The only reason I even use a calculator these days is to use an average earnings formula that I got from a small business valuation book.
Cheers
Oddson.
The key to a mechanical value investing strategy is removing the human element! However I do not believe a mechanical value investing strategy can be applied on the ASX due to the size of the market, you need sufficient diversity in the portfolio to account for the occasional bomb. Therefore to be successful using FA only, IMO an investor is best to split FA into three opportunity streams to go fishing from:-
1. Extraordinary business stream. The buy and hold forever. Holding timeframe decades.
2. Long term survival stream. Mispricing by the market on the long term survival of the business. I would apply a discount rate of 12.4% and growth rate of 3% to ground any valuation to long term historic returns. Focus on operating history over last 5 - 10 years and product. Holding timeframe 1 – 2 years.
3. Short term success stream. Relative valuation (still do not overpay though) and catalysts such as company announcements. Read Joel Greenblatts “How to be a stock market genius” cover to cover ten times. Holding timeframe: weeks/months.
I personally like 2. as it suits me. A 15-20% capital growth and a dividend or two is enough for me over the holding timeframe of a year.
How does an investor make approach 2. into a successful profitable system?
- Holding period. 1 to 2 years. My research to date seems to indicate this is the ‘right’ holding period for this type of approach.
- Position size. The more discount to a conservative IV then the more you buy. Do not be afraid to take large postions.
- Sell. Either on earnings downgrade or when it reaches a fair price. Personally I do not worry about +23% or +27%, the closer the price moves to a fair price the more risk I take on therefore I want to sell.
- Active management. This is not buy and hold forever.
What do I think could improve the returns on 2?
- Some form of momentum component. Moving averages or 52 week high.
- Some form of overall market valuation. Maybe screen for PE < Long term average PE. The more there is then the more likely undervalued the whole market is.
As for probability, one day I was bored and created a spreadsheet to calculate the expected value of my portfolio then I realised it was pointless, approach 2. is not about +/- 1% and buying/selling a few shares here and there rebalancing portfolio it is about seeing a clear +30-50% upside. You do not need a spreadsheet for that! The only reason I even use a calculator these days is to use an average earnings formula that I got from a small business valuation book.
Cheers
Oddson.
The shift that affects results is investors changing "strategy" every six months - defensive income, agressive growth, blah blah blah. Pointless. Stick to a plan.
odds-on,
What you've described in point 2 is essentially what i'm aiming to achieve only with some slight variations. I'll probably vary my position size also based on company quality, so allocate more to high quality highly undervalued companies and less to the low quality and regularly underavlued companies - note low quality does not mean B&B or ABC Learning, low quality means relative to my mechanical filters etc.
I'm also planning on allocating slightly more to smaller companies simply on the basis of higher risk / higher reward that I may be able to capture some additional returns on a 1-2 year basis.
I also have the same goals as you, securing some form of reasonable dividend while I wait for the fair value to be realised on a 1-2 year basis without chasing multi-baggers etc. Investing on a 1-2 year basis also means i achieve capital gains discount, and i can make sound investing decisions without contributing huge amounts of time to portfolio management and monitoring. I also believe a 1-2 year value investing style is optimal for me as forecasting earnings or economic events beyond 1-2 years is a mugs game and there is plenty of evidence that even majority of 'leading' economists in this country get it wrong on a regular basis, and quite often by a large margin.
While skc's approach is different in some ways and probably more like your weeks/months option odds-on you can see how successful he was simply buying undervalued companies with sound reasoning and a future catalyst which was likely to positively impact the share price.
What you've described in point 2 is essentially what i'm aiming to achieve only with some slight variations. I'll probably vary my position size also based on company quality, so allocate more to high quality highly undervalued companies and less to the low quality and regularly underavlued companies - note low quality does not mean B&B or ABC Learning, low quality means relative to my mechanical filters etc.
I'm also planning on allocating slightly more to smaller companies simply on the basis of higher risk / higher reward that I may be able to capture some additional returns on a 1-2 year basis.
I also have the same goals as you, securing some form of reasonable dividend while I wait for the fair value to be realised on a 1-2 year basis without chasing multi-baggers etc. Investing on a 1-2 year basis also means i achieve capital gains discount, and i can make sound investing decisions without contributing huge amounts of time to portfolio management and monitoring. I also believe a 1-2 year value investing style is optimal for me as forecasting earnings or economic events beyond 1-2 years is a mugs game and there is plenty of evidence that even majority of 'leading' economists in this country get it wrong on a regular basis, and quite often by a large margin.
While skc's approach is different in some ways and probably more like your weeks/months option odds-on you can see how successful he was simply buying undervalued companies with sound reasoning and a future catalyst which was likely to positively impact the share price.
tech/a
No Ordinary Duck
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This is not an F/A V T/A post.
Quite the opposite.
The problem occurs in both Disciplines.
Many many have "Plans"
But hardly any have a plan that they KNOW will be long term profitable.
If a plan is flawed you can have as many conditions as you like---youll never be profitable.
Im on the search for evidence in Both fields that there are profitable plans.
I have many on the technical side.
Just looking for some on the Fundamental side.
Tech/a
At a recent presentation I attended by a notable finance researcher they were looking at the merits of fund managers v the index and were pushing the index agenda. Obviously not really relevant to the current discussion but a point that stuck out was how to find the excellent fund managers and basically their studies showed that it took approximately 64 years to determine whether a fund manager has the ability and skill to consistently beat the index.
Obviously the situations are different for private investors v fund managers due to a number of convenents etc etc, but a lot of these fund managers label themselves as stock pickers or value investors. The guy giving the presentation went on to say how there are basically a handful of people who have beaten the market with their stock picking approach consistently over a number of years and have been producing these returns long enough to prove they can do so.
Further to this my own take on the 'value' investing approach is that the time it takes to prove your method works (i.e. 64 years to be completely satisfied) is simply too long for any academic research to prove it works so far. However the presentation did go on to show that over time, value stocks and small stocks deliver greater returns compared to the wider market.
So without having the actual evidence infront of me to prove what i'm saying as I don't have access to the presentation or data they were working with, it seems to me that 'value' investing does have merit and can work. However it is exceptionally difficult to consistently pick the top winners in this field and hence have a positive expectancy unless your investing across a large number of such value stocks.
I can try find the articles if you'd like as I think I took home a folder from the presentation which had some references in it. Will have a look tonight and I hope what i've said has made some sense. Basically value investing works, but its hard to prove in the short or medium term, almost impossible to back-test and that 'value' can have a wide range of theoretical meanings with no measurements clearly defined as being directly related to 'value' (although the research I saw indicated that RoE and Book to Market were the best indicators of value).
At a recent presentation I attended by a notable finance researcher they were looking at the merits of fund managers v the index and were pushing the index agenda. Obviously not really relevant to the current discussion but a point that stuck out was how to find the excellent fund managers and basically their studies showed that it took approximately 64 years to determine whether a fund manager has the ability and skill to consistently beat the index.
Obviously the situations are different for private investors v fund managers due to a number of convenents etc etc, but a lot of these fund managers label themselves as stock pickers or value investors. The guy giving the presentation went on to say how there are basically a handful of people who have beaten the market with their stock picking approach consistently over a number of years and have been producing these returns long enough to prove they can do so.
Further to this my own take on the 'value' investing approach is that the time it takes to prove your method works (i.e. 64 years to be completely satisfied) is simply too long for any academic research to prove it works so far. However the presentation did go on to show that over time, value stocks and small stocks deliver greater returns compared to the wider market.
So without having the actual evidence infront of me to prove what i'm saying as I don't have access to the presentation or data they were working with, it seems to me that 'value' investing does have merit and can work. However it is exceptionally difficult to consistently pick the top winners in this field and hence have a positive expectancy unless your investing across a large number of such value stocks.
I can try find the articles if you'd like as I think I took home a folder from the presentation which had some references in it. Will have a look tonight and I hope what i've said has made some sense. Basically value investing works, but its hard to prove in the short or medium term, almost impossible to back-test and that 'value' can have a wide range of theoretical meanings with no measurements clearly defined as being directly related to 'value' (although the research I saw indicated that RoE and Book to Market were the best indicators of value).
skc
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I like this categorisation.
Someone like Roger M is probably doing 3 (and not being very good at it) while trying to sell to others that he's doing 1.
