Value investing is a mistake

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NormR
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Value investing is a mistake

Post by NormR »

In an effort to combat confirmation bias, please let me know how, where, and why value investors are wrong.

I'm most interested in themes and patterns rather than specific examples of the form "company XYZ is a bad bet due to ABC". What is the best evidence against the efficacy of value investing in general?
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Re: Value investing is a mistake

Post by newguy »

I wouldn't go so far as to see why it doesn't work when it so obviously does. I would try and see if it's really value investing or maybe cyclical investing or even something else??.

You need a baseline to judge a system. With TA, you can use random entries and you'll usually find it's the exit rules that make the money (momentum effect). I would try and compare your valuation metrics to buying stocks that are at a cyclical low regardless of the valuation and use a similar holding time or cyclical high or even the same exit rules you use now.

You might just find out that you're an elliot wave theorist :D

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Re: Value investing is a mistake

Post by Just a Guy »

As a value investor myself, I'd say it can go wrong in a massive bull market, when the correction hits, even the value investor could suffer.

When everything is up, some crap begins to look like value. If you blindly invest in stocks based on a system, you are bound to encounter times when that system (whatever system) breaks down unless you step in with sober second though.

Personally, I don't invest in companies I don't know or understand as a qualifier to my value investments. Just because it shows up on a stock screener, doesn't mean I'll blindly invest.

Of course, no system works all the time, if it did everyone would be rich.

P.S. To compound the myth of systems that don't work, I'm also a buy and hold investor...
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Re: Value investing is a mistake

Post by ghariton »

I won't take the question personally. :wink:

Superimpose graphs of VTI and VTV for various time periods since 2005. It's not clear to me that VTV is superior. If anything, I would have preferred to have my money in VTI (as I did).

Part of that may be due to the relatively short time periods and unusual markets. But part of it may be that, as value investing has become more popular, it has become more difficult than it was in Graham's heyday, or indeed even ten years ago.

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Re: Value investing is a mistake

Post by Shakespeare »

why value investors are wrong.
In Canada or the US?
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Re: Value investing is a mistake

Post by AltaRed »

ghariton wrote:Superimpose graphs of VTI and VTV for various time periods since 2005. It's not clear to me that VTV is superior. If anything, I would have preferred to have my money in VTI (as I did).

Part of that may be due to the relatively short time periods and unusual markets. But part of it may be that, as value investing has become more popular, it has become more difficult than it was in Graham's heyday, or indeed even ten years ago.
I hold both VTV and VTI for a value tilt. Value got punished in the 2008/2009 financial crisis since bank and insurance stocks tend to fall into the value side of the median. For me, it is not clear to me there is more long term value in VTV ....but as you suggested, time period has been too short.
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Re: Value investing is a mistake

Post by Liam »

If I compare the total return (including dividends) of Vanguard's growth ETFs to the corresponding value ETFs, growth wins in each case over the last decade:

Large Cap: VUG's 138.5% beats VTV's 100.4% since June 15, 2005
Mid Cap: VOT's 122.3% beats VOE's 113.4% since Aug 24, 2006
Small Cap: VBK's 168.8% beats VBR's 129.8% since June 15, 2005

(Assuming the data from http://www.etfreplay.com/combine.aspx is reliable.)
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Re: Value investing is a mistake

Post by Flaccidsteele »

NormR wrote:In an effort to combat confirmation bias, please let me know how, where, and why value investors are wrong.

I'm most interested in themes and patterns rather than specific examples of the form "company XYZ is a bad bet due to ABC". What is the best evidence against the efficacy of value investing in general?
What is the definition of "wrong" here?

What is the definition of "value investor" here?

What is the definition of "best evidence" here?

What is the definition of "efficacy" here?

Depending on the definitions of certain terms, anybody can give examples of anything.

Rinse and repeat.

In general, in order to construct a premise to show that "value investors are wrong", you need to have a narrow definition of "value investors"; have "wrong" mean a short-term performance timeline (e.g. 3, 5 yr performance is good) and/or a simple value trap example (tech value traps/turnarounds are best); use conventional investors using overlapping conventional investment techniques as "best evidence" to show little "efficacy".

It shouldn't be too hard.

It wouldn't convince successful value investors, but that isn't your "target market" with this kind of exercise.

NB: As with most things that we want to accomplish, simply write down all the most common objections and then work on a way to handle each one. For example, some value investors say, "don't use leverage". So to handle this, just say "Warren Buffett is one of the most successful value investors in the world and he used leverage". Just don't disclose what you mean by 'leverage', speak interchangeably between Buffett and his businesses, and pick a small window of time that supports your argument. Basically cherry pick the information.
Last edited by Flaccidsteele on 16 Jun 2015 17:00, edited 3 times in total.
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Re: Value investing is a mistake

Post by adrian2 »

Flaccidsteele wrote:What is the definition of "efficacy" here?

Depending on the definitions of certain terms, anybody can give examples of anything.
What is the definition of "fragile retirement" in your signature line?

Depending on the definitions of certain terms, anybody can boast anything. :twisted:
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Re: Value investing is a mistake

Post by deaddog »

NormR wrote:In an effort to combat confirmation bias, please let me know how, where, and why value investors are wrong.

I'm most interested in themes and patterns rather than specific examples of the form "company XYZ is a bad bet due to ABC". What is the best evidence against the efficacy of value investing in general?
Looking at iShares ETFs the dividend XDV and growth XCG ETFs have out performed the value XCV over the last 5 yrs by a couple percentage points.
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Re: Value investing is a mistake

Post by BRIAN5000 »

What is the best evidence against the efficacy of value investing in general?
If I change from a couch potato portfolio to "value investing" will it be worth it?

Time, effort, return, knowledge, how much faster can I reach my goals or can I just spend an extra few years on the golf course waiting for the do nothing couch potato to catch up. Will I get paid for the extra computer face time or would I rather be doing something else. If a CP can get me to where I want in the time I want why bother with value investing?
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Value investing is a mistake

Post by AltaRed »

But as Norm has asked, and interpreted loosely, how, where and why do value investors 'underperform'? I'd have to guess one reason is the additional equity risk premium growth investors are wanting to capture in return for the volatility and/or risk normally associated with growth stocks. Tech stocks for example. By the time traditional value stocks get into 'value' territory with their traditional valuations, they no are longer in their major growth phase.

Too often, they also seem to become value traps, i.e. dead money due to failed business models or turnaround stories. I've had my head handed to me on a few of those. I have become leery of deep value stories because I simply do not have enough inside information to make prudent judgements.
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Re: Value investing is a mistake

Post by jay »

As some of the above posts eluded to, it can be a mistake due to it being harder to implement and even harder to stick to during periods of underpformance, hence requiring more patience and conviction. And that is tough, very tough actually. Hence it is a mistake in that it is not suitable for a lot of - if not most - investors.

Another potential mistake is probably in the implementation. What (combination of) fundamental ratios defines value? I am personally a very satisfied investor of Norm's report and his site and I like the measures and the screen he uses in his screeners. But then there are many others. Shareholder yield is an interesting one and might not be so commonly known among value investors.
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Re: Value investing is a mistake

Post by Taggart »

After years of it, I can read all the Graham or Buffett literature I want, but after taking a few stabs at value investing I realized rather late in life, I just don't have anything, anywhere near their abilities. I was beginning to feel like I was some sort of Walter Mitty character, and I didn't want that anymore. I just stopped doing it. So yes, value investing was a mistake for myself who cannot, but I certainly don't think it's a mistake for those few investors who are willing to put in the time and effort and can ultimately succeed with it.
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Re: Value investing is a mistake

Post by Flaccidsteele »

Taggart wrote:After years of it, I can read all the Graham or Buffett literature I want, but after taking a few stabs at value investing I realized rather late in life, I just don't have anything, anywhere near their abilities. I was beginning to feel like I was some sort of Walter Mitty character, and I didn't want that anymore. I just stopped doing it. So yes, value investing was a mistake for myself who cannot, but I certainly don't think it's a mistake for those few investors who are willing to put in the time and effort and can ultimately succeed with it.
jay wrote:As some of the above posts eluded to, it can be a mistake due to it being harder to implement and even harder to stick to during periods of underpformance, hence requiring more patience and conviction. And that is tough, very tough actually. Hence it is a mistake in that it is not suitable for a lot of - if not most - investors.

Another potential mistake is probably in the implementation. What (combination of) fundamental ratios defines value? I am personally a very satisfied investor of Norm's report and his site and I like the measures and the screen he uses in his screeners. But then there are many others. Shareholder yield is an interesting one and might not be so commonly known among value investors.
I agree with both.

This goes to my point re: definition of 'value investing' and 'value investor'. If you want to show 'value investing is a mistake', just tweak those definitions until you get the desired result (i.e. failure).
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Re: Value investing is a mistake

Post by Just a Guy »

People have to know what kind of investor THEY are. You can have any system you want but, if it doesn't mesh with your personality, you probably won't be successful at it.

I learned that fairly early when I tried other techniques. I knew what I was supposed to do, but my personality didn't have me doing it properly (for example, I know "how" to day trade, but I hate watching the market that closely). I know many successful day traders, so I know the system works...if you have the right personality for it, most people don't so they say it's "too risky".
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Re: Value investing is a mistake

Post by Flaccidsteele »

Just a Guy wrote:People have to know what kind of investor THEY are. You can have any system you want but, if it doesn't mesh with your personality, you probably won't be successful at it.

I learned that fairly early when I tried other techniques. I knew what I was supposed to do, but my personality didn't have me doing it properly (for example, I know "how" to day trade, but I hate watching the market that closely). I know many successful day traders, so I know the system works...if you have the right personality for it, most people don't so they say it's "too risky".
I agree.

However...

1. Most individuals aren't really interested in spending the time to specialize any particular method. Let alone to evolve/meld a chosen method with their personality.

2. And, to be honest, the simple dollar-cost-average-into-a-low-fee-index-and-wake-up-in-40-years produces very satisfactory results

Although, having said this, a) almost nobody does #2 and b) #2 would require a fairly rare personality type/awareness so it kind of fits into #1

But this is all OT. Apologies.
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Re: Value investing is a mistake

Post by Taggart »

If there's any mistake in value investing, it's this love affair or reverence to big name active value investors who when you look closer at their ten year plus returns, they either look mediocre against their respective index or else downright terrible. At least a couple of these investors have passed away a few years ago, but somehow the cachet name gets left behind I guess as a selling tool. Others have written books, as if the amateur follows the advice given, that they are going to turn themselves into this great investor, who can do what the majority of the professionals cannot. Meanwhile the authors themselves are showing crappy results. We all know who the winners are, but when it comes to the losers, we somehow forget about them. This applies to active value funds available both in the U.S. and Canada.
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Re: Value investing is a mistake

Post by Flaccidsteele »

Taggart wrote:If there's any mistake in value investing, it's this love affair or reverence to big name active value investors who when you look closer at their ten year plus returns, they either look mediocre against their respective index or else downright terrible. At least a couple of these investors have passed away a few years ago, but somehow the cachet name gets left behind I guess as a selling tool. Others have written books, as if the amateur follows the advice given, that they are going to turn themselves into this great investor, who can do what the majority of the professionals cannot. Meanwhile the authors themselves are showing crappy results. We all know who the winners are, but when it comes to the losers, we somehow forget about them. This applies to active value funds available both in the U.S. and Canada.
I completely agree with Taggart. Individuals shouldn't expect to pick up a book or emulate a 'famous active value invesetor' (a person who likely has a completely different personality) and expect to do well. Books only provide frameworks. Not solutions. It points readers in a direction. It's not a cookbook. And it's impossible to 'emulate' another person's personality. Individuals need to bring their own self-awareness, personality, and problem-solving skills into the equation in order to have a chance at success.

It also speaks to Just a Guy's post almost verbatim.
Just a Guy wrote:People have to know what kind of investor THEY are. You can have any system you want but, if it doesn't mesh with your personality, you probably won't be successful at it.

I learned that fairly early when I tried other techniques. I knew what I was supposed to do, but my personality didn't have me doing it properly (for example, I know "how" to day trade, but I hate watching the market that closely). I know many successful day traders, so I know the system works...if you have the right personality for it, most people don't so they say it's "too risky".
Apologies. OT again.
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Re: Value investing is a mistake

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Taggart wrote:After years of it, I can read all the Graham or Buffett literature I want, but after taking a few stabs at value investing I realized rather late in life, I just don't have anything, anywhere near their abilities. I was beginning to feel like I was some sort of Walter Mitty character, and I didn't want that anymore. I just stopped doing it. So yes, value investing was a mistake for myself who cannot, but I certainly don't think it's a mistake for those few investors who are willing to put in the time and effort and can ultimately succeed with it.
Buffet moved away from Graham and cigar butt's when he came under Munger's infleunce . He is much more focused on high quality stocks that have moat protection and high returns on equity and capital. He is much focused one reasonable prices rather then basement bargain book prices or extremely low PE ratios. If you have 25 or 30% return on equity a price aof 20 times earnings makes more sense then a business with 5% return on equity selling at 10 times earnings. If you are an owner of a business which is more attractive?
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Re: Value investing is a mistake

Post by Taggart »

Thegipper wrote:
Taggart wrote:After years of it, I can read all the Graham or Buffett literature I want, but after taking a few stabs at value investing I realized rather late in life, I just don't have anything, anywhere near their abilities. I was beginning to feel like I was some sort of Walter Mitty character, and I didn't want that anymore. I just stopped doing it. So yes, value investing was a mistake for myself who cannot, but I certainly don't think it's a mistake for those few investors who are willing to put in the time and effort and can ultimately succeed with it.
Buffet moved away from Graham and cigar butt's when he came under Munger's infleunce . He is much more focused on high quality stocks that have moat protection and high returns on equity and capital. He is much focused one reasonable prices rather then basement bargain book prices or extremely low PE ratios. If you have 25 or 30% return on equity a price aof 20 times earnings makes more sense then a business with 5% return on equity selling at 10 times earnings. If you are an owner of a business which is more attractive?
Yes, Gipper, but I don't think Ben Graham style investing is dead, as investors like Norm and Francis Chou will attest with their own success using this strategy. As for Buffett, I'm doing another re-read of Snowball, so I'm well aware of his own switch in styles, courtesy of Munger and Phil Fisher.

I may read the books for entertainment, but I don't make any attempt to follow them any more. I now just practice my own style of investing, that I feel comfortable with, and provides my wife and I with part of the stream of growing income we're looking for while retired. I certainly don't make it too difficult in the portfolios I run. Basic buy and hold, unless forced to sell. This bull market doesn't teach me anything, but the next serious bear that comes along, will let me know if I have to make any, hopefully just minor changes to the portfolio.
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Re: Value investing is a mistake

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Taggart wrote:
Thegipper wrote:
Taggart wrote:After years of it, I can read all the Graham or Buffett literature I want, but after taking a few stabs at value investing I realized rather late in life, I just don't have anything, anywhere near their abilities. I was beginning to feel like I was some sort of Walter Mitty character, and I didn't want that anymore. I just stopped doing it. So yes, value investing was a mistake for myself who cannot, but I certainly don't think it's a mistake for those few investors who are willing to put in the time and effort and can ultimately succeed with it.
Buffet moved away from Graham and cigar butt's when he came under Munger's infleunce . He is much more focused on high quality stocks that have moat protection and high returns on equity and capital. He is much focused one reasonable prices rather then basement bargain book prices or extremely low PE ratios. If you have 25 or 30% return on equity a price aof 20 times earnings makes more sense then a business with 5% return on equity selling at 10 times earnings. If you are an owner of a business which is more attractive?
Yes, Gipper, but I don't think Ben Graham style investing is dead, as investors like Norm and Francis Chou will attest with their own success using this strategy. As for Buffett, I'm doing another re-read of Snowball, so I'm well aware of his own switch in styles, courtesy of Munger and Phil Fisher.

I may read the books for entertainment, but I don't make any attempt to follow them any more. I now just practice my own style of investing, that I feel comfortable with, and provides my wife and I with part of the stream of growing income we're looking for while retired. I certainly don't make it too difficult in the portfolios I run. Basic buy and hold, unless forced to sell. This bull market doesn't teach me anything, but the next serious bear that comes along, will let me know if I have to make any, hopefully just minor changes to the portfolio.
Jason Donville is a strong disciple of the new Buffett over the old Buffett. I agree that some people have the ability to use the Graham method. Norm is one of them. For most we find to many traps. I thought Charles Brandes had value investing figured out and put a lot money into his fund back in 2003. It wasn't a good experience and past experience was useless on this investment.
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Re: Value investing is a mistake

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zinfit wrote:Jason Donville is a strong disciple of the new Buffett over the old Buffett. I agree that some people have the ability to use the Graham method. Norm is one of them. For most we find to many traps. I thought Charles Brandes had value investing figured out and put a lot money into his fund back in 2003. It wasn't a good experience and past experience was useless on this investment.
I was big into Brandes in the '90s. Can't remember much about it other than I think I did all right but nothing to write home about. That was when I was still with a full service UCS advisor.
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Re: Value investing is a mistake

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zinfit wrote:
Jason Donville is a strong disciple of the new Buffett over the old Buffett. I agree that some people have the ability to use the Graham method. Norm is one of them. For most we find to many traps. I thought Charles Brandes had value investing figured out and put a lot money into his fund back in 2003. It wasn't a good experience and past experience was useless on this investment.
AltaRed wrote:
I was big into Brandes in the '90s. Can't remember much about it other than I think I did all right but nothing to write home about. That was when I was still with a full service UCS advisor.
Brandes was one of the value fund managers I was referring to above. I didn't invest with him, but I still have his "Value Investing Today" (Third Edition) sitting on my bookshelf now gathering dust.
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Re: Value investing is a mistake

Post by Taggart »

Early last year, Larry Swedroe did an article on value investor, Marty Whitman.

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