Value Investing - do cheap stocks outperform?

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FinEcon
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Re: Value Investing - do cheap stocks outperform?

Post by FinEcon »

Excellent! The last few posts, taken together, in this thread by Taggart, Mike, scomac & ghariton should be a must read for anyone who invests in individual common stocks. The investor should probably re-read that every quarter just to keep the line or reasoning fresh in his own mind.
Mike Schimek wrote:
I'm evolving though, finding myself increasingly attracted to high ROE stocks that are in good businesses, which is Buffet's approach. The disadvantage of cheap value stocks is that often they can just sit there for a very long time and remain cheap. Case in point for me is Lakeview, which I've held for years. Less prominent is Calvalley, which I started buying at 2.00+/- and is now 1.55. It is probably the best value in the market right now that I can see, but the only movement it made was downwards so far this year.
I'm am finding the exact same thing in the agrsseive conservative portion of my portfolio, so I too am evolving towards high ROE reasobale price firms. Still have a hard on for small caps though, haven't lost that yet. In my view this happens to often because a given industry's economics are so bad that no matter how honest & competent an individual operator happens to be, the business result is dominated by industry/sector/political dynamics (i.e. essentially Buffet's point: "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.").

The only thing I might offer to add to th ROE portion of the discussion is what I like to use for calcs:
http://en.wikipedia.org/wiki/DuPont_analysis
IMO, no need to get all nutty about this model, you can do back of the envelope with it also althought there is tons of judgemnet and assumptions about extrapolating past trends forward as scomac mentions but a nice model nonetheless. Going with rough estimates for the inputs, it's great for building a diversified portfolio on inteligent quantitative criteria.
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Re: Value Investing - do cheap stocks outperform?

Post by Peculiar_Investor »

Taggart wrote:How to find great bargains in the stock market

NORMAN ROTHERY
Special to The Globe and Mail
Published Sunday, Nov. 03 2013, 8:02 PM EST
Last updated Monday, Nov. 04 2013, 10:03 AM EST

"To determine the winner of the Canadian performance race, I turned to the data collected by Prof. French."
@NormR, great article that got me thinking. I've got a couple of methodology questions for you.

1) The article states "average annual returns of both high, and low, ratio stocks from Jan. 1, 1977, to Dec. 31, 2012." I think I've asked you this type of question before, but have you tested the sensitivity of the results to different start/end points? I'd love to see a breakout of 10 year data, but decade for each of the '80's, '90s, ...

2) The article states "And how about stocks that don’t pay dividends at all?". How would a company that didn't pay a dividend for most of the period under study, but started paying one near the end be classified. Or vise versa, a company that paid dividends for years, but subsequently suspended them post 2008-09 financial crisis. The specific example that I've owned for years is Stantec (STN). When I bought it years ago, I would have made a case that I bought it using a value investing approach, but it didn't pay a dividend at the time. That changed in Feb 2012. If I accept the conclusion about "stocks that don't pay dividends at all" then I'd potentially miss companies like Stantec when screening.
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Re: Value Investing - do cheap stocks outperform?

Post by NormR »

Peculiar_Investor wrote: @NormR, great article that got me thinking. I've got a couple of methodology questions for you.

1) The article states "average annual returns of both high, and low, ratio stocks from Jan. 1, 1977, to Dec. 31, 2012." I think I've asked you this type of question before, but have you tested the sensitivity of the results to different start/end points? I'd love to see a breakout of 10 year data, but decade for each of the '80's, '90s, ...
From a few years ago

http://www.ndir.com/SI/articles/FlipBooks.shtml

http://www.ndir.com/SI/articles/Canadia ... ipBook.pdf
Peculiar_Investor wrote:2) The article states "And how about stocks that don’t pay dividends at all?". How would a company that didn't pay a dividend for most of the period under study, but started paying one near the end be classified. Or vise versa, a company that paid dividends for years, but subsequently suspended them post 2008-09 financial crisis. The specific example that I've owned for years is Stantec (STN). When I bought it years ago, I would have made a case that I bought it using a value investing approach, but it didn't pay a dividend at the time. That changed in Feb 2012. If I accept the conclusion about "stocks that don't pay dividends at all" then I'd potentially miss companies like Stantec when screening.
The portfolios are resorted each year. So, if it paid a dividend over the prior year it gets in for the current year.
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Re: Value Investing - do cheap stocks outperform?

Post by Peculiar_Investor »

Thanks, got more to add to the reading/studying list. The education continues ...
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Re: Value Investing - do cheap stocks outperform?

Post by Taggart »

If you read the previous page on this thread, you'll find a few posts on illiquidity. This continues with an article from Robert Tattersall in Globeinvestor.

One way for small investors to outperform institutions
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Re: Value Investing - do cheap stocks outperform?

Post by George$ »

Taggart wrote:If you read the previous page on this thread, you'll find a few posts on illiquidity. This continues with an article from Robert Tattersall in Globeinvestor.

One way for small investors to outperform institutions
Thanks Taggart. Yes, a very interesting article - mention of -
Roger Ibbotson, made what I believe is a compelling argument for a strategy where the individual investor actually has an advantage over a large institution.
Putting all this together, where should a long-term individual investor direct their research focus? In the Canadian context, the TSX Venture Exchange is heavily populated with small and microcap illiquid stocks. Your immediate reaction may be that there are few value stocks in this universe, but a screen of the GlobeInvestorGold database turned up the following sample of half a dozen stocks. They are definitely illiquid, microcap and appear to be value picks (based on a price-to-book ratio of less than one).
My own experience with ALC (108% gain) and with HLF (217% gain) - may be in this "illiquid and microcap" (not sure) - when I bought them a few years ago. :thumbsup:
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Re: Value Investing - do cheap stocks outperform?

Post by George$ »

Re Taggart's reference (related perhaps?) - see

Dimensions of Popularity - by ROGER G. IBBOTSON AND THOMAS M. IDZOREK
CONCLUSIONS

For many years, academics have sought to explain
and understand asset prices, with a strong emphasis on
market premiums and market anomalies. Generally,
these academics end up falling into one of two camps:
the equilibrium efficient market camp or the behavioral
economics camp. Popularity offers an explanation that is
consistent with both approaches. The premiums that are
considered permanent (for example, for risk, liquidity,
taxability, and so on.) are expected to provide excess
returns, even after their discovery. These premiums
are consistent with efficient markets and might include
risk (for example, volatility and beta), size, valuation
(growth versus value), and liquidity. The more transitory
popularity characteristics, for example, the stocks
that are highly traded, in the news, or there is much
excitement about, may be associated with mispricing. In
all cases, the movement from the unpopular dimension
to the popular dimension corresponds to relative price
increases. Mispricing impacts shorter term returns but
not necessarily long-term returns. Popularity is a key
concept that helps to explain valuation as well as longand
short-run returns.
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Re: Value Investing - do cheap stocks outperform?

Post by Taggart »

This is what I had to say on this thread back in April 2013.

http://www.financialwisdomforum.org/for ... tt#p496265

"I'm not enamoured with either Greenblatt's or O'Shaughnessy's books like I was a few years ago. I always keep in mind an article in Barron's back in 2006 with the title "The Little Book's Little Flaw". Also one person interviewed for that article, Robert Haugen, also had something to say in "Comparative Analysis of Two-factor and Multi-factor Ranking Methodologies"

As for O'Shaughnessy, his 15 year returns have been great for both his Canadian Equity and U.S. Value, but both are lagging behind their respective indexes for the last five year returns. Is that a sign of things to come? I can't answer that, nor can anyone else. All I know is that the active investors keep saying that in this environment, it should be easy to be beat the index, but that I see no sign of."

-------------------------------------------------------------------------

So now, bringing us up to date Greenblatt has now started a hybrid index fund.

A Stalwart Picker of Value Stocks Joins the Indexing Crowd

Joel Greenblatt is banking on a combination of passive and active strategies.

------------------------------------------------------------------------------

So my two part question would be, whatever happened to "The Little Book That Beats The Market", and how the heck can you lose three quarters of your funds assets in what has been essentially a bull market?

"Greenblatt started a series of long-short mutual funds in 2012. They made a splashy debut, attracting billions of dollars. But losses in 2015 sent investors fleeing. The oldest fund, Gotham Absolute Return, ended November with $967 million in assets — about a quarter of its peak."
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Re: Value Investing - do cheap stocks outperform?

Post by twa2w »

One of the things OShaughnessy specifically states in his books is that there will be long periods of under performance in his strategies. This was observed in his back tests as well as in real life with his funds.
When his funds first came out they had a different name. Something like strategic index funds. They did ok then performance lagged and they started losing assets. RBC decided to change the name and rebrand as OShaughnessy to emphasize it was his strategy not theirs.
The performance turned around and the funds outperformed for the next few years. As you observed, they have lagged somewhat over the last few years.
Perhaps now is the time to invest, when no one else wants them :D

FWIW, the last time I checked, his Cdn funds had beat their benchmark about 70% of rolling 12 month periods.
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Re: Value Investing - do cheap stocks outperform?

Post by Taggart »

How many decades of one's life does an investor have to chase a dream of outperformance. At my age, I for one don't have many left (if any).

I still have O'Shaughnessy"s first edition of "What Works On Wall Street". His top strategies are showing long term compound returns in the mid to high teens. I haven't seen anything near that in ten year results for any of his funds available here in Canada.

He has two Canada funds. RBC O'Shaughnessy Canadian Equity Fund with a ten year return of 4.0% matching the returns for the RBC Canadian Index Fund. My own TD Canadian Index Fund - e has done better than both with a ten year return of 4.38%.

I will concede he has done better than the market over ten years with his RBC O'Shaughnessy All-Canadian Equity Fund with a return of 6.1%. I don't think the investors who decided to put their hard earned money into the other fund would be all that happy with that.
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Re: Value Investing - do cheap stocks outperform?

Post by ockham »

Taggart wrote: 16 Dec 2017 07:35 How many decades of one's life does an investor have to chase a dream of outperformance. At my age, I for one don't have many left (if any).
I'm reminded of the investing maxim: When your strategy is underperforming, it's likely impossible to tell whether you're being disciplined or being irrational if you stick to that strategy. And, as you say, an investor's investing time horizon for finding out which is a short one.
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Re: Value Investing - do cheap stocks outperform?

Post by AltaRed »

That said, there is also a point in life where outperformance is no longer of interest or concern. Making market returns is more than adequate in the latter decades of one's life.
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Re: Value Investing - do cheap stocks outperform?

Post by deaddog »

AltaRed wrote: 16 Dec 2017 17:42 Making market returns is more than adequate in the latter decades of one's life.
Only in a bull market. :)
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Re: Value Investing - do cheap stocks outperform?

Post by AltaRed »

deaddog wrote: 16 Dec 2017 19:45
AltaRed wrote: 16 Dec 2017 17:42 Making market returns is more than adequate in the latter decades of one's life.
Only in a bull market. :)
I don't buy that argument. Using VPW methodology, the concept is premised on market returns to begin with. It is well understood there are bears in equity markets from time to time. If one is very adverse to several years of negative equity market returns, that suggests AA is wrong in the first place.
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Re: Value Investing - do cheap stocks outperform?

Post by bubbalouie »

I agree with Shiller that passive investing in "the market" dilutes our intellect and lowers our goals and expectations.

https://www.cnbc.com/2017/11/14/robert- ... ystem.html
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Re: Value Investing - do cheap stocks outperform?

Post by deaddog »

Yes; I only have a couple decades left and I suppose I could take my portfolio to cash and live comfortably off the proceeds. But what I do is so simple and has managed to outperform the market that I see no reason to stop investing in equities.

Gotta do something in my dotage and messing with the market keeps what little mind I have left fairly sharp.
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Re: Value Investing - do cheap stocks outperform?

Post by ghariton »

deaddog wrote: 17 Dec 2017 10:16 Gotta do something in my dotage and messing with the market keeps what little mind I have left fairly sharp.
That's what my play money is for. I just mentally add two zeros to all trades, etc.

As for Shiller's fears of indexing, I don't buy it. Large institutional investors, who actually have the specialized professiobnals, the volume of investment, various exemptions from requlatory requirements and, in some cases, a voice in managing the company, will still find active investment attractive (if only so that their management can justify their salaries). By contrast, indexing is and will remain the way to go for retail investors (except for deaddog who has a golden touch :wink:). As an exception, if a retail investor has a large enough portfolio, he can effectively build his own widely diversified portfolio and avoid the MERs.

Anyway, even if everybody indexes equities, there is the question of asset allocation. If equity prices as a whole rise too much, it will become profitable to switch to alternatives such as fixed income, commodities, real estate, private placements, and so on. That will serve as a break -- eventually -- on the equity index.

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Re: Value Investing - do cheap stocks outperform?

Post by Taggart »

In investing, if I had it all to do over again, I would have gone exactly the same route as Tom Connolly starting in the early 80's with individual Canadian dividend growth stocks bought using a mild form of value investing in mind. No market timing or anything remotely like that. By 1999 when the first TD e-Series funds came out I would have converted both RRSP's to a passive global portfolio, eventually adding broad market index ETF's, but kept the non registered account in an all Canadian dividend growth stocks portfolio. Without a doubt, my wife and I would have been far better off financially by now.

Considering we both started off together with a grand combined savings of $15,000, no high salary employment, with no financial help from others along the way, but with a bit of luck, we've done OK though, even with my investing ineptitude.
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