Thoughts about Value Investing and the changing investment landscape

 

Thoughts about Value Investing and the changing investment landscape
After the Covid vaccines are announced, the flavor of the month is about sector rotation strategies into different areas. Personally, I am aware that technology stocks are trading at a elevated multiple in US and HK/CN and the upside may be limited. There is a real risk of missing out greater potential returns in other sectors like EV, financials, asset plays, pharmaceuticals etc.

However, I still believe that the companies in my portfolio will still perform well with regards to their financials. Nonetheless, they may surface to become a growth trap if the growth rates fail to live up to expectations, or the stock price may fail to move as they are already incorporated in the rich valuations. As my portfolio is a mix of strong businesses in growth stocks, asset plays (Buildings), financials and ETFs, in the event that the value stocks do seek a resurgence, I will not miss it completely.

In the speculative landscape of the US market, there is a lot of fanciful IPO stocks which are luring unsuspecting retail investors to invest in them, by reassuring them that easy money policy by the federal reserve will go on forever. Although I see potential in some of the pitches, I am exceptionally wary of the climate whereby self professed gurus / speculators from you-tube channels and seeking alpha are selling fanciful TAM projections. Considering the fact that competition in a capitalist economy in inevitable, the total combined TAM projections of the competition companies far exceed the entire Earth's population, and there is no credible way to test if the projections are correct apart from some fanciful research by some self proclaimed industry expert.

Most of the companies have no real business plan, no competitive moat, and no route to profitability. They are capitalizing on stock price appreciation to induce FOMO into gullible investors. As the company face cash crunches, capital raising via debt raising / share dilution is inevitable and I am not sure how long the cash burning facade can be kept up. Nonetheless, there are some companies with credible business models but at an nosebleed valuation that I find it hard to stomach. As the fear and greed index is registering extreme greed, I shall endeavor to remain disciplined to let my warchest rejuvenate while I wait indefinitely for undervalued opportunities. I have been catching up on readings on areas not directly related to buy/sell decisions, and I may try to blog about them in the upcoming posts.



Aswoth Damodaran on The History of Value investing

Minimalist value Investing
=> Buy a simple Vanguard / Blackrock / Dimensional Factor tilted ETF to achieve the factor based abnormal returns you could get.

Active investing
Cerebral Value Investing => Apart from quantitative factors, incorporate qualitative factors by looking at the nature of the business, management, moats, tailwinds supporting its growth and other competitive advantages.


Contrarian Value investing
Requires deep understanding of specific business and capitalizing on price shocks from averse events. Requires a deep understanding on how displacable is the business from external shocks, and whether there is a strong likelihood of the business recovering from the setback. |

There is a true risk of buying a business that is permanently impaired. Blind following of buying the dip can easily lead to averaging down on Wirecard and Valeant all the way to bankruptcy / restructuring. A margin of safety is a threshold to buy good business at a cheaper price, and NOT a full substitute for risk assessment.


Activist value investing
Activist value investing are generally not accessible to retail investors as they do not have a sufficient capital base to build up a significant shareholding position in the company to invoke changes. Moreover, family / founder held companies usually have majority stakes / voting rights making the founders essentially untouchable. 

A lot of the newer technology stocks have founders holding super voting rights in their special classes of shares rights making addressing of shareholder grievances almost impossible.

 Is Value investing coming back?

Problems with traditional value investing

Reflecting on my investment philosophy
The closest comparison on my present philosophy is the Chameleon approach by Peter Lynch. Notably, I try to avoid turnarounds, and cyclicals that I have no comparative advantage in. I am not considered a traditional value investor as I buy software / technology stocks which are decried by most traditional value investing authors, whom are burnt badly by the tech bubble in 2001. I use different mental models like searching for fundamentally good businesses / unique business models and identifying the underlying companies, then monitor the stocks indefinitely for a potential price shock / temporary problem that does not affect the long term businesses.

I do not strictly filter for low PE/PB multiples as my sole investible universe unlike deep value investors. Any first year student in accounting will know how useless book value is on identifying the future cash flows of the company. The warped EBITDA / TAM / MAU/ DAU creative metrics also distorted the quality of earnings of some companies, requiring a deeper analysis at the FCFE level, and also some judgement on the capital allocation ability of the managers. Just because a company has consistently high FCFE does not mean it is a great stock if it in under-investing for future growth, nor Negative FCFE necessary bad if there is strong potential to reinvest to build up assets to achieve future earnings.

I have adopted different models such as Magic Formula filters, Piotroski f score filters, Fisher 15 point filters, and guidelines / analysis on good business models from different fund managers. Notably, I do not practice contrarian value investing for the purpose of being contrarian. I am willing to do incorporate my watch-list from Superinvestors that I follow, and even the thesis from fundamental short sellers, to change my views as the thesis of the company changes. I am also willing to invest in ETFs if I believe the fundamentals of the industry / country is very strong, but I do not have granular insight on all the various companies, and wish to diversify from company specific risks.

Value / Growth At Reasonable Price Investing is not a static space and there is a lot of judgement involved for my brand of investing. Noticeably, my best returns are obtained when the market is crashing. In normalized / speculative market conditions. there is a real risk of under-performing an unman-aged index fund, making active investing hard to justify. At this current stage, I quite enjoy the process as well as the proceeds, learning about current affairs and business models. Nonetheless, I shall endeavor to keep clear books and records on my performance, to track if the time and effort is worth the returns generated.