Is Value Investing passé?

[tombrown1]

Correct. It's simply matter of using different criteria to determine what's "on sale".

[bovverd]

For me buying growth stocks and hoping the growth continues is little more than speculation.

Buying stocks that are STATISTICALLY or FACTUALLY low priced using logical analysis takes you away from speculation and it then becomes investing.

I like to stick to the facts and look to buy stocks that are cheap regardless of what the markets are doing, this method is therefore self policing because when the markets are overpriced I will not find anything and will be forced to sit and wait.

When the markets fall like in recent times the bargains appear and then its time to back up the truck and buy when things are priced low.

[Jenkmister]

Your logic sounds good. Can you give us an example of what you see as having value and you are buying now? Just trying to understand your analysis.

Thanks;
PDE

[tombrown1]

Bovverd, your views are short-sighted and poorly researched. You seem to be insinuating that the scores of people who have made fortunes by reading charts were simply lucky.

I'll assert yet again that there are many ways to make money in the market, and if you think your way is the only way, then you are sorely mistaken.

There are many STATISTICS and FACTS to back this up.

[bovverd]

Originally Posted by tombrown1

Bovverd, your views are short-sighted and poorly researched. You seem to be insinuating that the scores of people who have made fortunes by reading charts were simply lucky.

I'll assert yet again that there are many ways to make money in the market, and if you think your way is the only way, then you are sorely mistaken.

There are many STATISTICS and FACTS to back this up.

Tombrown -

What on earth are you talking about ? Who mentioned charts? Did I mention charts? You chart boys are so sensitive to criticism that in an attempt to defend yourselves you invent arguments which are not actually there.

I never mentioned CHARTS I was talking about GROWTH. Go and read Grahams take on Growth stocks. If you then remain offended by the view that there is a high degree of speculation with regards to growth stocks then maybe you should find yourself another forum because this is the Warren Buffett & BEN GRAHAM Investment community.

Also can you highlight where I said 'my way is the only way'?

Can you highlight evidence of my views being short sighted or poorly researched ?

oh hang on I see - You became all offended by my putting the words statistical and factual in upper case! Go and read George Soro's New Paridigm For Financial Markets and then you will understand.

Soros talks about layers of misconception causing financial bubbles in our global markets. I invest in stocks which are cheap relative to asset values so they are statistically low priced relative to the strength of the organisations itself and not the current position of the market.

My point was if a person sticks to the facts and invests in stocks which are factually and statistically low priced, the layers of misconception and poor regulatory measures used to fix those misconceptions, cannot hurt you.

So to summarise:

I wasnt talking about charts and do not have any interest in them. I was talking about growth and speculation.

Short sighted and poorly researched views? I'll allow you to elaborate on this.

Ive never once said my approach is the only way - If anything my own approach is a bit much for a typical investor. You can elaborate on this accusation too.

Misconception, poor regulatory measures and greed causes bubbles in financial markets. By sticking to investing in asset classes which are statistically low priced a person can avoid the speculative nature of growth which can be an element of a financial bubble itself.

So your wrong to suggest I was chart bashing. I'll wait for your apology on your own misconceptions.

[npg]

As long as none of you two say that a security priced at $50 is cheaper than a security priced at $450...

[tombrown1]

Bovverd, I do apologize for the tone. It was a bit much.

Maybe I am getting a little defensive nowadays.

To address your points:

Everybody is a speculator - we all use statistics and facts to try and increase our probability that the chosen security will go up in price in the future. Nobody knows for sure what will happen to a stock's price - we are just trying to increase our odds. So by definition, you too are a speculator. It shouldn't be a derogatory term.

You didn't ever mention charts - that was me being defensive. However, most people reading charts invest in growth stocks - that was the connection. And many people investing in growth stocks over the years have made tons of money, and it wasn't an accident. Sorry Graham.

"Short-sighted and poorly researched views" - also a little defensive - but once again you are ignoring the many people who have made fortunes in growth stocks. You call them little more than speculators. Your view that growth people can only be lucky (by your use of the word speculator) is incorrect.

You never said your way was the only way - I'm sorry. I thought your post came across as a little smug and I interpreted it that way.

I think I was just a little pissed because your post sounded a little smug in stating that you used statistics and facts (other people don't?) and you seemed to be ignoring the fact that growth investors can make a lot of money.

I do enjoy reading your posts in general, but this one caught my attention.

Tom

[bovverd]

Originally Posted by npg

As long as none of you two say that a security priced at $50 is cheaper than a security priced at $450...

Interesting - if the security priced at $450 has a book value of $600, current assets totalling $300 per share, of which $200 is cash with little of the remaining assets being inventory and very little or no long term debt, it could very well be cheaper than a security selling for $50.

Its not the low price itself that determines the value is whats your getting in exchange for that price which determines if the price in question is low.

Only my opinion of course.

[Gunnski]

This may help Gentlemen:

Fundamental versus Technical Analysis
There’s a lot of hostility and denial in the phrase “fundamental versus technical analysis,” which, incidentally, is what makes it a good post title. I want to defuse that hostility and examine three types of analysis that are important to the longer-term trader.

Why the hostility?

The hostility appears to be born out of ego and psychology. The ego mechanism at work is that we want to believe what we’re doing is “right,” or else we wouldn’t be doing it. The psychological principle at work is association, or put another way, “we are what we believe in,” which is why we tend to respond to any critiques of our beliefs as if they were personal attacks. These twin biases tend to make us emotionally uncomfortable with rationally comparing the systems that we use with those that we don’t use.

Some basic facts about the markets are hard to accept. It’s hard to accept that lots of people make money in the markets using methods that are different from mine. It’s hard to accept that if I study what these other methods are, and the principles behind them, I may be able to improve my methodology. It’s hard to accept that the markets are not personal, and that my looking critically at what I do in the market doesn’t mean I’m a “bad person” or a “bad trader.”

The failure to accept these basic facts about the market breeds the hostility we see between advocates of what are viewed as two competing methodologies.

Are they really that different?

My assertions are that most who style themselves as “fundamental investors” actually use, albeit in unsophisticated ways, many of the tools of technical analysis, and further, that an integration of the two styles could be more effective than either one alone over some timeframes.

Investopedia defines fundamental analysis as “examining related economic, financial and other qualitative and quantitative factors” with the end goal of assigning a value that is compared to the current price to determine a position, e.g., long, short, or neutral. In other words, the fundamental trader is looking for a temporary mismatch between price and value that is large enough to be tradable. I say “temporary” because the fundamental trader is betting on the price/value divergence being resolved by a rising price, resulting in renewed convergence between price and value.

If the price and value are divergent at this particular moment in time, logically one of three conditions must hold. These three conditions are: (1) the price and value have been divergent ever since the security was issued, (2) the value has increased more than the price has, and (3) the price has decreased more than the value has. The majority of the value plays I’ve made fall into category (3). To the extent that self-styled “value investors” are looking for “fallen angels” or stocks trading below NCAV (net current asset value), they also are looking for situations where price is falling faster than value.

The claim that “value investors” screen for falling price action will be met with furious denial by many – “value investors” mostly – but the way to penetrate denial is through examination of actual behavior. Take a look at Shai Dardashti on Grahamian Value, a website devoted to “value investing.” For a very long time, and currently as this post is being written, the very first item in the “quick links” section on his sidebar is titled 52 Week Low List. Shai, a dedicated value investor, has given the most prominent position in his links section to a technical screen.

Shai is not alone in his use of technical screening for potential values. Take a look at this post by the Buffetteer, which is typical of the flavor of his material. His “fallen angel” concept is based on a technical screen for falling prices. VInvesting has no fewer than six technical screens on the link bar to the left of the page. Controlled Greed shows an attraction to stocks based on falling price in this post as in many others, where he lists as a “plus” the fact that the stock is recently trading lower.

The alleged opposite of fundamental analysis, technical analysis, is defined by Investopedia as a “method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.” If “value investors” are attracted to potential purchases primarily through price action, are they really closet technicians?

“Value investing” is a mean reversion stock market trade with a long payoff horizon. Value investors are sentiment traders that want some fundamental analysis of their stocks, for safety’s sake. The measurements of sentiment that “value investors” use are based on price action, in other words, technical screening.

Types of analyses

When I review the definitions of fundamental analysis and technical analysis given above, it’s clear to me that only the definition of technical analysis is “pure.” What most think of as fundamental analysis is really a third category that I chose to call FundaTechnical.

Fundamental Analysis includes those things that relate to the company being strong, financially secure, stable, and in general reducing the risk of loss of capital due to insolvency of the company, but are independent of the statistics generated by market activity, such as past prices and volume. This would include such items as Return on Assets, Debt to Equity, Return on Invested Capital, Projected Growth (Earnings, Revenue, etc.), Historical Growth (Earnings, Revenue, Book Value, Tangible Book Value, etc.), Profit or Gross Margins, measures of earnings quality, interest coverage, reliance on financing cash, ability to pay interest coverage, Current Ratio, Quick Ratio, and other financial metrics.

Technical Analysis already has a robust definition.

FundaTechnical Analysis includes those things that relate to both the company’s financial strength and the recent price action and/or sentiment. These include PE, PEG, and the ratio of intrinsic value to current price, all of which compare some objective measure of company strength to the subjective measure of current sentiment, i.e. price. At one point I went so far as to claim that Price/Sales and Price/Book were technical sentiment measures, because static measures of book value and revenues didn’t relate to the quality of the company. However, the measures of book value and revenues have nothing to do with market activity, so they can’t be purely technical and I now include these as FundaTechnical.

Summary

There’s less actual conflict between “fundamental investors” and “technical traders” than most market participants seem to think there is. What hostility and denial exists is primarily the result of our own failures to examine the landscape in a rational matter. Once we set aside our egos, we can explore the variety of ways in which others make money in the markets, and having done so, we open the doors to our own improvement as traders.

Spot on. Best of investing! From Fresno, CA, Ag. Capitol of the World!

[bovverd]

Originally Posted by tombrown1

Bovverd, I do apologize for the tone. It was a bit much.

Maybe I am getting a little defensive nowadays.

To address your points:

Everybody is a speculator - we all use statistics and facts to try and increase our probability that the chosen security will go up in price in the future. Nobody knows for sure what will happen to a stock's price - we are just trying to increase our odds. So by definition, you too are a speculator. It shouldn't be a derogatory term.

You didn't ever mention charts - that was me being defensive. However, most people reading charts invest in growth stocks - that was the connection. And many people investing in growth stocks over the years have made tons of money, and it wasn't an accident. Sorry Graham.

"Short-sighted and poorly researched views" - also a little defensive - but once again you are ignoring the many people who have made fortunes in growth stocks. You call them little more than speculators. Your view that growth people can only be lucky (by your use of the word speculator) is incorrect.

You never said your way was the only way - I'm sorry. I thought your post came across as a little smug and I interpreted it that way.

I think I was just a little pissed because your post sounded a little smug in stating that you used statistics and facts (other people don't?) and you seemed to be ignoring the fact that growth investors can make a lot of money.

I do enjoy reading your posts in general, but this one caught my attention.

Tom

Tom - Apologies Im English so if my tone appears smug or different to you guys it may be because Im not from the US, so you get slightly different interpretations with the written word etc.

One of the drawbacks with this particular forum is that there are so many topic boards that the discussions always seem to be spread across so many subjects the whole forum itself can seem somewhat fragmented and then now and again a topic such as this appears which everyone participates in and it becomes invaluable.

For me there are varying degrees of speculation. I like to buy stocks which have been beaten up by the market but have reasonably healthy balance sheets. I know it cannot go much lower, I also know its balanced healthily enough to survive so I can invest with less of a speculative risk. All the bad news is already in the price so any improvement will push the price higher. If there are no terminal problems the upside is far more likely than much more downside.

This is my way and will most probably not sit well with other people but I am more comfortable investing when there is limited downside rather than relying on growth earnings and general market sentiment to continue to be great for a continuation in price advances. Thats my take on degrees of speculation.

Ive never investigated the connection between growth stocks and charts. Ive always thought even a beaten up stock can then display enough momentum to get buy signals on charts so this was no attempt at chart bashing. I dont understand enough to know its merits or be able to shoot it down so i prefer to stear clear due to lack of knowledge.

I dont believe growth people are lucky - i merely consider growth investing to carry a higher degree of speculation than investing based on asset values as I explain in my piece above. Its not luck - As long as the growth continues the price will head north but for me as the price moves way ahead of both asset values and earnings any slight hiccup in prospects or future forecasts will push the price lower, so the downside is more considerable than with the stocks I buy. Thats how it sits with me and i dont expect you or anyone else to agree.

The statistics and facts remark was referring to asset value investments again. If I can find companies with decent looking balance sheets which are selling for a low price relative to their own assets they are factually and statistically priced low no matter what the market as a whole is up to so you have a kind of self policing method of investing. During bull markets there will be very little cheap enough to buy, so it keeps you out of the market. during conditions such as those recently experienced I found as many as 170 individual companies selling for around the NCAV alone. Sol as the tide of postive sentiment goes out of the market more bargains appear.

So with this I was not suggesting other people on here are not using statistical or factual information in their investment decisions, I merely stated that I considered myself to be doing so independently from Mr Markets madness and the financial bubbles that Mr Soros believes is expected to get much much worse before it gets better.

I suppose another of putting it is the stocks I buy are cheap relative to themselves rather than the markets current position. I am using factual data contained within the company itself instead of anything the general market is serving up at the time.