While it is true that there is less uncertainty, when valuing more mature companies in stable markets, you are more likely to find those mistakes in companies where the uncertainty is greatest about the future, either because they are young or distressed, or because the macroeconomic environment is challenging. One is that companies have become much more aggressive in playing accounting games, using pro forma income statements to skew the numbers in their favor. There is good reason to trust those numbers less now than in decades past, for a few reasons. Don’t take accounting numbers at face value: It is undeniable that value investing has an accounting focus, with earnings and book value playing a central role in investing strategies. Rather than avoid uncertainty, face up to it: Many value investors view uncertainty as «bad» and «something to be avoided», and it is this perspective that has led them away from investing in growth companies, where you have to grapple with forecasting the future and towards investing in mature companies with tangible assets. Similarly, value investing’s focus on dividends has caused adherents to concentrate their holdings in utilities, financial service companies and older consumer product companies, as younger companies have shifted away to returning cash in buybacks.
In this post, rather than focus on your or my price of risk. In this, my third post, I want to explain why value investing is in trouble and point to ways in which it can be reinvented, to gain new life. For value investing to rediscover its roots and reclaim its effectiveness, I believe that it has to change in fundamental ways. For the moment, you may have lost, but having watched this boutiques near me for as long as I have, that can change in a minute. Additionally, Mr. Kinahan noted, Tuesday’s worse-than-expected consumer confidence report may also be weighing on markets. I think that value investors are on shaky ground assuming that doing your homework and focusing on mature companies yield precise valuations, and on even shakier ground, when assuming that markets correct these mistakes in a timely fashion. DryShips, Inc. (DRYS) – Shares of Dryships Inc are showing some major buy signals right now.
Akamai Technologies Inc. (AKAM) – Akamai Technologies Inc. (AKAM) was up on renewed buyout chatter. While I will consider this issue in depth in a post later this week, I will look at the interaction between dividends, buybacks and market damage in this post. You might think that this isn’t all that important in investing, because the goal will always be to make money, but this would be a grave error, and it would indicate an overly simplistic view of investing and money in general. I do not think that I will be invited back again, because I argued in harsh terms that value investing had lost its way at three levels. If you look at the US stock market over many many years, you will see that the average daily move in the market is less than 1% (2008 and 2009 are exceptions). Does that mean that stock prices are ready to rocket to new highs?
This is because Rolex historically raised their prices 3 to 5% p.a, with vintage watches retaining good value. It has become rigid: In the decades since Ben Graham published Security Analysis, value investing has developed rules for investing that have no give to them. It has become righteous: While investors of all stripes believe that their «investing ways» will yield payoffs, some value investors seem to feel entitled to high returns because they have followed all of the rules and rituals. It has become ritualistic: The rituals of value investing are well established, from the annual trek to Omaha, to the claim that your investment education is incomplete unless you have read Ben Graham’s Intelligent Investor and Security Analysis to an almost unquestioning belief that anything said by Warren Buffett or Charlie Munger has to be right. When you are looking at advisory for advice to invest in, you want to make sure that they are well-known companies that have large market knowledge. I explained before (see What happens after the Santa Claus rally?) that the «earnings cliff» is the result of a deteriorating profit outlook by large cap multi-national companies. For instance, value investing has been steadfast in its view that companies that do not have significant tangible assets, relative to their market value, and that view has kept many value investors out of technology stocks for most of the last three decades.