Long term value investing

[Blue_Bull]

I realize most of you are probably short term traders, but I you probably still have an opinion on this -

Do you think that the market is less efficient when it comes to long term value picks? So example, a company may be undervalued and rise like, 100% in 5 years. But because of the 5 year time frame, nobody wants to touch it right now. Is that logical?

Also, I think this topic came up recently on ET, but is there a good site equivalent to ET but focused more on "pure investing," rather than trading?

I'm just trying to learn multiple aspects, but I find that too many forums are loaded with spam and crap.

 

[makloda]

Some random starting points:
* read Buffet's letters (http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporate/dp/0966446100 + http://www.berkshirehathaway.com/letters/letters.html ) -- especially the older ones, when Buffet was more of a trader because he could be more nimble with less capital
* read Monish Pabrai's books. Follow his hedge fund and his buys
* other managers of interest: Daniel Loeb, David Einhorn, Seth Klarman

As a long only value investor you need a strong stomach. Drawdowns in excess of 50+% are not at all uncommon. I'd advise a ruleset that tries to reduce downside volatility/beta exposure at the expense of performance (by hedging/buying insurance). Nobody says value investors have to be 100% net long all the time.

 

[rwk]

I have a stockbroker friend who keeps trying to interest me in value investing. I have looked at it, but it just doesn't suit my needs. I am a trader, not an investor. I also think value investing is harder than it looks because value stocks tend to be quite sensitive to bear markets. That said, 2009 would have been a very good year to start such a program.

You might have a look at this group:
http://finance.groups.yahoo.com/group/magicformulainvesting/

 

[Blue_Bull]

Thanks to both of you. I can't wrap my mind around value investing - If it were as easy as checking the P/E or PEG ratios etc, then an unmanned computer would be all you need. In other words, it seems the market would be efficient enough to eliminate an easy edge. So I guess one needs to learn to find value in a place that a computer can't see it?

 

[rwk]

I was a computer programmer in a prior lifetime, and my preference is to use the computer to test everything I do. The challenge in value investing is to get enough data and data that is clean enough. In my opinion, only the Compustat Point-in-Time (PIT) database makes the grade. Unfortunately, they don't sell it to individual traders, and it would be too expensive anyway. When you're buying low p/e stocks, you absolutely *must* understand, and allow for, survivorship and lookahead biases.

 

[Blue_Bull]

Quote from rwk:

I was a computer programmer in a prior lifetime, and my preference is to use the computer to test everything I do. The challenge in value investing is to get enough data and data that is clean enough. In my opinion, only the Compustat Point-in-Time (PIT) database makes the grade. Unfortunately, they don't sell it to individual traders, and it would be too expensive anyway. When you're buying low p/e stocks, you absolutely *must* understand, and allow for, survivorship and lookahead biases.

Can you expand on the survivorship + lookahead biases?

 

[The Big D]

I think the stock market is inefficient in the long term, but not in the way you describe.

There are only two differences between the stock in a public corporation and a piece of paper that I write "STOCK" on.

1) The real stock pays dividends

2) The real stock can be voted

For investors who take small positions relative to the size of the companies they're investing in, only 1) matters since voting control is a practical impossibility for the little guy.

Unfortunately, publicly traded corporations as a whole do a colossally shitty job of paying dividends, and an even worse job of reinvesting the dividends they don't pay out to produce future dividends. The end result is the from the little guy's perspective, there isn't much difference in value between the real stock and the piece of paper - both are worth nearly zero unless you intend to turn around and sell the stock, in which case you have the mentality of a trader, not an investor.

Hence why I trade but do not invest in public companies.

If I was bankrolled to take a big enough position in a company to obtain voting control and force the payment of dividends, then common stock might look better. That's in essence the Buffett method, but I don't have that kind of bankroll so I stay away.

 

[Blue_Bull]

Quote from The Big D:

I think the stock market is inefficient in the long term, but not in the way you describe.

There are only two differences between the stock in a public corporation and a piece of paper that I write "STOCK" on.

1) The real stock pays dividends

2) The real stock can be voted

For investors who take small positions relative to the size of the companies they're investing in, only 1) matters since voting control is a practical impossibility for the little guy.

Unfortunately, publicly traded corporations as a whole do a colossally shitty job of paying dividends, and an even worse job of reinvesting the dividends they don't pay out to produce future dividends. The end result is the from the little guy's perspective, there isn't much difference in value between the real stock and the piece of paper - both are worth nearly zero unless you intend to turn around and sell the stock, in which case you have the mentality of a trader, not an investor.

Hence why I trade but do not invest in public companies.

That's a good point. Would you say that a value investor is basically a trader who looks to fundamental analysis to find an edge?

 

[The Big D]

Quote from Blue_Bull:

That's a good point. Would you say that a value investor is basically a trader who looks to fundamental analysis to find an edge?

My personal definition is that a trader is someone who looks to start with a pile of cash, enter a position, exit the position, and have a bigger pile of cash.

An investor wants to start with a pile of cash, buy something, and have it generate income.

By that definition, all investors must care first and foremost about fundamentals since the future price is irrelevant to them. But traders must try to predict price, and can do so using either technical means or fundamental means. Similarly, be definition all investors must be fairly long term but traders can work on any time horizon where they get good price movement.

Others will disagree with my definitions.

 

[dcraig]

Quote from Blue_Bull:

Can you expand on the survivorship .... biases?

For example some stocks have a low P/E because they very well deserve to have a low P/E and have very poor prospects. If they subsequently vanish for whatever reason many sources of data on the net just remove them from the historical database, leaving only the survivors. If you were to back test using this data, you could come to the conclusion that buying low P/E stocks constituted an edge when in fact all you are looking at is the survivors.