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Why value investing might not work today.
Benjamin Graham is considered one of the pioneers of value investing - where you find the intrinsic value of a company to be lower than it's stock price. Let’s see why purely value-based investing might not work today.
Benjamin Graham is considered one of the pioneers of value investing - where you find the intrinsic value of a company to be lower than it's stock price. Let’s see why purely value-based investing might not work today.
Interest rates
Interest rates today are close to/sub zero in developed economies, this has created a lot of cheap money which is chasing growth. Notice, this money will mostly never chase “intrinsic value”. Let’s understand what this means.
Interest rates today are close to/sub zero in developed economies, this has created a lot of cheap money which is chasing growth. Notice, this money will mostly never chase “intrinsic value”. Let’s understand what this means.
The Fed has printed trillions of $ since the pandemic to keep the economy afloat, this can go on for a while until substance (economy) catches up with the liquidity & valuations, the only way this can happen is by delivering growth.
The companies with “intrinsic value” lower than the market valuation (without growth) will never be looked at in this environment.
Information availability
In this age where everyone can screen based on certain metrics, if you think you’ve found a company with intrinsic value parity in most cases there might have been millions who would have already looked at it.
In this age where everyone can screen based on certain metrics, if you think you’ve found a company with intrinsic value parity in most cases there might have been millions who would have already looked at it.
Investing based on screening metrics can turn out to be a nightmare. Think of everyone sitting in their suits in fancy offices who’ve already got there ahead of you with complex investment systems and algos. It’s hard to beat this being a retail investor.
PE ratio
There are many issues with this ratio, which some investors use as a holy grail of valuation. One simple example why it may not be a right peer comparison is if two companies are depreciating it’s assets differently or if one has recently invested
There are many issues with this ratio, which some investors use as a holy grail of valuation. One simple example why it may not be a right peer comparison is if two companies are depreciating it’s assets differently or if one has recently invested
in large capex to expand, the depreciation of that company might be higher lowering the PAT and hence increasing the PE. Using this as a sole basis for valuation is a fundamental mistake a lot of investors make.
The second issue even if you do consider PE as a relevant ratio for valuation, figure out how much of the stock price CAGR would it contribute to over the next decade. If you go by the rule of 72, you’ll know that a PE expansion by 2x or contraction by half would mean
+7.2% or (7.2%) CAGR over 10 years. If you pick a stock that grows it’s EPS by 20% over 10 years, you’ll notice that the majority of the growth comes from EPS expansion and not by the PE.
Read @Marcellusinvest’s brilliant article about this here - https://bit.ly/3n9nQZU
Read @Marcellusinvest’s brilliant article about this here - https://bit.ly/3n9nQZU
What should retail investors do?
Institutional capital mostly comes with a shelf life. The simple way for retail investors to achieve reasonable returns is by buying and sitting tight for a long period of time, while also making sure the company is expanding, gaining market share
Institutional capital mostly comes with a shelf life. The simple way for retail investors to achieve reasonable returns is by buying and sitting tight for a long period of time, while also making sure the company is expanding, gaining market share
not letting go of it’s MOAT and the financial reporting is accurate. We as retail investors can’t beat institutional research, but we can beat their investment horizon. This one thing will help generate a lot of return.
