Friday, December 21, 2012

Value Investing, Idiots.

I always found value investing a complex problem.

Initially to my feeble mind, value investing seemed to be simple statistical strategies like mean-reversion.  Then I pondered, maybe it's anecdotal mind framing like 'being a contrarian'.  I'm still amused everytime someone quotes Buffet in an investment presentation.  Or even mentions him.  Yes I'm laughing at myself.

I thought I was a genius when I tried thinking about value investing as technical price strategies:
- buy when the RSI is below .20
- buy companies near their 1yr, 2yr, 3yr lows

Price driven, without any regard to fundamentals.

Guess who tried value investing in reference to Buffet and value screeners?
- buy stocks that are below it's intrinsic value, graham metrics, low p/e, book values.

The 'value trap' is real.  Have a look at HPQ this year. http://finviz.com/quote.ashx?t=hpq.  Yes, I bought this stock at 20, and yes, I sold at 13.

I recall in the 2009 GFC when there was real blood on the street and remember seeing Blue chips on the ASX like Commonwealth Bank and BHP at price earnings at between 5 and 7.  Now if you see some stock with P/E of 10, you're thinking it's a bargain.  This was my first real generational buying experience, which I spent my time busy shorting or staying on the sidelines.

Then I discovered spreadsheets and projecting earnings, projecting earnings on what? Revenues, mainly, and the components of such.  Was there truly an edge here? Finding points in an arbitrary space in future time?  Combined with portfolio theory there's hope for spreadsheet analysis, but I think 'spreadsheet investing' is no more a farce than technical analysis.  If anything, reading the tape has a more contextual background, and works better in the macro-headline, risk-on/risk-off mania of the media markets.

True value investing doesn't require spreadsheet as the core value adding tool, true value investing is being able to have foresight into industries, 5/10/15 years, and measuring really simple competitive metrics against such, and having both the buying and holding fortitude to see the theme play out.