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The Values of Value Investing

in Process

This article has been in the works since last November.  It started out as a speech I gave to the Swiss CFA Society.  To me it is an important framework for understanding value investing.  I think the rise of the consulting industry, armed with cheap computing power and an abundance of stock-specific data, has harmed the industry, because according to them, a “value” investor is one who holds statistically cheap stocks and a “growth” investor is one who holds statistically expensive stocks.  The truth is somewhere … well, actually it’s a lot more complex, and the consulting industry's crude segmentations don’t capture it.  - Vitaliy The Values of Value Investing I organize a conference every summer called VALUEx Vail. Vail is a quaint, beautiful, ritzy ski resort town tucked away in the gorgeous Rocky Mountains, about 100 miles from Denver.One day I received an e-mail from a reader asking why I — a value investor — would have a conference in an expensive place like Vail. He suggested that as a true value investor I should hold the conference in a hotel somewhere by the airport where prices are much cheaper. His precise comment was, “I thought value investors were supposed to like cheap stuff.”This e-mail challenged my...

Downhill Racing Meets Value Investing

in Process

I wrote this article in May 2015. Every time it was destined to be published in the pages of Institutional Investor, it got bumped by another, more timely one I had written. Finally, when a space opened in September, the market had taken a major dive, and what was supposed to be an “evergreen” article was suddenly out of touch with reality. Here is the irony: This piece addresses complacency, but its author was complacent too. The market has recouped its summer losses, and this article is relevant again.I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottomThen, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep.Suddenly, something changed. I could not ski. I could barely make...

Investment Lessons Learned from the Poker Table

in Process

“I don’t know.” These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss.I received a few e-mails from people who had a problem with a phrase in one of my blog posts this fall. In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road.I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many e-mails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen.I don’t know whether...

For Investors, Discovering Truth Takes Time

in Process

The Roman philosopher, playwright, statesman and occasional satirist Lucius Annaeus Seneca wasn’t talking about the stock market when he wrote that “time discovers truth,” but he could have been. In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random. Here are two real-life examples:Let’s say you had the smarts to buy Microsoft in November 1992. It would have been a brilliant decision in the long run — the software giant’s stock has gone up manyfold since. But nine months later, in August 1993, that call did not look so brilliant: Microsoft shares had declined 25 percent in less than a year. In fact, it would have taken you 18 months, until May 1994, for this purchase to break even. Eighteen months of dumbness?In the early ’90s the PC industry was still in its infancy. Microsoft’s DOS and Windows operating systems were de facto standards. Outside of Macs and a tiny fraction of IBM computers, every computer came preinstalled with DOS and Windows. Microsoft had a pristine balance sheet and a brilliant co-founder and CEO who would turn mountains upside down to make sure the company succeeded. The...

How Emotional Intelligence Can Make You a Better Investor

in Process

Your knee hurts, so you pay a visit to your favorite orthopedist. He smiles, maybe even gives you a hug, and then tells you: “I feel your pain. Really, I do. But I don’t treat left knees, only right ones. I find I am so much better with the right ones. Last time I worked on a left knee, I didn’t do so well.”Though many professionals — doctors as well as lawyers, architects and engineers — get to choose their specializations, they rarely get to choose the problems they solve. Problems choose them. Investors enjoy the unique luxury of choosing problems that let them maximize the use of not just their IQ but also their EQ — emotional intelligence.Let’s start with IQ. Our intellectual capacity to analyze problems will vary with the problem in front of us. Just as we breezed through some subjects in college and struggled with others, our ability to understand the current and future dynamics of various companies and industries will fluctuate as well. This is why we buy stocks that fall within our sphere of competence. We tend to stick with ones where our IQ is the highest.Though we usually think about our capacity to...

Unraveling the Mystery of Oil and the Swiss Franc

in Process

Has the DNA of the global economy been gradually altered by endless injections of quantitative easing, morphing it into a freakish mutant? Are things that are not supposed to happen for centuries on end going to become common occurrences? The collapse of oil prices and jump in the Swiss franc have forced me to puzzle over these weighty questions. In isolation, these events and the direction of their moves did not worry me, but their magnitude, velocity and proximity to each other sent me on an intellectual quest.Let’s start with oil. Supply has been increasing due to growth in shale oil production in the U.S., and that increase along with a stronger dollar drove oil prices lower (since oil is priced in dollars). Additionally, demand for oil has weakened in the developed markets as vehicles have become more fuel-efficient. However, none of these things are new. You can also blame the fall in oil prices on OPEC and its unwillingness to lower production, but what is now an obvious decline was not obvious six months ago. Oil prices have sunk more than 50 percent in less than five months, and this happened not during a financial crisis but in a...

To Infinity and Beyond? Don’t Be Surprised If the U.S. Stock Market Cracks

in Process

In 1986 Jeremy Grantham — an investment legend and co-founder of Boston-based asset manager GMO — started to warn his firm’s clients about, and even created an investment product to protect them from what he believed would be, the eventual bursting of the Japanese stock bubble. We all know how that story ended: In 1990 the Japanese market crashed, stocks declined more than 70 percent from their peak, and the Japanese economy slipped into a 25-year coma. However, before all these bad things happened, from 1986 to 1990 the Nikkei more than doubled. Grantham was right, but it took four years for the risk that he identified to play out. From today’s perch, four years in the ’80s are just four years in the ’80s, but I am sure that to Grantham they seemed like dog years. In the eyes of his clients and the market, Grantham’s credibility became inversely correlated with the Nikkei. Every time the Nikkei set a new high, Grantham’s reputation set a new low. I used to think that bull markets end when every bear is mugged, skinned and reincarnated into a bull. Now I realize that is only partially true. A lot of bears stop growling because they get exhausted or simply...

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