I consider myself a value investor, I have read several of the classic books on the topic and practiced it.
The original value investing, what Ben Graham practiced and thought, and what Warren Buffett started with I would now call Value Investing 1.0. Net-nets, low PB, low PE with nominal growth, and similar approaches worked then and can sometimes still work now. I think the risk currently is that the pace of change and ease of disrupting incumbents increased so much, that revenues and margins can decrease so quickly that such 'value' investment indeed becomes a value trap.
IBM, KHC (lately), retailers, etc. come to mind.
There will be of course good outcomes in that category, and I hope that BHC and VER will turn out to be like that in my portfolio.
Famously, Buffett thanks to Munger realized the value of quality/moat/growth and enhanced value investing to recognize these qualities. The prime example given by them is of course See's Candies.
The modern version of it are all the technology companies, which can grow revenues at a high rate with virtually no incremental capital required or when at worst R&D is the new Capex. Let's call it Value Investing 2.0.
Present-day FB and GOOG are ideal examples of that which I own. But many other companies fell into that bucket, with the increased importance of internet.
Lately I came across Whitney Tilson's interesting passage in his GOOG article:
Rather, it’s in part because the stock has always appeared expensive me, using the traditional valuation metrics with which I’m most comfortable • But there are other reasons, rooted more in emotion than logic: – As a contrarian and value investor, I don’t like owning what everyone else owns – I don’t like buying stocks that have already risen a lot (instead, I prefer to bottom-fish among the beaten-down stocks of out-of-favor companies, betting that they can turn things around) – I felt extreme regret for not having long ago purchased the stock of this incredible company – a classic case of the “I missed it” phenomenon
Buffett and Munger were asked, “…what have you learned about investing in technology companies?” Munger answered that their “worst mistake in the tech field” was not investing in Alphabet: • Well, we avoided the tech stocks, but as we felt we had no advantage there and other people did and I think that's a good idea not to play where the other people are better, but you know, if you ask me in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there and we weren't smart enough to do it and didn't do it. We do that all the time too.
On top of that, I listened to a great interview with Bill Nygren, which covered Netflix and how they would have only 14x PE in late 2017, should they increase price from $10 to $15. Another interesting angle on that is the approach to value users that Aswath Damodoran described here. In some way, this is of course what VCs always look for and try to value, at least during later funding rounds.
When done from a conservative perspective and based on proven track record and legitimate value that given service/product offers to customers with minimal marginal costs, I think this deserves a to be included in the 'value' world - as a distinct bucket, let's call it Value Investing 3.0. Post-IPO GOOG, FB and event recent NFLX per Bill's insight are I think prime examples of this.
This leaves my portfolio with one notable position which I did not bucket just yet - GM. That's because I believe it actually has pieces of each three. Let me explain:
1.0 - even though it's a cyclical stock, the current PE (adjusted for one-off charges) gives lots of safety and GM should break even at SAAR of 10-11M. With current SAAR in ~17M and average fleet age of over 11 years, I have a hard time imagining that we can reach 10M even in severe recession. The only reason it could happen is an ultra rapid adoption of self-driving across all types of vehicles...
2.0 - GM ain't internet business, but their capital allocation, discipline in building for the actual demand and keeping incentives at bay, as well as efficient capex and high ATPs make them a very strong player.
3.0 - I'm a big fan of self-driving and I think GM is best positioned to rapidly deploy in this space. Waymo is more advanced, but I think Cruise is catching up quickly and much better positioned to deploy quickly at scale than Waymo is. Integrating self-driving tech into an arms-length manufacturer's cars will be neither scalable nor cost effective. Investments from Vision Fund and Honda prove that this is a sound strategy.
AMZN is another outlier, which I actually think of as a combination of 2.0 and 3.0. While capital-intensive, the competitive moat of AMZN businesses is akin to Walmart decades ago - low-cost, operator with huge scale that is almost impossible to fight with. But there is also a unique ability of Amazon/Bezos to expand into new areas and grab new markets. Such skill/ability is a truly unique thing.
The original value investing, what Ben Graham practiced and thought, and what Warren Buffett started with I would now call Value Investing 1.0. Net-nets, low PB, low PE with nominal growth, and similar approaches worked then and can sometimes still work now. I think the risk currently is that the pace of change and ease of disrupting incumbents increased so much, that revenues and margins can decrease so quickly that such 'value' investment indeed becomes a value trap.
IBM, KHC (lately), retailers, etc. come to mind.
There will be of course good outcomes in that category, and I hope that BHC and VER will turn out to be like that in my portfolio.
Famously, Buffett thanks to Munger realized the value of quality/moat/growth and enhanced value investing to recognize these qualities. The prime example given by them is of course See's Candies.
The modern version of it are all the technology companies, which can grow revenues at a high rate with virtually no incremental capital required or when at worst R&D is the new Capex. Let's call it Value Investing 2.0.
Present-day FB and GOOG are ideal examples of that which I own. But many other companies fell into that bucket, with the increased importance of internet.
Lately I came across Whitney Tilson's interesting passage in his GOOG article:
Rather, it’s in part because the stock has always appeared expensive me, using the traditional valuation metrics with which I’m most comfortable • But there are other reasons, rooted more in emotion than logic: – As a contrarian and value investor, I don’t like owning what everyone else owns – I don’t like buying stocks that have already risen a lot (instead, I prefer to bottom-fish among the beaten-down stocks of out-of-favor companies, betting that they can turn things around) – I felt extreme regret for not having long ago purchased the stock of this incredible company – a classic case of the “I missed it” phenomenon
Buffett and Munger were asked, “…what have you learned about investing in technology companies?” Munger answered that their “worst mistake in the tech field” was not investing in Alphabet: • Well, we avoided the tech stocks, but as we felt we had no advantage there and other people did and I think that's a good idea not to play where the other people are better, but you know, if you ask me in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there and we weren't smart enough to do it and didn't do it. We do that all the time too.
On top of that, I listened to a great interview with Bill Nygren, which covered Netflix and how they would have only 14x PE in late 2017, should they increase price from $10 to $15. Another interesting angle on that is the approach to value users that Aswath Damodoran described here. In some way, this is of course what VCs always look for and try to value, at least during later funding rounds.
When done from a conservative perspective and based on proven track record and legitimate value that given service/product offers to customers with minimal marginal costs, I think this deserves a to be included in the 'value' world - as a distinct bucket, let's call it Value Investing 3.0. Post-IPO GOOG, FB and event recent NFLX per Bill's insight are I think prime examples of this.
This leaves my portfolio with one notable position which I did not bucket just yet - GM. That's because I believe it actually has pieces of each three. Let me explain:
1.0 - even though it's a cyclical stock, the current PE (adjusted for one-off charges) gives lots of safety and GM should break even at SAAR of 10-11M. With current SAAR in ~17M and average fleet age of over 11 years, I have a hard time imagining that we can reach 10M even in severe recession. The only reason it could happen is an ultra rapid adoption of self-driving across all types of vehicles...
2.0 - GM ain't internet business, but their capital allocation, discipline in building for the actual demand and keeping incentives at bay, as well as efficient capex and high ATPs make them a very strong player.
3.0 - I'm a big fan of self-driving and I think GM is best positioned to rapidly deploy in this space. Waymo is more advanced, but I think Cruise is catching up quickly and much better positioned to deploy quickly at scale than Waymo is. Integrating self-driving tech into an arms-length manufacturer's cars will be neither scalable nor cost effective. Investments from Vision Fund and Honda prove that this is a sound strategy.
AMZN is another outlier, which I actually think of as a combination of 2.0 and 3.0. While capital-intensive, the competitive moat of AMZN businesses is akin to Walmart decades ago - low-cost, operator with huge scale that is almost impossible to fight with. But there is also a unique ability of Amazon/Bezos to expand into new areas and grab new markets. Such skill/ability is a truly unique thing.
