1/ Little v “value” vs Valuation Investing
Little v “value” investing focuses on buying cheap stocks Example: High B/P
Valuation investing focuses on buying undervalued, stocks trading below intrinsic value
Let’s explore the differences
#ValueInvesting
#ValuationDriven
🧵👇
Little v “value” investing focuses on buying cheap stocks Example: High B/P
Valuation investing focuses on buying undervalued, stocks trading below intrinsic value
Let’s explore the differences
#ValueInvesting
#ValuationDriven
🧵👇
2/ Little v “value” investing buys accounting variables such as book equity cheap relative to a stock’s price
But:
Value is monetary worth
Cheap is relatively low in cost
Little v “value” is Cheapness investing, not true Value investing
But:
Value is monetary worth
Cheap is relatively low in cost
Little v “value” is Cheapness investing, not true Value investing
3/ Cheapness investing spawned an industry through a seminal paper from Fama/French in 1992.
It documented amazing results to buying high book to price stocks from ‘63/‘91
In the study high b/p portfolios literally printed $
Trillions of $ chased the published results since
It documented amazing results to buying high book to price stocks from ‘63/‘91
In the study high b/p portfolios literally printed $
Trillions of $ chased the published results since
4/ Houston we have a problem…
While the high B/P stock strategy performance WAS amazing, it was born in hindsight
🤔 funny that..
Since ‘91, B/P has not been nearly as effective
Now research struggles to justify B/P or adds “new” & “improved” factors but ignores Valuation
While the high B/P stock strategy performance WAS amazing, it was born in hindsight
🤔 funny that..
Since ‘91, B/P has not been nearly as effective
Now research struggles to justify B/P or adds “new” & “improved” factors but ignores Valuation
5/ It was easy to get excited viewing Fama/French B/P results as they were really amazing during the study period
But out of sample, when answers were not known in advance, (real life), “value” investing has not impressed
“Investing is a hard way to make an easy living”
But out of sample, when answers were not known in advance, (real life), “value” investing has not impressed
“Investing is a hard way to make an easy living”
6/ Intrinsic Value
Few would argue that if one had perfect intrinsic value estimates for stocks, riches follow
Of course no one has such data, so investment research is all about developing proxies such as B/P, E/P…
But how about estimating intrinsic value directly? We have
Few would argue that if one had perfect intrinsic value estimates for stocks, riches follow
Of course no one has such data, so investment research is all about developing proxies such as B/P, E/P…
But how about estimating intrinsic value directly? We have
7/ Little v “value” vs Valuation
The Little “v” approach provides a perspective on cheapness, not Value. But
Cheap stocks are often overvalued, while undervalued stocks often seem expensive.
Which dominates? Cheap/Expensive or Under/Over Valued
It’s an important question…
The Little “v” approach provides a perspective on cheapness, not Value. But
Cheap stocks are often overvalued, while undervalued stocks often seem expensive.
Which dominates? Cheap/Expensive or Under/Over Valued
It’s an important question…
8/ What approach works better?
There are complex statistical, as well as intuitive common sense approaches to get these answers
However, both approaches reach the same conclusion - Little v “value” independent of intrinsic value destroys wealth.
There are complex statistical, as well as intuitive common sense approaches to get these answers
However, both approaches reach the same conclusion - Little v “value” independent of intrinsic value destroys wealth.
9/ Statistical Answer
The chart summarizes the confidence investors should have in the alpha to common Little v factors
The factors are so unreliable, that statistically it’s impossible to have any confidence their alpha is not = zero.
The chart summarizes the confidence investors should have in the alpha to common Little v factors
The factors are so unreliable, that statistically it’s impossible to have any confidence their alpha is not = zero.
10/ Finance Thunderdome
To understand whether Little v or Valuation dominates the other is to ask
Do cheap but overvalued stocks outperformed?
Similarly we can ask do expensive but undervalued stocks outperform?
Finance Thunderdome - Two world views enter, one view leaves
To understand whether Little v or Valuation dominates the other is to ask
Do cheap but overvalued stocks outperformed?
Similarly we can ask do expensive but undervalued stocks outperform?
Finance Thunderdome - Two world views enter, one view leaves
11/ Deconstructing Value™️
The charts that follow all have the same format, the universe is divided into 30/40/30 % groups, then crossed with two variables
This chart compares extreme B/P & Intrinsic Value Factor®️ groups
It’s obvious Intrinsic Value Factor®️ dominates B/P
The charts that follow all have the same format, the universe is divided into 30/40/30 % groups, then crossed with two variables
This chart compares extreme B/P & Intrinsic Value Factor®️ groups
It’s obvious Intrinsic Value Factor®️ dominates B/P
12/ Intrinsic Value Dominates Little “v” value
The Little v tribe argue that B/P is only one value proxy. Let’s look at the most popular alternatives: E/P, CF/P, S/P, & composites
Results are the same:
Intrinsic Value Factor®️ dominates Little v approaches to proxy Value
The Little v tribe argue that B/P is only one value proxy. Let’s look at the most popular alternatives: E/P, CF/P, S/P, & composites
Results are the same:
Intrinsic Value Factor®️ dominates Little v approaches to proxy Value
13/ Not Surprising
Intrinsic Value is the intersection of: Economic Profit, Growth, Risk, and Competition
Those are the forces that determine a firm’s worth.
What does last year’s book value or sales tell us about the next 40 years?
Obviously very little as the data shows
Intrinsic Value is the intersection of: Economic Profit, Growth, Risk, and Competition
Those are the forces that determine a firm’s worth.
What does last year’s book value or sales tell us about the next 40 years?
Obviously very little as the data shows
14/ Valuation
Available information for insightful valuation analysis is very thin and sketchy.
Few “experts” have sufficient data to show their skill, yet speak with authority.
We will change that dynamic soon…
If this interests you - retweet, and follow me @rresendes
Available information for insightful valuation analysis is very thin and sketchy.
Few “experts” have sufficient data to show their skill, yet speak with authority.
We will change that dynamic soon…
If this interests you - retweet, and follow me @rresendes
15 Notes
The data & concepts I reference are more fully developed in the following research reports (titles abbreviated) found at AppliedFinance.com
Valuation Beta tinyurl.com/ekt6cxe4
Quant Val Broken tinyurl.com/4r7xu3kc
End Multiples tinyurl.com/5fbs8k49
End
The data & concepts I reference are more fully developed in the following research reports (titles abbreviated) found at AppliedFinance.com
Valuation Beta tinyurl.com/ekt6cxe4
Quant Val Broken tinyurl.com/4r7xu3kc
End Multiples tinyurl.com/5fbs8k49
End
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