Workshop IX: Value Investing

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1 Workshop IX: Value Investing Agenda Myths Philosophy of Value Investing Value Performs: Empirical Evidence Next Series Preview 1

2 Myth #1 Value investing is for sissies and nerds No! (i.e. Krish & Ming are cool) Takes Jedi-like self discipline and patience Takes crap from momos and techies with a straight/professional face Makes more $$$ on average than other strats Myth #2 Value investing is too hard & complicated No complicated finance involved It s a PHILOSOPHY, a WAY OF THOUGHT o o Conservatism, self-control, self-doubt Quiet meditation vs. loud hype Wisest are those who know they know nothing Socrates 2

3 Myth #3 Value investing is dead in this bull market Excess liquidity (i.e. stupid money) won t last forever Pockets of inefficiency will always exist o o Unsystematic, business specific risk/reward Avoids systematic risks and market blips Bear market? No problem! Philosophy A stock is a small piece of a business Buy low, sell high Price matters! Always figure out price Margin of safety Conservatism over optimism Contrarian bias & information edge Concentration is better than diversification But you better know what you re concentrating on Selectivity and never falling in love 3

4 Stock = Business Buying stock is buying a business Businesses have an estimable value Stock is not just a ticker with a price blip Mr. Market does not think like this Mr. Market has mood swings everyday that we try and avoid (up one day down the next) Investing vs. speculation The 10-Year Test Buy low, sell high Price matters! Good companies don t make good stocks Good stocks are a combination of (1) a good business (2) a low price 4

5 Margin of Safety Never overpay! Be a cheapskate Stingy-money is better than stupid-money Protection against downside Maximization of upside Assume the worst! Risk/reward must have upside bias Distrust growth assumptions Contrarianism & The Edge What do we know the market doesn t? The market typically and often has it right Public information is not an edge Interpretation of public information is an edge Is the market being stupid? The market CAN be stupid! People who don t believe that are just a part of the market that doesn t like to be called stupid. 5

6 Concentration! Contradicts modern finance Concentration is better than diversification Don t eliminate unsystematic risk Textbook risk is volatility (both up and down) True risk is just downside Protect downside with margin of safety Why diversify to reduce upside? Investing stocks eliminates unsystematic risk almost completely Selectivity There are thousands of publicly traded stocks be selective, don t settle! Don t fall in love Screening first! Time is scarce Analysis on good ideas only 6

7 Empirical Evidence Value vs. Growth Arguably there s no difference between the two strategies Both strategies aim to purchase stocks at prices below their intrinsic value Main difference is that growth investors are more willing to pay for growth (higher P/Es) But why pay when we don t have to? 7

8 Buy the losers, Sell the Winners Source: Damodaran Value Trumps Growth Source: Damodaran 8

9 Preview for Next Workshop How do you find value ideas? screening 9