ValuePickr Forum

TMIT Chapter 3: “The Most Important Thing Is . . . Value”

What are the key messages?

(Extracts)

HM says that the most important thing is to value things right and to act rationally when prices move.

“For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.”

“buy at a price below intrinsic value, and sell at a higher price”

HM negates technical analysis by using random walk theory which states “a stock’s past price movements are of absolutely no help in predicting future movements”

HM negates momentum investing by explaining that “if something cannot go on forever, it will stop.”

The form of investing that remain… “we are left with two approaches, both driven by fundamentals: value investing and growth investing. In a nutshell, value investors aim to come up with a security’s current intrinsic value and buy when the price is lower, and growth investors try to find securities whose value will increase rapidly in the future.”

Here the comment from Joel Greenblatt is pertinent "This estimate of value includes an estimate for future growth in earnings or cash flow.”

“most analytical approaches would say that all those other characteristics—financial resources, management, factories, retail outlets, patents, human resources, brand names and growth potential— are valuable precisely because they can translate eventually into earnings and cash flow.”

“The quest in value investing is for cheapness.”

“The primary goal of value investors, then, is to quantify the company’s current value and buy its securities when they can do so cheaply.”

Growth investing’s goal is to “is to identify companies with bright futures.”

“The difference between the two principal schools of investing can be boiled down to this:

Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price.

Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to produce substantial appreciation.”

"the choice isn’t really between value and growth, but between value today and value tomorrow.”

“Growth investing represents a bet on company performance that may or may not materialize in the future, while value investing is based primarily on analysis of a company’s current worth.”

“Joel Greenblatt: One of Buffett’s major contributions has been to extend the idea of value beyond the simply “cheap.” Buffett looks for “good” businesses that are available at an attractive price. The concept of growth is incorporated into the calculation of value.”

“I think it can fairly be said that growth investing is about the future, whereas value investing emphasizes current-day considerations but can’t escape dealing with the future.”

Using historical example of “Nifty fifty investing” in the US market during the period of 1960’s where growth stocks which were considered “quality” were bought at very high valuations and that did not end well.

He warns against ones ability to “for the long-term persistence of growth—and for the ability to predict it accurately.”

“There’s no question about it: it’s harder to see the future than the present. Thus, the batting average for growth investors should be lower, but the payoff for doing it well might be higher.”

“In general, the upside potential for being right about growth is more dramatic, and the upside potential for being right about value is more consistent. Value is my approach. In my book, consistency trumps drama.”

Value investing is not easy and it “depends on an accurate estimate of value.”

“the next important thing is to hold it firmly.”

Because “being correct about something isn’t at all synonymous with being proved correct right away.”

“The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less.”

“Seth Klarman: Ideally, considerably less. The bigger the discount, the bigger your margin of safety.”

#:grinning:

“An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse. This one statement shows how hard it is to get it all right.”

“Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out. Thus, there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third: you have to be right.”

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Another interesting snippet I found from the chapter

There’s no bright- line distinction between value and growth; both require us to deal with the future. Value investors think about the company’s potential for growth, and the “growth at a reasonable price” school pays explicit homage to value. It’s all a matter of degree. However, I think it can fairly be said that growth investing is about the future, whereas value investing emphasizes current- day considerations but can’t escape dealing with the future.

Key take away- that is fall out from it and the earlier commentary of HM on growth and value investing.

  • Even though both in value investing and growth investing, investor will end up dealing with future; the perspective of looking at future can be quite different…and I would say to some extent opposite. In value investing…you look at the future with focus on “Risk” as to what can go wrong…to dent the hypothesis that we have about current value and/or factors that can reduce the current value. Examples of technological innovations/competitive land-scape etc given by HM also signifies the same.

On the other hand, in growth investing when we deal with future, we deal with the perspective of “Opportunities”. This is so because for a growth investor a large portion of the value unlocking/realization is coming from increase in intrinsic value over time. Thus, we look at prospects of the business as to how it can grow its intrinsic value…with the prism of optimism

However, when we deal with future as growth investing…and quite a few of us…have either come around to or intrinsically believe in paying a fair value for a great business…do fall into category of a growth investor where increase in intrinsic value may be far more important than the current intrinsic value. Hence questions for HM

  1. " Even though both in value investing and in growth investing, investor ends up dealing with future…however the perspective while dealing with future can be quite different in each case. In value investing, investor looks at future from the perspective of “Risk” (factors destroying current intrinsic value) while in growth investing…for investor the primary focus is on “opportunity” available in future(factors that can lead to increase in intrinsic value). In this context,In your experience, is growth investing more susceptible to behavioral biases and what are the key biases that growth investor shall guard against?"

  2. As HM mentions, for a value investor…focus is on current intrinsic value which is primarily derived from hard asset. While determining the valuation of a potential investment what is more important the value of the assets or earning power of the asset? Also, how relevant are future cash flows (say 3-5 years down the line)/earnings while making an investment decision?

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