I am reading the latest book by Jeremy Siegel that you recommended,
and I am thoroughly enjoying it. He is a little bit stuck on
extrapolating past experience into the future, but he presents some
very interesting data.
By the way, I personally am beginning to believe that the mechanical
"value investing" approach of investing in the low P/E stocks, as
opposed to high P/E stocks, may have lost some or all effectiveness,
as a lot of people jumped on this bandwagon.
I was reading an article about "statistical arbitrage hedge fund crash
of 2007" and realized that a huge number of hedge funds are employing
very considerable leverage buying low P/E stocks and selling high P/E
stocks short. This cannot possibly be good for this sort of strategy.
By the way, true value investing is about more than mindlessly picking
low P/E stocks as opposed to high P/E stocks.
Reply to
Igor Chudov
Igor Chudov, I read the subject line and thought we were going to see a nice chat about Honda Motor Company and whether it is a prudent buy for value investors now. ;-)
I would say more people than two decades ago use value investing (of the flavor you and I and several others here bring up). But I am not convinced that enough use it now to make the strategy ineffective. Right now, I do not know how one would measure its effectiveness. I guess before we could have said average P/Es have risen and have stayed high for X years. Therefore, a value today is not what it was in the 19--s (fill in the decade).
ISTM hedge funds in general were central to the economic collapse, never mind the damage they did to all sorts of strategies generally considered sound for the long run. You had these younger people (in hedge funds and other creative financing vehicles) letting a gain over a short time period over-inflate their egos. They found "proof" when all they had was a gambler's lucky streak.
One just does not read of anyone who did well with hedge funds for a few decades. Mostly ISTM we read of people who overall lost a lot of money with hedge funds.
I think all stock investing may be full of heartache for a while. Sorting out where debt lies and is actually being properly reported is nightmarish. The market will be capricious on top of, say, earnings being lost. Anoop has raised this point (re not being able to trust company financial reports), and understandably. I would caution that some industries are more transparent when it comes to debt than others. I am not buying with enthusiasm at the moment. Which regrettably is dangerously going along with the crowd. Yet I have such an eyebrow raised at so many, from the typical American consumer to government giving sizable interest free loans to first time home buyers. I listen to the old-timers (this too shall pass and so on) and think about my own justification for buying stocks (that it is a bet that the economy will grow over the long run). Still, while I am not selling my positions I am dragging my feet on buying more (even though I in fact have not less than four value positions picked out). I may be missing opportunities. Mostly I am taking a breath. Having my portfolio decline some 25% in one year is bearable. Since before Black Monday in 1987, I have always been prepared to roll with market volatility. Seeing my dividend income decline--not so much.
Reply to
Another book you might enjoy is "Contrarian Investment Strategies" by David Dreman. He makes a very strong case for value investing. His first edition in the 1970's was one of the first investment books I ever read and it has influenced my approach since then. He has updated the book several times.
Value investing in general waxes and wanes over the years, both in popularity and returns. You couldn't give away a value stock in 1999. But I believe that value investing is fundamentally advantaged and will always be so.
The reason is that it goes against investor psychology. People have a strong tendency to buy popular stocks just because they are popular. They justify this with the terms "growth" or "momentum". By buying good stocks that are currently out of favor, you are far more likely to see good returns over the long haul. "Buy low, sell high" usually works better than "Buy high, sell higher".
-- Doug
Reply to
Douglas Johnson
I believe that I have that book. It is all great, as long as there are not too many mindless people buying "low P/E" stocks.
By the way, the shortcut of calling buying low P/E stocks "value investing" is misleading. A stock can have a high P/E and still be a value stock. Say, a company has no debt, $1/share earnings, $100 in per share in appreciated buildings with book value of $20/share and shares cost $30 each. This is a value stock. But it is high P/E.
You can also find examples of low P/E stocks that have low P/E for a good reason, like financial fraud.
True value investing is about finding out what a company is "really worth", as opposed to just buying "low P/E".
That, is a very difficult thing to do, and buying low P/E is an easy thing to do, and that easy thing also used to pay well due to the reasons outlined by Dreman and many others.
The question is that, now that there is a lot of people in those leveraged hedge funds "buying low P/E and shorting high P/E", will it still work?
And my answer is "I am not at all sure".
So, while I agree that buying cheap is a superior strategy to buying "growth at any price", I am not at all clear that low P/E is still cheap.
This is true if that investor psychology overwhelms all those "automatic low P/E investors". Plus the crash may have affected it as well. I think that it is a fantastic time to buy stocks, but buying a straight index now may be a better approach than buying a "value index".
Reply to
Igor Chudov

Site Timeline Threads

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.