Why I don’t believe in Value Investing
I don’t believe in Value Investing and neither should you!
This is a very heated subject, yup, I DON’T believe in value investing nor apply its principles as the main factor to decide which stock I will buy and I will tell you why in this post, but if you want to cut to the chase, if you want to make money then you need to think outside the box. Fundamentals matter over valuations, companies with new products or making breakthroughs are more likely to be big winners and also to be traditionally “expensive”.
What is value investing?
Value Investing has it roots with Benjamin Graham (1894-1976, that’s a long time ago), he wrote two great books about value investing: “Security Analysis” and “The Intelligent Investor” (I read the latter, it has some nice anecdotes and is REALLY boring). The main idea with value investing is that one should buy stocks that are traded at prices that are below their intrinsic value. In other words, their current P/B (Price to Book) is low, around 1 and the P/E is low, in example, around 20.
This idea revolutionized the world because it was fresh and very smart, if you own a stock below its intrinsic value and the company goes bankrupt, then you will get in return more than what you paid for, so, if the company goes bankrupt, you make money and if the company does well, then you keep making money.
Why was value investing a game changer?
You need to place yourself in that day and age, its 1949 and computers are not that powerful, there’s no internet, the only way to get information about a company is by writing to them (phones were not available everywhere) or by reading newspapers. This means that news did not affect the Share Price immediately like it does today.
If you were an avid investor, you would have spent countless hours doing math for many stocks until you found the one that was trading at the right price (P/B and P/E) and if everything else looked good on the company, you would buy the stock because it was a steal. This is how Warren Buffett made his fortune and if you want to be like him, I’m really sorry but you were born 50 years too late to apply this.
Why I don’t believe anymore on value investing?
Welcome to the 21st century, we live in the Information Age! If you want to know anything, the only thing you have to do is google it. This also is true in the investing world, if you want to know what is the P/E or P/B of any company, you don’t have to dig through newspapers and do a ton of math, you just google it and that’s it!
Everyone knows what the valuation is!!! Good luck finding that hidden gem by applying value investing 😉
Stocks that value investors love.
If you wanted to be value investor, you would probably own any of the following stocks. I took this from Warren Buffett portfolio:
- Johnson & Johnson (JNJ): 99% return on 5 years
- Coca-Cola (KO): 25% return on 5 years
- American Express (AXP): 65% return on 5 years
- Costco (COST): 85% return on 5 years
- Bank of America (BAC): 160% return on 5 years
- An average of 86.8% if you had this stocks on equal portions
Those numbers are really not that bad right? Hey, Bank of America with 160% return on 5 years is amazing, but, how does this compare against index investing (Holding a S&P 500 ETF)
- S&P 500 Index: 85% return on 5 years (1 percent lower than Warren Buffett, wow…)
Well, I have to give credit where credit is due, Bank of America was an excellent investment because the bank was almost destroyed after the 2008 collapse, but, also because Mr Warren Buffett himself rescued the bank and made the stock go ballistic. Read between the lines, neither you or I have $5 Billions to rescue an almost bankrupt bank and make the share price go up because of our name!
If you take out Bank of America from the portfolio I showed earlier, you would have under performed the simple Index Investing strategy
What would you have missed by avoiding “expensive” stocks
Amazon (AMZN), current P/E: 316: Warren Buffett would have had a heart attack if you attempted to suggest to him to buy this stock at a P/E of 316! Yes, Amazon is considered to be expensive, but Amazon is THE leader in online shopping, there’s no other direct competitor and they keep making innovations, new products, Kindle, Prime, you name it. Performance: 368% return on 5 years
Tesla (TSLA), current P/E: Negative (losing money): Who on their right mind would buy a stock who is losing money? No one right? The thing is, Tesla is the first to show the world that electric cars were no longer a dream and they own the electric cars market, and when nobody thought it was possible, they released electric trucks. They shook the car industry and changed it forever. Performance: 917% return on 5 years
Netflix (NFLX), current P/E: 215: Online movie and series streaming? but why? I have cable and I can rent movies if I wanted to, why would I have a Netflix account? Guess what, that crazy idea is killing the cable companies and is growing and growing more every day. Performance: 1400% return on 5 years
Facebook (FB), Year 2012 P/E: 2300: If you were crazy for buying Amazon at P/E 316 then you must be clinically insane to buy Facebook when it was at 2300. Social media, can you make money from it? Turns out yes, and a lot, especially if you are the leader at it! Performance: 492% return on 5 years
If you had this 4 stocks in your portfolio in equal parts, you would have had a 794% return on investment, which means, if you invested $1000 5 years ago and never contributed more money to it, you would have today $7,940, while if you had Warren Buffet portfolio, you would only have $1,860 or 4 times more money!
Don’t let anyone tell you that you can’t beat the market, everybody knew about those stocks during the past 5 years, they were “hidden” in plain sight.
Growth stocks, my kind of stocks!
Growth stocks are companies which earnings are expected to grow more than the average company. Lets rephrase this, Growth Stocks are Stock from companies that are expected to make more and more money every year, year after year. Yes, that’s the kind of stocks that will bring your portfolio to the next level!
Amazon, Netflix, Tesla and Facebook have the following in common: revenue increase quarter by quarter over 10%, their are the leaders on their industry, they don’t pay dividends, instead, they reinvest the profits to expand the company even more.
Another thing that Amazon, Netflix, Tesla and Facebook have in common is that they are Growth Stocks! and they are overvalued to a value investor, and why are this companies overvalued? Because this are money-makers and shareholders expect them to grow real fast, driving the share price up and up after each financial reports.
So let the disbelievers keep crying “Amazon is overvalued, you will lose all your money!” and reap the rewards of a 368% 5 year return on investment! Hey, when you are making 368% return you can easily take a 20% loss on your portfolio, but if you are only making 86% (I’m watching you value investor), then a 20% is a massive hit.
Fortune favors the bold, investing is inherently risky, and this won’t change if you are a value/growth/index investor. When I buy stocks I buy them because this companies have great ideas, their revenues are constantly growing and they are taking the market by surprise, but also everyone is screaming “IS TOO EXPENSIVE!!!”.
It’s not up to me to argue with the market and tell Amazon: “Hey Amazon, you are overvalued, I want to buy you, please drop 80% your price so you are valued properly”, NO! I will buy it and ride the bull ride until is dry! and so far, the bull ride has lasted more than 5 years.
So you can yell “ITS EXPENSIVE”, or you can stop arguing with the stock market and take benefit from the amazing returns!
What are YOU going to do? Leave your comments below!
Quote of the day:
“The market can stay irrational longer than you can stay solvent.” – John Keynes
If you want to learn about Index Investing, read this post!