
The age-old strategy of buying cheap shares is faltering - prostoalex
https://www.economist.com/graphic-detail/2020/09/19/the-age-old-strategy-of-buying-cheap-shares-is-faltering
======
throwaway189262
By many measures tech stocks have not been this overvalued since 1999. Similar
situation. COVID + staying at home + government stimulus means there's a lot
of money sloshing around. Tech companies are relatively unaffected by pandemic
so all this money ends up there.

Lots of general public getting in on the market just like 99. Senseless
valuations on companies without a dollar of revenue. A historic year for tech
stocks right after a historically long bull run, just like 99. Many
allegations of fraud since money is so easy to get. Tech stocks make up
something crazy like 30% of value in market, again just like 99.

If tech isn't in a bubble, I don't know what's going on. How does virtually
every tech company become twice as valuable in 6 months? They don't.

Unlike last time, most of these companies won't crash to zero. But they could
easily lose 2/3 of the value as soon as life goes back to normal and everyone
sees how much damage corona has done. The relatively fast early recovery has
the markets in a state of euphoria.

I moved all my money to "value" stocks last week. These tech valuations defy
all logic. Remember when Buffet said to be fearful when others are greedy?
Well right now he's investing out in Japan

~~~
looping__lui
I think the idea behind “value stocks” if I remember the Intelligent Investor
correctly was about “book vs. market value” in many aspects. “Buy stocks worth
a dollar for pennies”.

I think times have changed. When the automotive industry falters, the assets
won’t be worth anything near “book value”.

A very wealthy (now retired) investment banker once told me: “The stock market
over-reacts, but is right about the general direction”.

Growth potential, margins and inflation drive stock prices.

I don’t see how tech could be anything but a winner. If anything, Corona has
accelerated the need for digitization and buying patterns change.

Buffet did horribly during the crisis. He admittedly undervalued Tech and
invested in Airlines - big regrets.

I do not think a lot of industries will go back to the way things were. Why
travel in planes if you can do zoom meetings? Why your own car when you can
work from home?

Personally, I would rather be worried about the real estate market and office
buildings folding in value...

~~~
memling
> Personally, I would rather be worried about the real estate market and
> office buildings folding in value...

Real estate also has a long-term demographic problem: fewer people means lower
demand. We're below replacement rate[1], so as a general class I'd expect real
estate to underperform.

My folks sold a house in a upper-middle class neighborhood in one of the best
school districts in their state. They owned for 22 years and didn't make
inflation on the sale.

[1]
[https://en.wikipedia.org/wiki/Demographics_of_the_United_Sta...](https://en.wikipedia.org/wiki/Demographics_of_the_United_States)

~~~
looping__lui
Thanks for sharing! Yes - but with a BUT: I think it depends where. On average
this certainly is very true. But urban areas (I speak for Germany): they will
probably not see a decline in population but rather an increase. Less dense
areas may die out. Urban areas with strong economies are “hot” and I am not
convinced this may change soon. Home-office may make “urban centers” less
attractive and overvalued - but “suburbs” will remain very valuable imho.
People still want to have good infrastructure and schools, so even with a
shift from city-center office work to “suburb-homeoffice” I don’t think this
will change...

And for clarification: in Germany (over-simplified) expensive locations in
city centers run at 10kEUR/sqm, suburbs maybe at 4k-7k EUR/sqm in strong
regions? So this may sound “super cheap” to folks in the US with a bit of
upside until we reach “US prices”.

I am sorry and surprised to hear that they didn’t make inflation even on the
sale... Crazy.

~~~
dakna
The average price per square meter is roughly the same in Berlin and
Washington DC. The real estate market in San Francisco and the bay area is an
outlier. Houses in second and third tier cities in the US are actually cheaper
than comparable cities in Germany, even before you take all the additional
transaction costs in Germany into account.

~~~
looping__lui
Thanks, this is interesting!

For those who wonder: in some states, there is a 6.5% tax on real estate
sales. You sell a house for 1 Mn EUR, the buyer has to pay 65k in taxes... Per
transaction. Add the notary and add the real estate agent leaves you at 10%
pretty quickly...

And then the government wonders “why aren’t people more flexible in moving
across the country to fill all these skilled worker gaps”...

It may also be worthwhile to consider: most houses are brick houses with
excellent insulation and high quality windows. The “substance” of the houses
is usually built to last 50+ years...

------
valuearb
The terms “growth” and “value” nowadays are silly mechanical definitions that
bear little relationship to any intelligent investing strategy. The worlds
premier “value” investor Warren Buffett was buying Pepsi and Coke stock 50
years ago, and owns more Apple now than anyone.

Buffett will tell anyone who will listen that value investing is purchasing
investments at discount offering a good margin of safety to a reasonable
estimate of intrinsic value. Low price to book value or low price to earnings
don’t remotely comprise the universe of good value investments.

~~~
adthomsen
I have only recently started reading about investment and the concept of value
investing and your comment doesn't seem to encapsulate what I've understood.

There are also things like the company's management and how they run the
company. It's about looking for "wonderful companies" at a good price.

I'm not saying which investment strategy is better or worse, just that I
believe there is a lot more to Buffet's idea of value investment than you
imply.

~~~
divbzero
You and GP are both right but simply referring to different definitions of
value investing.

GP is using “value” in the traditional Benjamin Graham sense of companies that
are quantitatively undervalued based on current financial statements. This is
the definition used on Wall Street for “value” ETFs or mutual funds.

You’re referring to Warren Buffett’s expanded definition of “value” as any
company priced below intrinsic value, which can include qualitative judgment
of future growth.

You both make the point that Buffett’s approach deviates from the traditional
Wall Street definition of “value”.

------
snird
This is an over simplistic view. Simplify the terms so much and you get
garbage in, so obviously garbage out.

The russell 1000 value index is quantitative only and tries hard to define
"cheap" stocks by different measures.

Value investing in the real world, especially when talking about Buffet, is
heavily reliant on qualitative analysis. How else would Apple, Buffet's
biggest holding, will be considered a value investment?

The title therefore is completely wrong. A good title would be: "Russell 1000
value index performed worse then their growth index recently"

~~~
throwaway5752
First, _Berkshire Hathaway_ holds AAPL. Ted or Todd probably initiated the
position, not Warren Buffett.

Second, they are up about 300% on the stake. That equates to a P/E of 10x
based on ttm earnings on AAPL and their basis. At the time, I think AAPL had a
pretty modest valuation, also. The theory is that phones were cyclical and
that service income would not offset the loss of income from devices. AAPL was
widely discussed as a value investment around that time (as was Facebook).

~~~
divbzero
Todd or Ted was the first to buy Apple shares for Berkshire, but Warren
Buffett made the decision for the bulk of Berkshire’s current stake in Apple.
The $35 billion Apple investment (worth more now) [1] is larger than what Todd
or Ted manage (about $13 billion each as of last year) [2]. Buffett has also
commented publicly on the rationale behind his decision to own Apple.

[1]: [https://www.cnbc.com/2020/07/16/warren-buffett-
reaps-40-bill...](https://www.cnbc.com/2020/07/16/warren-buffett-
reaps-40-billion-from-giant-apple-stake-since-march-bottom.html)

[2]: [https://www.cnbc.com/2019/02/25/warren-buffett-says-
berkshir...](https://www.cnbc.com/2019/02/25/warren-buffett-says-berkshire-
stock-managers-weschler-and-combs-have-trailed-the-sp-500.html)

------
throwaway5752
This is the kind of headline you look back five years later and realize it
marked the market top.

~~~
paul_f
Maybe, but don't ever ever try to time the market.

~~~
dls2016
Haha why? I'd _much_ rather be wrong and miss out on some gains for a year
than loose a bunch like I did in 2008 with this mentality. Pandemic damage is
certainly _not_ priced in.

~~~
staticman2
Because if there is a bubble it can go on for a decade, you'll eventually lose
faith in your strategy and go all in at even worse valuations.

------
inthewoods
Usually when I see an article like this, I start looking at the strategy
because it usually means it's about to start working again.

I remember an article saying "buy and hold was dead" in 2009. Marked the exact
time to do buy and hold.

~~~
themodelplumber
I'm not using the strategy myself, but if I had to buy and hold anything right
now just to test your idea, the market seems full of reasonably intuitive
options. I could think of a lot more worrying securities than e.g. AAPL at
$106. They've split many times before, and the odds are it'll happen many
times again in the future. (This is not investing advice, yada yada)

------
klipt
Shouldn't any well known strategy stop working over time as more people use
it? There's only a finite amount of alpha.

~~~
im3w1l
I've heard people say that the higher returns are compensation for the higher
risk.

~~~
skohan
Theoretically if the risk is actually higher, there should also be a more
substantial downside at some point.

~~~
lotsofpulp
But practically, you can socialize the risk by devaluing the currency.

------
opportune
"Cheap shares" are only cheap because investors are pricing in less growth
compared to other countries with similar revenue. Common mistake new investors
make is to invest only in companies with low P/E because they're
"underpriced". But the pricing is the market saying they have little faith in
their abilities to improve their business.

The obvious explanation is that the market is getting better at assessing
growth. Of course there are companies like Tesla, Nikola, Snowflake with
insane valuations relative to their actual business (and two of them are solid
companies with real products and growth). It might be possible that people are
pricing in too much growth. But when yields outside of equities are so low you
kind of have to chase growth, which incentivizes investors to pile onto growth
opportunities.

------
mcguire
This is unsurprising, given how disconnected the market has been from the
economy. "Growth" stocks have naturally taken the greater share of incoming
money.

It won't last. There will be a correction, of one kind or another, more or
less violent. That is how the "efficient market" works.

------
mullingitover
This is when you switch to the other age-old strategy: selling ovepriced
shares.

~~~
ComputerGuru
Yes, that’s the easy and obvious answer. The hard question: where do you park
that money? People are investing in tech stocks because everything else is so
uncertain right now.

~~~
oh_sigh
I paid off my 25 years remaining mortgage after selling some long-held TSLA,
because I really didn't know where else to put it, especially with the
election uncertainty coming up. I feel a little bit cowardly doing this, but
I'm in tech and aapl/amzn/goog is a fair chunk of my portfolio and don't want
to put even more of my eggs in one basket.

~~~
marketgod
I really recommend rethinking that. TSLA is the future of the market. Hold it
forever.

------
inshadows
Where do the authors of the article get the chart data?

It turns out that index details and data are kind of treasured secrets. I
could only find Russel 3000 on Bloomberg and MarketWatch[3][4]. On official
FTSE Russell page there are no current values[1]. On Googling "Russel 3000
Growth" I get a chart from Google, but when going to MorningStar, which
according Google's disclaimer is their source of data for "INDEXRUSSELL", I
could only find Russel 3000[2] and it has bogus quote compared to Bloomberg
and MarketWatch.

I'm new to all this and since I've been reading a lot about ETFs latey I was
hyped about the transparency. But it seems that if you're not Authorized
Participant and the ETF tracks index such as Russell 3000 Growth, you know as
much about your portfolio as if you had money in managed mutual fund.

[1] [https://www.ftserussell.com/products/indices/russell-us-
styl...](https://www.ftserussell.com/products/indices/russell-us-style)

[2]
[https://www.morningstar.com/indexes/ixus/rut/quote](https://www.morningstar.com/indexes/ixus/rut/quote)

[3]
[https://www.marketwatch.com/investing/index/rua](https://www.marketwatch.com/investing/index/rua)

[4]
[https://www.bloomberg.com/quote/RAY:IND](https://www.bloomberg.com/quote/RAY:IND)

~~~
anonu
ETFs have to publish their fund holdings daily. Go to the issuer website and
you'll be able to download it.

In addition you can go to edgar and download the NPORT files monthly.

You're right that index positions are expensive to obtain. But the ETF
holdings are a pretty good proxy

------
viburnum
It's been a long time but I remember one explanation of the value premium was
value stocks are more likely to get wiped out in a crisis (no free lunch).

Another was that high commission costs would have eaten up all the gains in
actually maintaining a value portfolio. Apparently there's a lot of churn in
and out of value.

------
sd_mikey
Between the Feds quantitative easing during the Great Recession and now their
buying of corporate bonds (sometimes junk), it’s difficult to discern the true
value of companies. Easy and cheap money can make balance sheet appear pretty
good at first glance.

~~~
nemo44x
The USD losing value relative to peers is helping the market as well. Most
companies generate significant revenue overseas but report in USD. As the
dollar falls in value they end up with more dollars when converting.

If the dollar continues to weaken then I’d hedge towards the markets
continuing an upwards trajectory.

~~~
ericmay
Is the dollar weakening? I think right now the Fed is trying to prevent
deflation because of the demand for dollars.

But if the dollar weakens, it doesn’t weaken with no benefits, America starts
selling and exporting more as products and services become cheaper.

~~~
nkurz
One common way of measuring the strength of the dollar is to compare it to a
"basket of currencies":
[https://www.investopedia.com/terms/u/usdx.asp](https://www.investopedia.com/terms/u/usdx.asp)

By this standard, the US dollar is down about 10% from its post-COVID crash
high (103 -> 93). But over a longer time scale, it's up about 10% from where
it spent most of the 2000's:
[https://www.marketwatch.com/investing/index/dxy/charts](https://www.marketwatch.com/investing/index/dxy/charts).

So I think the answer both "yes, the dollar is signicantly weakening" and "the
dollar is still slightly stronger than its recent historical norm".

~~~
ericmay
Yea great info to share. Thanks for that!

I’m wondering if that describes this scenario: there aren’t enough dollars,
there is high demand for them, but as they get printed they go into
securities.

What do you think?

~~~
nkurz
I don't feel I understand well enough to offer much of an opinion, but I think
that captures a lot of it. An important addendum might be that a lot of
foreign debt is dollar denominated, which means that dollars are often
required even to service debt that is not US originated. In my amateur
opinion, this is a good primer: [https://www.lynalden.com/global-dollar-short-
squeeze/](https://www.lynalden.com/global-dollar-short-squeeze/)

------
letstryagain2
"You can gauge just how pricey a stock is by looking at its price-to-book
ratio,"

"Since 2010 the Russell 1000 value index, which tracks American stocks with
low price-to-book ratios and low expected earnings growth, has risen by just
87%, compared with 171% for the market overall."

This reminds me of what Blow-up artist Niederhoffer told me before his second
blow up: Price-Earnings ratios have no meaning for long term stock performance
:-)

------
DennisP
Value stocks have always faltered when growth stocks did well.

If value stocks always worked then they would lose their advantage. The fact
that people give up on them is one theory academics have used to explain the
persistent long-term edge value stocks have had over growth, for at least the
past century.

------
jariel
Massive inflation in stocks and real-state. It's ridiculous. They should have
started raising interest rates years ago - we had record low levels of
unemployment, what was the Fed doing but protecting the top 10%?

And for failing to make the right moves ... we get hit with COVID.

~~~
BMSmnqXAE4yfe1
Low interest rates are dictated by market forces, not by "them". Too much
money, accumulated by older people, chase too few investments, that young
people must pay interest for. There are fewer and fewer young people relative
to old people, that's the fundamental problem.

~~~
jariel
Interest rates are very effectively controlled by the Fed and if they want to
raise them, they can, anytime.

~~~
BMSmnqXAE4yfe1
The fed rate always closely follows treasury rates, and the latter are set by
the markets.

------
OGWhales
Anyone have a non pay walled version?

~~~
david-gpu
[https://outline.com/5Rps3M](https://outline.com/5Rps3M)

