
The Superinvestors of Graham-and-Doddsville (1984) - bryanwbh
https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors
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acconrad
I belong to a fair number of value investing forums and made money off of the
strategy for a while. Here's why I think this no longer works in the
traditional sense and what works now:

The rise of quants, ETFs, and instant information has largely arbitraged away
value mispricings. So if it looks like a bargain, it's probably a value trap.

So where can you find value? Where the above things are not present. Quants
work for big firms. Goldman Sachs can only make a dent if it does massive
deals. As Buffett said, he could still do great things with $1mm AUM, but with
billions, he can't make small plays anymore. So individuals can only find
value where the big players (GC, ETFs) don't play. This means micro caps,
foreign stocks (Japan comes to mind as a hot spot for value). The problem is
two fold:

1\. The above-mentioned pool is very small.

2\. It's riskier.

So you have to do a _ton_ of research to avoid the value trap mistake, often
with way less information since these stocks aren't subject to the same
10K/10Q auditing that American stocks are.

Now you've researched something so much you're biased to believe it working
since you've sunk so much time into it. And because you've sunk so much time
you don't have the time to research the rest of the investment pool, so
combined you see these value investors who are very concentrated in some
highly-convicted bets. And thus, the ones that win, win big and can claim
there is always value to be found even in a market dominated by momentum
investing. The rest lose to value traps, and lose big.

So what's the takeaway? It still works. The low numbers in terms of P/E and
P/B that are in books like _The Intelligent Investor_ don't work. You have to
relax those constraints quite a bit. And you can't be looking in the S&P 500.

I used to think I could do this as a hobby. And I did. But I think I got lucky
based on the amount of time and research I did. To be demonstratively good at
value investing time and time again requires robotic levels of dispassionate
patience, and research that demands a full time job.

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lixtra
I disagree. Remember the big Apple plunge a few years ago? Or Macies about a
year ago? Or Sodastream a few years ago? I find a reasonable opportunity about
once per year. But I still lack the balls to go into these with huge amounts.
(Currently considering LB, if you ask).

~~~
acconrad
The same could be said for Facebook. What you're referring to is an irrational
market responding to news and creating a sale on an asset. "Facebook on
discount, buy now!" If you bought at the nadir of the $FB dip you'd already be
up 7% right now.

Yes, those things do exist, that doesn't mean those companies are value
stocks. Facebook is still trading at a P/E ratio of 28, and an EV/EBIT of 20,
both of which are high. Was it a discount to it's current momentum? Yes. Was
it a discount based on value? I'd say not.

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bunderbunder
Curious, how often is it even possible to evaluate a company using Graham and
Dodd's methods these days? I haven't read much of their work, just _The
Intelligent Investor_ , so there's a lot I don't know. The difference in P/E
ratio standards they talked about struck me, yes, but even more than that, I
am unsure of how to translate a lot of their ideas about how you limit your
potential losses into the modern economy.

Back when companies tended to have a lot of physical assets (relative to their
overall value) that tended to depreciate slowly, that might have been easy to
calculate. For a company that participates in the information or service
economy, though, virtually all of their value is tied up in intangibles, and
about the only physical assets that are likely to have any value at all after
a few years are the office furniture.

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derivagral
As someone who followed Intelligent Investor (and Klarman's Margin of Safety
concepts) as an amateur who made good annualized returns, my partner and I
stayed away from the modern tech stocks. We basically agreed with what you say
about the risk on the performance of a company like FB: if things go bad,
there's no real moat or tech or assets that comes close to the market cap of
the company.

What's still reasonably valid is the concept of both moats and float, both of
which I think you can get indications of in the 10-Q/A reports that aren't
always reflected in current expectations.

Also, focus on where you can win. You aren't pricing AAPL better than the
legions of professionals over 5 years, but the boring small-mid cap stocks
that are too small for major funds to care about have more opportunity.

And finally: this is why indexing is such a huge thing. This stuff is hard,
and using a low fee fund to track the market lets you live your life instead
of having an extra job. I personally quit because while the % was good, the
scalar wasn't worth the time invested.

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bunderbunder
That's more-or-less what I concluded after reading II, too, and why I never
made a serious go of it. With the amount of money I had to play with, even if
I managed to double market returns, which I assumed was a _very_ optimistic
outcome, it would still be a lower return on my time, in terms of $ per hour,
than just working the occasional contract job after hours.

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mxschumacher
A good read in a time when the valuations of Netflix, Amazon, Tesla etc are
extreme by conservative investing standards.

Many famous value investors such as Bill Ackman, Bruce Berkowitz and David
Einhorn have been getting absolutely killed in the market in the last several
years.

It is difficult for me to imagine that this pendulum will never swing back.
The combination of oligopolistic technology firms (platforms!), Quantitative
Easing, low interest rates and more globalisation than ever certainly make for
exciting times.

~~~
adventured
To be fair, Ackman got absolutely killed for going deep into VRX. The exact
opposite of what a value investor should have done, as VRX was anything but a
value play at the time. His big CMG position by contrast is well above water.

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aaavl2821
I went to columbia business school, where buffet is revered and the value
investing program is the most exclusive and sought after program in the
curriculum (and arguably one of the few that actually teaches useful skills).
they publish a letter called graham and doddsville with articles and stock
pitches from modern day value investors.

i didnt do value investing but took some classes and attended some talks, so i
am not an expert, but from what i saw, things have changed a lot. it is harder
to be a value investor today just because everything is so expensive. just
like 50 years ago opportunities to buy businesses for less than book value
became harder and harder to find, in today's market it is much harder to find
value investments as defined by traditional valuation metrics like EV /
EBITDA, ROIC, FCF / earnings yield, etc

Value oriented funds, and long / short equity funds in general, have been
having a tough time. Too many funds popped up in the last 20 years and they
are all competing for a few good investments. People are changing the
definition of "value", though i am not sure if anyone has found a good one.
Many people pitched FB and Google as value stocks, even though by traditional
metrics they could not qualify as value investments

Bill Ackman, a prominent investor and sponsor of an investing contest that is
a major part of the value investing curriculum, said if he was starting today
he wouldnt be an investor, but would start a tech company. He wasn't the only
HF manager who expressed that sentiment

~~~
pmart123
You know, I think the thing that is interesting is Buffett never really was as
resolute in Dodd's philosophy as many of the famous long/short investors who
have struggled recently seem to be. Buffet evolved as an investor:

1\. He recognized the multiplicative power of combining the insurance float
alongside his stellar investment ability.

2\. He recognized the power of moat and brand value vs. Graham and Doddsville.

3\. He saw the value in return on capital over purely P/E for a growing
business from Sees Candy.

As an aside, one reason long/shorts have had a tough time is that low rates
make it harder to generate an automatic 6% return on your short book.

But, I believe many value investors have failed to understand how technology
and network-based platforms work. P/S works better for AMZN than P/E when the
CEO is trying to minimize E. NFLX could have lower its P/E to 20 if it charged
$15/month last December. FB just had to monetize its platform by something
like a couple dollars per user right after it IPO'd. I think many traditional
value investors did not understand or adapt their thinking regarding
stickiness, revenue per user expansion, fixed costs for platform-based
businesses, and redefining what tangible and intangible asset value is.

There's an almost stubbornness to many of these investors versus a curiosity
to listen to an alternative viewpoint.

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tim333
Buffett's thinking is nearly always a pleasure to read for its clarity. If
you'd read that in 1984 and put your money into Berkshire on that basis you'd
be up about 250x.

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devdimi
I have been doing on and off value investing as a hobby investor for 8-9 years
now and can share some of the mistakes to avoid. Company valuation is just as
important as before. It is just the way it is done has changed quite a lot
since Graham. 1\. Company Growth (past and future) has to be incorporated in
the valuation. Company with P/E 15 growing at 2% per year is more expensive
than company with P/E 30 growing at 40%. This is the reason FB and GOOG are
actually a value plays nowadays. 2\. As already said the value of Intellectual
Property, Software and Human Capital can't be easily read from the balance
sheet alone. Yet these are the most valuable assets that yield highest
returns. 3\. If the founder of the company is CEO and large shareholder the
company is worth a lot more than if not. 4\. Doing all this research on your
own is hard and very time consuming. There are some excellent paid stock
newsletters with great track record that can do this for you for 300$ per year
or less. Do yourself a favor and use them. Your family will thank you.

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finfun234
There is a case to say that research and valuation is better than following a
trend. I’m working on a project to make the research project friction less. I
would love feedback on it. A frustration of mine was reading boilerplate text
when I read the company risk section. So I applied some machine learning &
Natural language processing to extract the unique risks. The way to access it
is to visit [https://shareseer.com](https://shareseer.com) then search for a
company name or ticker. You will get the 10k/10 q along with important risks.
The other features available are a real time insider transaction feed and a
company filings feed:

[http://shareseer.com/today/insiders](http://shareseer.com/today/insiders)

[http://shareseer.com/today/filings](http://shareseer.com/today/filings) I’m
trying to learn what are your pain points with your investment research
process ? Is this useful? And feature requests?

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rubidium
Timely, as I am just finishing a study of Buffett. Some additional recommended
reading about/by Buffett:

Buffett's bio by Lowenstein, "Buffett: Making of an American Capitalist".

A collection of Buffett's writings in:
[http://www.monitorinvestimentos.com.br/download/The%20Essays...](http://www.monitorinvestimentos.com.br/download/The%20Essays%20Of%20Warren%20Buffett%20-%20Lessons%20For%20Corporate%20America.pdf)

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btian
[1984]

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tlb
Edited, thanks.

