You don’t have to look far to find someone mourning the death of value investing; it dominates headlines in investing circles.
It seems, the obituary goes, that the growth indexes have handily beaten the value indexes over the past few years… and, why, you’d have to have rocks in your head to use value investing techniques.
Nevermind that it’s crazy to use an index to track the value investors’ performance. This approach is all about using rigorous quantitative or fundamental research techniques – or some combination of the two – to uncover opportunities that the market has overlooked.
By definition, there just are not that many opportunities (or good ones, at any rate) except at market extremes. There sure as hell are not anywhere near the – good grief – 2,000 or so stocks that FTSE Russell uses to form its value index.
Value investors hunt with a rifle, not a shotgun.
I’ll be blunt: That argument against value investing may well be the dumbest argument of all time. And if you buy into it, it’s costing you money.
Here’s Who’s Really Winning the Performance Game
The last time I jumped waist-deep into the growth versus value debate, I pointed out how well some of my Heatseekers “sabermetrics” recommendations have performed in recent years, as compared to the market averages and growth indexes.
Needless to say, they have crushed both competitors, and I expect they’ll continue to do so in the future.
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Today, I want to look at some other managers that pick stocks in a similar fashion. There are some differences in style and approach, but these folks have put buying assets and cash flows at bargain prices at the very core of their investment philosophy.
I asked a very simple question: What would happen if you just bought the top five stocks from each of these managers’ portfolios and rebalanced that portfolio every three months?
You would be winning the performance game. Absolutely crushing it, in fact, for quite some time.
You would have outperformed over the past three, five, and 10 years.
To be sure, you would not own super exciting social media and software companies. In fact, your theoretical portfolio is packed with some ugly ducklings that, for the most part, fly way under Wall Street’s radar.
Your holdings are a collection of banks, hotels, aircraft leasing companies, timber producers, senior living facilities, and beer companies. The only tech presence you have would be a semiconductor manufacturer, Micron Technology Inc. (NASDAQ: MU).
Micron, by the way, is down almost 35% in the last six months alone. That’s more likely to get a laugh than admiring comments would you tell folks what you own. You own the last laugh, though, because you are making a lot more money than the conventional investors who love to own the exciting stocks.
I decided to ask a second question of the magic database.
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Much of what I use to put together my approach to buying stocks and building portfolios starts with deep value investing. It’s improved and refined by what I’ve learned about the very best investors on the planet today.
Private equity investors also buy assets and earnings on the cheap and then sell them when they get a price that reflects full value or more. They use four different strategies, or buckets, in the same way I do.
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So what would happen if we only bought the stocks these mega-investors owned?
I picked five private equity firms that use techniques very similar to my own. What happens if we just buy what they own?
Well, to steal a phrase from the current resident of 1600 Pennsylvania Avenue NW: “Winning. So much winning.”
You crush the index-fund buyer and the performance-chaser over the three-, five-, and 10-year time frames.
Again, for the most part, it is not an exciting portfolio.
You’d own eyeglass stores, a power transmission manufacturer, a commercial real estate lender, a commercial landscaper, a collection of single-family rental homes, a burglar alarm company, craft stores, and a reinsurance company in runoff mode, among others.
Chattering on about these stocks will not get you invited to the cocktail party at the boss’s house this weekend. It will, however, help you make enough money so that one day soon, you’ll be able to tell your boss to take a leap at a rolling donut sometime.
But there is excitement to be had in the value game. And here’s where that happens.
The best private equity firms have hundreds of billions of dollars under management, and it makes no sense for them to mess with smaller companies. Anything less, say, than a billion dollars or so just isn’t worth their time.
We don’t have that problem. That means we get more – much more – to choose from than your Warren Buffetts and Seth Klarmans; we can use the same valuation techniques and portfolio decisions on smaller companies and bank even higher returns that the big boys can.
It’s as much a size issue as it is a talent issue.
Real value investing is far from dead. It’s not even all that boring when you get down to it, investing alongside some of the richest movers and shakers on the planet. And when done correctly – with a heavy dose of private equity-style company selection and portfolio balancing – the returns are practically spine-tingling.
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