In this blog we present our summary of the third video in the series where Value factor has been discussed. (Emphasis Ours. The screenshots have been taken from the presentation given by Rajeev Thakkar).
Is Value Investing Dead?
· Buffet Underperformance
· Huge run up in stock prices of companies like Amazon/ Netflix
· More importantly money flowing into startups like WeWork, OYO,Tesla
To answer this First We should know What is Value?
Todat’s Value is Sum of Discounted future Cash Flows. But for equity shares that the amount is very uncertain, different people will have significantly different estimates of DCF values
How is Value measured?
Proxies like P/B, P/E, P/S, P/FCF, EV/EBITDA. Lower P/B, P/E etc stocks are considered to be value stocks.
Academicians use P/B as a measure of value for factor research
Growth is generally considered as opposite of value.
If you check the constituents of Russell 3000 Growth Index you will observe it contains a lot of High PE and High growth stocks. Below is a comparison of performance of growth index Vs normal index. Growth has outperformed.
Whereas If you check the constituents of Russell 3000 Value Index you will observe it contains a lot of Low PE, Low Growth stocks. Below is a comparison of performance of value index Vs normal index. Value has underperformed.
Based on above analysis it is tempting to conclude that Value is dead.
But as Buffet says Growth is not opposite of Value but a component of Value.
Growth benefits investors only when the business in point can invest at incremental returns. You can buy a high a P/E company and it can be value investing and you can buy a low P/E company and it can’t be Value investing.
Issues with using Low Price/Book ratio as an indicator of Value
- Inflation/ Time differences
- Different Accounting policies
- Mergers and Acquisitions
- Mark to Market Accounting
- Financial and unreported losses
What’s the alternative?
If not P/B something needs to be used. DCF is the only correct method of calculating value. However, in quants it can’t be used as it a subjective
- Low Earning Based indicators like P/E ratio
- Low FCF based like EV/FCFF
- Low EV/EBITDA
Value factors have been outperforming the index for a long term. Value factors outperform the index on an average in long term. Also, it can noticed the all other value factors outperform the P/B with a considerably large gap.
Is Value Investing only about buying cheap?
No, it is about buying Quality stocks at cheap valuations