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A fundamental problem with "value investing" -- every valuation metric implies a growth rate (the rate that would give all stocks the same expected return). Buying a "cheap" rather than "expensive" stock is just a bet that the expensive stock won't grow into its valuation,
or more accurately that the cheap stock will beat its implied growth by more than the expensive stock. When you look at it this way it's clear that "value investing" is far from guaranteed to outperform. It's not even obvious there should be any premium at all.
Part of the reason that value has sucked over the last ~15 years is that value spreads widened, but equally if not more important is that the expensive stocks grew into, and even outperformed, their implied growth rates -- i.e. the central bet failed.
This reminds me of my favourite chart/argument from the pension world suggesting that the long investment horizon will allow one to buy when prices are low and sell when they are high
I was told there were no problems with value investing and everyone else is wrong
It’s called ESG investing now.
At the rates of some ridiculous future revenue multiples; it is not unreasonable to assume that expensive stock will actually not grow into its valuation. I think absolute numbers are often overlooked as growing revenues from 500k to 750k is not the same as growing from 2m to 3m.
Reason is that network effects are limited, TAM is overrated as it neglects competition (abnormal profits are not easy), economies of scale certainly not easy. SaaS companies have been playing the trick of zero profitability, huge SBC, and pure top line growth. That catches up.
It's all stupid because they almost never discuss sizing and relative positions i.e. distribution of outcomes. I take it with a grain of salt but generally it's a rank things and look at extremes method. Not more quantitative than that. Which is a positive in some ways.
Price multiple valuation omits investment in positive NPV projects, competitive advantages & discount rates. Even worse, the "value" factor gets tethered to low growth in many methodologies to ultimately conflate low profits, low growth & high leverage.https://twitter.com/dk_bergen/status/1450168174138232838 …
also while everyone is busy talking up the performance of "value" circa 2002-2007, there's very little introspection about what those components were vs. today. You could have bought AMZN for 0.7x sales 20 years ago, and stuff at that level today is, like, the Funko pop company
For that matter, it's also Walmart. Which is because they're a mature company that never grows and never shrinks running a 3% profit margin (on 2.5% of the US economy, subtle rub) and that's 20x profit.
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