If you buy a share, it’s usually because you think the price is going to go up. The person selling it to you usually thinks the price will fall. So one of you is bound to be wrong. And the person on the other side of the trade is typically an institutional investor with more information and resources than you. So you’d better have a good reason for believing you’re the one who’s got it right.
Value investors think they do. They look for stocks everyone else hates – that’s why they’re cheap. Overall, it works. Stocks that have underperformed the market for three years typically outperform for the next three. But it’s not easy.
By definition, value investors go against the crowd. They buy when everyone else is selling, and sell when everyone else is buying. And they might have to wait longer than three years to be proved right. For example, growth investing has performed better ever since the 2008 financial crisis. So value investors must be both patient and stubborn.
Psychologically, that isn’t easy. That’s one reason why each autumn value investors flock to New York for the Value Investing Congress (VIC), the largest value investing conference in the world. They come to be reminded that value investing works. They come to reassure themselves that they are not sad and lonely; they’re geniuses. And they come to share their best ideas.
Last year, there was an air of excitement at the VIC. It had been a bad summer for stocks; the S&P 500 was down 15% on its spring high. Talks on cutting the deficit were going badly in America, while Europe was in crisis yet again.
But value investors sensed opportunity. The American economy was recovering, albeit slowly, while the European Central Bank (ECB) was bound to have to act soon. They were right. The S&P is up around 30% on last year.
This year, the mood was more subdued. Most attendees said they were having a hard time finding value. More than half of the 15 presentations were on short ideas (ideas for stocks to sell), small firms, or very specific opportunities, such as special situations or turnarounds. My feeling was that value investors sense that stockmarkets are fully, if not over, valued.
For example, Bill Ackman of Pershing Square (who made his name shorting bond insurer MBIA before the crisis) put 18% of his fund into Procter & Gamble (P&G) in spring. Ackman thinks P&G has been poorly run, with high costs and a weak position in emerging markets. That means it has a lower rating than peers such as Unilever.
He thinks a rise in profits and its price/earnings multiple would offer the chance of a double. But it’s hardly a deep value investment – P&G is surely one of the most defensive positions an equity investor can make. Is Ackman signalling the top?
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The star of the second day, meanwhile, was someone better known for short-selling than traditional value investing: David Einhorn of Greenlight Capital.
Five years ago, he told the VIC audience why he’d just shorted Lehman Brothers at $70 per share. He held his position in the doomed bank all the way to zero. This year, on the short side, he picked out fast-food chain Chipotle Mexican Grill.
It’s too expensive, says Einhorn, and exposed to rising food prices. On the long side, he likes car maker GM because the 2008 bankruptcy cleaned up its balance sheet and cut costs. Its cars are getting better, and investors may be underestimating the recovery in vehicle sales.
Not everyone was defensive. Alexander Roepers of Atlantic Investment Management runs concentrated portfolios of just five to seven stocks. That’s way too risky for me. But it means Roepers knows his companies inside out.
One long position he discussed was Joy Global, which supplies mining equipment to the coal industry. US coal prices have been hit by the development of ‘fracking’ technology, which has released huge supplies of cheap onshore natural gas (see our cover story for more: The shale gas revolution).
But Roepers reckons that every American energy user who can possibly switch to natural gas has now done so. That means coal prices have bottomed. Indeed, American miners are now exporting like mad to Europe because coal is so much cheaper than our domestically produced gas and Russian imports. Joy’s main rival, Bucyrus, was acquired by Caterpillar two years ago at twice its current valuation.
Overall, this year’s VIC seemed less well attended to me. I feel sure that’s telling me something. I can’t say exactly what, but my gut instinct is that there simply isn’t that much value out there right now.
This mood was captured well by up-and-coming short-seller Zack Buckley, with his presentation: “Is it 1999 again?” Recent cloud computing and social media initial public offerings, with their high valuations and vulnerable business models, remind him of the late stages of the dotcom boom.
1999 was the last time value investors underperformed the market badly: they couldn’t find anything undervalued. Needless to say, they were vindicated in 2000. Investors, particularly in the more expensive stockmarkets, such as America, should be very wary.
• Simon writes the True Value newsletter. For more, see www.moneyweek.com/TV.
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