Interesting commentary out of Minyanville (Today’s Market Is Missing Valuation, Fundamental Metrics) from a self-described “old valuation guy” lamenting the disappearance of value and value investors from the market. I usually enjoy these articles. I like sitting on Uncle Warren’s knee while he talks about the time he swapped a bag of cocoa beans for a controlling interest in Berkshire Hathaway:
For several weeks I busily bought shares, sold beans, and made periodic stops at Schroeder Trust to exchange stock certificates for warehouse receipts. The profits were good and my only expense was subway tokens.
Great story, Uncle Warren. I’m right now trying to buy Pfizer (PFE) with a paper clip and some pocket lint, but I digress. I was just getting settled onto Old Valuation Guy’s lap when he springs this one on me:
One of the most frustrating aspects of the current market to an old valuation guy is the complete absence of a focus on fundamental valuation metrics and apparent lack of understanding of the relationship among leverage, growth, and value. Old Mr. Market is just not doing what he’s supposed to.
“Old Mr. Market is just not doing what he’s supposed to.” Say what? Isn’t the whole point of Ben Graham’s Mr. Market analogy that Mr. Market is a manic depressive who does silly things? What Mr. Market is supposed to do is act irrationally. You say he’s acting irrationally? He’s doing what he’s supposed to! I don’t think Old Mr. Market is the problem here. I think Old Valuation Guy is the one who’s not doing what he’s supposed to, which is to say, valuing things and taking advantage of Old Mr. Market. Reading between the lines, I think what Old Valuation Guy is saying is that the market refuses to go up. In my book, that’s not conclusive evidence that you’re not a value investor, but it’s strike one.
So-called Old Valuation Guy continues:
For those of us who grew up with a nod to Graham and Dodd, efficient market theory, or even discounted cash flow, this is one tough time, as increased volatility, whipsaw-like moves, and technical “tells” seem to be in ascension. Perhaps this is the inevitable volatility reflecting the combined uncertainty about the upcoming elections, the outlook for global recovery, and general economic uncertainty, and Mr. Market is merely going through the inevitable digestion required after the gluttony of the last decade; but I’d posit that there’s a bigger risk sitting in the wings.
Placing the words “efficient market theory” right after the words “Graham and Dodd” is vanishingly close to blasphemy. Wash your mouth out, and strike two. I’d give you a third strike for that line about “increased volatility” and “whipsaw-like moves”, but then you’d be out of strikes, and I want to send you to the showers for this gem:
Should investors and professional money managers come to believe that metrics like P/E ratios, TEV to EBITDA, book values, hurdle rates, or WACC are meaningless and antiquated tools in the current post-Armageddon financial meltdown, it may be a long time before folks come back to the market and provide the necessary liquidity to break us out of the doldrums.
WACC? WACC?? WACC is meaningless. And useless. And meaningless (Did I mention that?). Strike three. You’re outta here. I’ve got news for you, Old Valuation Guy: You’re not a value guy.
Value guys like volatility. Crazy, gyrating market? Giddyup. Whipsawing prices? Yee hah. ”Uncertainty about the upcoming elections?” Beautiful. Follow that red herring. No liquidity? Along with raindrops on roses and whiskers on kittens, these are a few of my favorite things. Why? It is axiomatic to value investing that volatility is not risk, but the generator of opportunity. We want Mr. Market manic depressive for the rest of our lives. We want him bucking like a bronco. We want him scaring people away.
These articles pop up occasionally. Remember the article What Would Warren Do? where Megan McArdle interviewed a fund manager under the Omaha twilight who suddenly said, “The only way to make money these days is leverage”? This sort of fuzzy thinking needs to be beaten back with a stick. If you’re going to go around calling yourself a value guy, at least have the common decency to find out what a value guy believes. A good place to start would be that Graham and Dodd book you nodded at as you were coming up.
Read the rest of it here. It improves slightly until he asks if ”Edwards and Magee [have] finally beaten Graham and Dodd? Have momentum investing, computers, and flash trading killed the value investor?” Ugh. No.