Focusing on value beats worrying about macro


Particularly apt reading tonight as stocks head south on worry about a partial U.S. government shutdown, The Brooklyn Investor makes the case for trying to ignore whatever the latest macro-boogeyman happens to be, and instead focus on buying and holding reasonably valued stocks. Paraphrasing Seth Klarman: "You just have to figure out what a business can earn in five or ten years on a normalized basis and see what it's worth; if you can buy it for lower than that, then it doesn't matter what the headlines say."

The Shiller cyclically adjusted P/E ratio does raise TBI's eyebrow as it shows the market to be 47% overvalued, but it was similarly so in 1966. While the averages did nothing over the next 16 years, the "Superinvestors of Graham and Doddsville" (Walter Schloss, Tweedy Brown, Sequoia Fund) racked up ridiculous returns (this, of course, may be of little comfort to index investors).

Buffett's classic "Superinvestors" article from 1984.

Can the market go down? A lot? No doubt, says TBI, but the odds against being able to exploit a bear market are far too long - better to spend time looking for stocks trading at 1.1x book that should be selling for 1.5x book.

Index value ETFs: SPYV, IVE, RPV, VOOV, FTASPYV, IVE, RPV, VOOV, FTAIWN, VTWV, UVT, SJHIWWMDYV, IJJ, RFV, IVOVSLYV, IJS, RZV, VIOV.

Comments (5)
  • Stephen J Melnykevich
    , contributor
    Comments (1320) | Send Message
     
    What would be some examples of value stocks that Graham and Dodd would pick up in current markets?

     

    MCD, AAPL?
    29 Sep 2013, 09:55 PM Reply Like
  • Philip Marlowe
    , contributor
    Comments (1538) | Send Message
     
    Yeah, I guess i should not curse the Republicans for screwing us yet again, but I should look for deals. But life would be so much easier if our republican congressmen would just do their jobs and pass a fricking budget.

     

    Also, I should note that the Shiller P/E ratio is just not useful nowadays. Look at a graph for the SP500 P/E for the last 10 years. Do you see how it shoots up to the sky around 2009? The financial crisis destroyed earnings which made P/E ratios go up. Since the Shiller ratio takes into account the P/E's of the last 10 years, it is distorted by the high P/E's during the crisis.
    29 Sep 2013, 10:10 PM Reply Like
  • Placebo Investment Advice
    , contributor
    Comments (3967) | Send Message
     
    "Since the Shiller ratio takes into account the P/E's of the last 10 years, it is distorted by the high P/E's during the crisis."

     

    This myth has been debunked by academics.The current Shiller P/E also reflects the unusually elevated earnings in the years leading up to the crash, in particular from banks and residential real estate related companies. In fact, this is exactly why the CAPE was invented--to diminish the effect of outlier years both good and bad. Even with the low earnings in the two crisis years, the prior decade had real earnings above the historical trend. It was a good decade for earnings.
    29 Sep 2013, 10:53 PM Reply Like
  • Placebo Investment Advice
    , contributor
    Comments (3967) | Send Message
     
    Buffett recently admitted that he's not finding bargains, and Klarman is returning money to shareholders because of too few investing opportunities. Not exactly ringing endorsements from the celebrity investors quoted in the blog.
    29 Sep 2013, 11:09 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5027) | Send Message
     
    Value investing is a way to market time.
    30 Sep 2013, 07:28 AM Reply Like
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