Jumping the Shark in Financial Advisordom

I am inundated with financial advisor magazines. I could have sworn there were only one or two a couple of years ago. Now there seem to 10 to 20 different magazines all trying to do the same thing - sell services to advisors.

It reminds me of the technology bubble and all those technology magazines I use to get back during that blow-out.

Getting Ahead in Traffic - An Analogy for Active and Passive Investing

Heather recently shared a great analogy between changing lanes in traffic and active and passive management.

In the same way that active management seeks to get ahead (beat the index), lane changers are trying to get ahead in traffic.

In the same way that studies have shown that those who stay in their lanes finish ahead of those who are always jostling for position, studies have also shown that those who stick to passive index funds typically do better than the average investor over the long term. 

Just as active management incurs lots of costs, so to trying to get ahead in traffic incurs lots of costs (psychological, emotional, physical).

The different speeds of the various lanes encourages drivers to jump from one lane to the next. Sounds familiar, as when investors use hindsight bias to jump into the latest investment craze. 

The Conceit of Value Investing

Value investors rightly argue that if you focus on acquiring undervalued assets, ie. assets trading below intrinic value (whatever that is...certainly no objective measure...a post for another day), then the market will eventually come around to recognizing the firm is worth more than what it is currently and start bidding up the price.

The irony or conceit of value investing is that it is generally in a bullish (positive growth) economic environment that either the company's fortunes turnaround or the market has pushed the value of growth and momentum names so high that it is now looking for valuation arbs and comes down to the value end of the market to find those opportunities. A positive economic environment gives the market the confidence to take a punt on a distressed asset and time is the healer of all things (which is why value performs best at the end of a cycle - it is playing catch-up).

Value investors will also argue that value investing works in down markets because you have purchased assets at depressed prices and that provides a cushion (margin of safety) relative to the high priced (multiple) growth and momentum names that have led the market. That has not generally been my experience. In a large market pullback all names seem to fall together.

Value names tend to outperform at the beginning (inflexion point) in a market cycle and toward the middle-end of a market cycle. Growth and momentum names dominate (or lead) the market through the middle of a cycle. 

Keep It Simple - The Crux of Value Investing

I don't think you have to do fancy algorithms or deep quant or anything else to uncover deep value. You only have to be patient and be willing to pick-up a good company when the market has discarded it to the side of the road.

I call this value investing. In order to do it you have to have some gumption as to what you think the company is worth. The reason and the cause of the 'fall from grace' are important because you have to discern that it is a temporary setback.

The aforementioned is a company specific self-inflicted own goal or some sort.

The other major time when 'value' investing can work healthily is when the market itself has got itself in a panic and is casting everything out with the bathwater.

Contrarianism is ingrained deep within the process. 

Both instances call for a gauge of intrinsic value, conviction, courage and patience. Those are the most important elements to being and becoming a better investor.