Old School Value Nugget Fest (July 5th Edition)

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What We’re Reading in the Media

Strategy

• The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors (O’Shaughnessy Asset Management) [PDF]
  I was going to make the next piece my “must-read” of the week, but then I read this one. It’s dense, but you can read the first few summary pages. In essence, the author is arguing: that ROE is distorted (too high) because book equity measures must be inflation-adjusted; depreciation is understated due to inflation (implying earnings are generally overstated); that FCF is thus a better measure of value and that EV/FCF and P/FCF are better valuation metrics on their own (however, when creating portfolios, diversifying across multiple measures is better); FCF/Book is a better measure of profitability than ROIC; and finally, he ends with a measure that correlates with future 10-year returns better than the CAPE (though both agree the next 10 years will produce lower returns).
• Financial Backtesting: A Cautionary Tale (PHILOSOPHICAL ECONOMICS)
  An excellent piece that I highly recommend reading in full. In case you don’t, here are the conclusions: “From an investment perspective, a theoretical understanding of how the market produces a given outcome is important…  We need such an understanding in order to be able to evaluate the robustness of the outcome, the likelihood that the outcome will continue to be seen in the future…
  “When we extrapolate future performance from past performance–a move that can be justified, if conditions in the system have remained the same–we need to favor recent data over data from the distant past.”
  
  
• The truth about growth and value stocks (McKinsey)
  From 2007. “The probability that a company designated as a growth stock will deliver a given growth rate is virtually indistinguishable from the probability that a value company will do so.”
   
• The death of value (Abnormal Returns)
  We’ve heard this before. Value investing is dead, it’s not working anymore, time to move on. This post is a collection of quotes from different investors about what they think of value investing. “I wouldn’t go as far as to say that value investing is ‘dead’, but’s it’s hard to ignore just how long it’s been since we’ve seen outperformance.”
• JP Morgan AM: Guide to the Markets 3Q19 (PDF)

Global Interest

• Various commentaries on Brexit (via Reddit /r/SecurityAnalysis/)
  From smart people like Aswath Damodaran, Ben Bernanke, Century Management, First Eagle Management, FPA Funds, George Soros, Oakmark Funds, Jason Zweig, Jensen Investment Management

Profile/Interview

• Invest Like The Best – Interview with Bill Gurley (Investor Field Guide)
  “As you’ll hear, despite enormous success through his career, Bill is clearly still in love with business and investing. Where many might discuss past glories, I’ve been incredibly impressed with how both Bill and his partners emphasize the current portfolio and market landscape.”
  
  
• Interview with Paul Singer, Doomsday Investor (The New Yorker)
  “The head of Elliott Management has developed a uniquely adversarial, and immensely profitable, way of doing business.”

Podcast of the week

• EP55 Amazon CEO Jeff Bezos’ Management Philosophy (Value Investing Podcast)
  Not an interview. Jun Kim talks about Amazon CEO Jeff Bezos’ Management Philosophy illustrated in 2016 letter to Amazon’s shareholders (https://www.sec.gov/Archives/edgar/data/1018724/000119312517120198/d373368dex991.htm) 

Image of the Week

India Times takes a look at the magic formula (India Times)
A fun but caustic look at how investor emotions move in cycles. There are a few graphs to illustrate the point.

Video of the Week

Jeff Bezos 60 minutes interview 1999 (YouTube)
Blast from the past. Bezos only had 10 Billion during this interview.

​Quote of the Week

“The big picture is: the main thing you should be concerned about in the future are incremental returns on capital going forward. As it turns out, past history of a good return on capital is a good proxy for this but obviously not foolproof. I think this is an area where thoughtful analysis can add value to any simple ranking/screening strategy such as the magic formula. When doing in depth analysis of companies, I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of ‘normal’ earnings power over time.”

― Joel Greenblatt