Old School Value Nugget Fest (September 26th Edition)

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It’s easy to get caught up in the latest investing research or following the latest market developments. Impeachment? WeWork? Repo markets? Bitcoin selloff? And that’s just the last couple days.

Perspective is important to keep this from distracting you or causing you to make bad decisions. I’ve got some articles below on this, at the beginning of the “Markets & Investing” section.

As a long-term investor, it’s also important to keep yourself healthy. Insert marathon-not-sprint quote. To that end, a few articles stuck out to me this week that you might enjoy, but which don’t fit neatly into our current categories.

The titles speak for themselves. Enjoy them if they seem relevant to you.

Last, I’m off on a week-long trip to Europe tomorrow, so there will be no newsletter next week. Serendipitously, Farnam Street wrote a piece about how travel can help give you perspective and counter confirmation bias: A Wandering Mind

See you in 2 weeks.



Warren Buffett Likes ‘Wide Moat’ Stocks. Should You? (WSJ)

A Morningstar study found that narrow-moat stocks outperformed since 2002 (when they began their moat ratings). However, on a risk-adjusted basis, wide-moat stocks did better. Seems like a “duh” conclusion to me. If it turned out any differently, you’d have to question their moat ratings more than anything.

The main thing missing from the analysis is any aspect of price or value. Nobody says to buy wide moat stocks at any price!

What People Say About the Economy Can Set Off a Recession (NYT)

“Big economic changes come when popular narratives mutate and spread, infecting the decisions of millions of people, the economist Robert J. Shiller says.”

Markets & Investing

We’ve got several articles this week which are essentially about market timing.

The Cost of Waiting (Of Dollars And Data) shows you pretty definitively that holding back your cash as “dry powder” is actually a pretty terrible strategy.

Why I Don’t Keep Cash and Invest it All (The Dividend Guy Blog) uses more anecdotal evidence to show why he doesn’t “wait for the price to drop” before buying.

A Behavioral Prescription (Irrelevant Investor) talks about why overreacting to market volatility is one of the worst things an investor can do.

On the flip side, Seth Klarman, in a 2004 letter, talks about why a better “alternative is to remain liquid, defy the steady drumbeat of performance pressures, and wait for the prices of at least some securities to drop.”

And last, Fat, Happy & In Over Your Head (Collaborative Fund) talks about going out on top, or thinking about what it means to have “enough.” In investing, you can think of this as conservatism that leads to leaving money on the table, but it’s probably better framed as: “An insatiable appetite for more – will push you to the point of regret.”

I think, for me, the takeaway from all these is to stay focused on the long-term, stay invested in great companies at attractive valuations, and don’t time the markets.

Another set of articles that formed a theme on taking down the myth that private markets are somehow better.

How We Should Bust an Investing Myth (Zweig, WSJ) offers a nice explanation of why private markets do a worse job pricing. “Markets work best when they are both deep and wide, integrating sharp differences of opinion from many people into a single price at which investments can trade. Private markets, however, are shallow and narrow, despite their enormous size.”

Also, there’s no way to express a pessimistic view, i.e., by shorting. Thus, pricing is done by optimists.

Aswath Damodaran’s Insights on VC Pricing: Lessons from Uber, WeWork and Peloton! started out as a Peloton valuation but turned into an analysis of the themes he’s seeing in the more outrageous S-1 filings this year. One of those themes? When companies basically tell us their potential total addressable market is unbounded. He ties this back to why it’s happening: because VCs reward it.

How David Swensen Made Yale Fabulously Rich (Bloomberg) is a lot of things, but one aspect that I find most interesting is thinking about Swensen’s role in making the size of the private market so large.

Value investing is getting a lot of press these days, with Value sharply outperforming Growth in the last week or two.

First, Safal Niveshak argues that Value Investing Works over the long-term precisely because it doesn’t always work over the short-term. This is also Joel Greenblatt’s argument.

The second article, provocatively titled “Value Investing’s Heady Days Aren’t Coming Back” is really just arguing that book value is not a great measure of value anymore. With more companies expensing their intangibles, particularly R&D, brand development, and HR, less of it is shows up in book values.

We also know from OSAM’s research piece earlier this year that book value should be adjusted for inflation, which makes as-reported book values even less useful for most companies. We all know that other valuation metrics, like EV/EBIT[DA] and P/FCF, and methods like Discounted Cash Flow analysis, can and should be used, instead or in addition to P/B. So, can we all just agree that researchers should stop constructing their Value factor using Price to Book alone?

Last, a piece from The Acquirer’s Multiple, Has Value Investing Been Disrupted? does an OK job pointing out that price and value are not the same, but I think it misses the idea that value investors can still buy stocks like AAPL, MSFT or BABA on an “attractively valued, high quality, with a margin of safety” basis.

Diagram of Ensemble’s Investment Philosophy Intrinsic Investing)

A nice visualization.

“Before we invest in any company, we must believe that three key factors – MANAGEMENT, MOAT, and FORECASTABILITY (which informs OUR VALUATION) – are present. These factors are of equal importance.”

Company & Strategy

American Shared Hospital Services (AMS): Growth, Profits, and a Good Balance Sheet (Old School Vlaue)

This is a super long piece on our blog. We hope it helps you learn about this specific company, but more importantly, we hope it shows you how to analyze a small company in an industry you may not know a ton about. How to take growth initiatives and map them to projections and a valuation. Let us know what you think.

5 Reasons to Consider Buying Berkshire Hathaway (Mornignstar)

Worth reading all the reasons, and worth signing up for the free membership to read the whole thing.

Less than Half of Google Searches Now Result in a Click (SparkToro)

“We’ve passed a milestone in Google’s evolution from search engine to walled-garden. In June of 2019, for the first time, a majority of all browser-based searches on Google.com resulted in zero-clicks.”

The definitive story of how a controversial Florida businessman blew up MoviePass and burned hundreds of millions (Business Insider)

“MoviePass revolutionized the movie-theater business, which now embraces movie-ticket subscriptions. In the process, the company imploded.”

Apologies if you hit a paywall. Try it in a new tab. I get the paywall about 50% of the time.

Podcast of the Week

The Intellectual Investor: The EV Paradigm Shift (Part 1 of “Tesla, Elon Musk, and the EV Revolution”) – Ep 30

“You don’t fully know a company until you buy its stock. This recently happened to Vitaliy, except he didn’t buy a stock, he bought a car: a Tesla. In this episode, Vitaliy takes the listener under the hood of how electric vehicles represent a tectonic shift in the auto industry, why there will be a stock bubble in charging stations, and more.”

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