Image: Value Trap received acclaim at the prestigious Next Generation Indie Awards at the Mayflower Hotel in Washington DC. Shown: Value Trap at the American Library Association conference Headline Books booth June 22.
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Hi everyone,
This week has been met with a lot of traveling, and I thank you for your patience as I seek to catch up on your emails. Also, please note the weekly datascreener will not be updated this week, but refreshed upon our team’s return to the offices next weekend.
For starters, I want to thank each and every one of you out there for your continued support. The field of finance has simply been turned upside down, with 90% of active fund management underperforming, and many professionals just charging 1-2% to hold an index fund. It’s sad.
I believe Valuentum to be a safe haven for individual investors, financial advisors, and institutional customers. I truly believe that. You are truly getting an independent perspective. We’re after the “right” answer, not telling you only what you want to hear. That’s how the industry got here in the first place. Too much selling and asset gathering.
But the industry is at a crossroads. Who is to say which type of investor education is correct? Certainly, many believe that looking backward, as in applying realized data, and using short-cuts, as in the P/E ratio or P/B ratio, is the right way to invest. The full, complete answer is to look forward and apply a comprehensive process such as enterprise valuation. You know it. I know it. But it is so bad out there. The catch phrase “evidence-based” is simply going to drive this industry back into the dark ages, pre-dating the works of Graham and Dodd. Investors need the right evidence, not just any evidence.
Finance has been off the tracks for years, and it is showing up today in the vast underperformance numbers. Do you think we can fix it? I’m trying. At what point, however, does finance say it has made a mistake, and it reverts back to actually performing due diligence on underlying holdings, something Valuentum holds dear. Should regulators get involved? My goodness — should fiduciaries really not know anything about the stocks they own for clients, as in the case of indexing? How many quantitative models have to fail before we start asking the tough questions?
I think Warren Buffett saw this coming in the 1980s in his famed Graham and Doddsville paper. Seriously, did finance really think that not paying attention to the intrinsic values of underlying holdings, looking only backward in “empirical” work, studying what has turned out to be spurious correlations, and promoting index funds was going to end well? If you think about it, during the past 15 years, almost every professional dollar has underperformed after fees, whether fund or advisor. Investors are losing, and I don’t like it.
It’s so silly to think about how the industry is trying to explain this massive underperformance, too. Instead of saying that a reversion to intrinsic value methods should be par for the course, the industry is saying that finance professionals are too talented, that their skills cancel out. I appreciate the spirit, but you’ve got to be kidding me. Not only this, but many say active funds just cost too much. I don’t believe it for a second.
The reality is that many are stuck in the mindset of the “Great False Dichotomy.” Structural barriers are limiting the conversation between active and passive *funds.* Many advisors lack the skill set of stock selection, so customers are losing out on other options such as stock selection (which is free of fund fees!). According to the Investment Company Institute, active and passive funds/ETFs combined represent ~30% of the corporate equity market. Just 30% of the market!
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There’s another 70% of the market out there where alpha can be captured and costs can be overcome. I do not believe that finance professionals are too talented to outperform. I believe that they are doing things the wrong way: looking backwards and applying shortcuts. While costs are important, I do not believe they fully explain active fund underperformance either. Active funds are just 16% of the corporate equity market (there’s a lot of potential alpha out there in the other 70% of the market).
Alright, let’s hammer out a few questions. I’ve been getting a number of questions on GameStop (GME). Folks — it’s simple. We like stocks that we think are undervalued and are going up (the market thinks are undervalued, too). GameStop’s stock has fallen all the way from the mid-$40s in 2015 to the single digits today. Do we like shares? No. The market hates this company, and its business model is under structural attack as physical game sales are overtaken by digital distribution. You might expect a buyout but you would have already lost big to this point. It’s not an idea in any newsletter portfolio.
There are better ideas. You should be thinking instead, for example: should I be adding to our favorite idea Visa (V) on the Facebook (FB) crypto news? See here. Facebook looks incredibly cheap. Should I be increasing that position? Fascinating that Booking Holdings (BKNG) was part of the Libra Association. This could be potential upside for this Best Ideas Newsletter portfolio holding, too. Add to strength! Don’t add value traps on weakness! GameStop is so far down the list of considerations that I’m trying not to think about it so I can focus faculties elsewhere. I want you to succeed.
Also, let me repeat. Many a value investor is buying stocks on the way down, and they are failing. It’s in the numbers. 90% of active management is underperforming during the trailing 15-year period ending 2018. I’m not so much encouraging you to think differently as I am encouraging you to think more logically. You need the market to agree with you to be right. Why not wait until shares start to move higher first before diving into what potentially may be a value trap! I wrote a whole book on this! See here.
One more thing before I wrap up this morning note. Many of you are stretching for ideas. Why? Some of you are thinking that just because we don’t have a lot of 9s and 10s that 7s and 8s have become the next best. NO. ABSOLUTELY NOT. Let me be clear. Our process is working. The markets have been going sideways for a long time, and that the Valuentum Buying Index hasn’t been highlighting many 9s and 10s shows that it is picking up the market’s choppiness as valuations remain less than attractive.
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I have to be clear. The things that finance has been peddling during the past few decades are not working. You have to start over with a clean slate. Think undervalued stocks that are going up that have strong competitive advantages with solid business castles and a solid dividend, to boot. Many of these are in the newsletter portfolios. I have to say it: If you have the urge to buy a stock just because it has fallen in price, you may be just like those 90% of active fund managers that are underperforming. Stop it.
I’m not asking you to think different. I’m asking you to think more logically. I’m asking you to think “correctly.” In a world where professional academic papers have been written on how to trade around phases of the moon (not kidding!), I’m asking you to focus on common sense. Let’s do this. Block out the other stuff, even some of the stuff that comes with a nice wrapping, as in presented in a fine academic journal. My goodness–how many peer reviewed papers in academic journals have been proven wrong (from the CAPM and beyond).
A 7 or an 8 on the Valuentum Buying Index does not become more attractive because there are fewer 9s and 10s. The ideas in the newsletter portfolios are among our best ideas for consideration. In times like these, if the ideas in the newsletter portfolios aren’t of interest, the Exclusive publication is where you’ll find three new ideas each month. Order here. We cover hundreds of companies on our website, and update the reports a couple times a year to provide background on our thought process and support the newsletter portfolios. We publish tons of commentary, too. In a financial market where most everyone else is underperforming, we’re trying to set you up for success, and I know you are winning. Read about the Best Ideas Newsletter portfolio here.
With all this said, I am enjoying my vacation. This one has been a long time coming, and I thank you for your patience. Were it not for you my dear members, Valuentum would simply not exist. Let’s keep pushing forward. Let’s forget the ways of others that are underperforming. Let’s keep looking forward. Let’s keep performing due diligence. Let’s stay away from short-cuts. Let’s embrace the information contained in market prices via technical and momentum indicators. Said another way, let’s keep doing things the right way. Thank you!
Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum‘s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.