• Home
  • About
  • Team
  • Contacts
  • Blog

Value Investing vs Index Investing

  1. Home
  2. Blog
  3. Value Investing vs I ...

Value Investing currently overvalued

Value investing

The S&P 500 Index is currently overvalued, whether measured by price to earnings, price to sales, or price to book. As a value investor, does this mean that it is time to withdraw from investing in stocks? Generally speaking, the answer to this question is no, because the aggregate earnings of an index such as the S&P 500 says very little about the durability of the moat or quality of the cash flows of any one of the 500 companies in that index or the thousands of companies that are not in that index.

The real value of a company today is measured by its potential for further cash flows, and the task of the value investing is to make as intelligent an estimate as possible of those future cash flows. This can only be done by a detailed study of the underlying assets of the individual company, its financial statements, broad knowledge of the industry that the company operates in. For me to really understand a company and value investing potencial requires several years of study of the company, specifically its financial statements, products, suppliers, competitors and customers. It is important to read a series of 10k’s and 10q’s to assess the consistency and honesty of management.

A decision to invest in value investing based on broad, top-down analyses of synthetic stock indexes such as the S&P 500 is essentially an exercise in market timing or momentum investing and an attempt to produce a simple answer to a very complex question. While equities have historically provided investors with attractive rates of return on a compound basis for those with a multi-year, and even better, multi-decade, time horizon, market timing is a short term judgement and, as such, a form of speculation.

Because of the difficulty of out-performing the market, particularly by large institutional investors, index investing has become very popular in recent years. Current data show that money is rapidly flowing out managed mutual funds, and into index funds and ETF’s. This shift undoubtedly has contributed the current over-valuation of indexes like the S&P 500.

As a result, the market is currently dominated by speculators – investors who invest in equities for the short term, or professional hedge, mutual or endowment fund managers who are mandated to do so by their incentives. This short-term, top-down analysis historically has produced poor results, and whether it has been produced by the individual or by the very highly paid professional, it generates markets that volatile and highly unpredictable.

The current fascination with ETFs and the over-valuation of S&P 500 could lead to a healthy correction in the overall market, or it could just lead to rapid transfers of funds from one class of ETF to another, for example from one country to another (e.g, U.S. stocks to emerging markets, which are currently historically cheap), or from one industry to another. Predicting this kind of movement is yet another form of the short term game and not one that is likely to produce satisfactory multi-decade results. In the short term, the valuation of stocks in the aggregate will stay the same, grow or fall. Anyone who claims to know when this will happen is deluded or dishonest.

Advantage to Value Investing

Index Investing is not always a bad idea, but while following the crowd can yield positive short term results, it will almost always lead to poor long term results. The point at which a good idea morphs into a mania is very difficult to define, and index may remain popular for a while, but the more it distorts the values within the stock market the more likely it is to end badly.

In this environment there would appear to be an advantage to the value investing for investor who can sift through large groups of stocks to find individual companies unpopular with short term investors, presenting an attractive current valuation. This process requires combining all of the work required by individual stock selection with a good deal of patience because what is unpopular today can remain unpopular for a good while.

The only constant in the stock market is change, and trends do mean revert so the long period of unpopularity for value investing would indicate that we will eventually see a long period where value investing stocks will revert to outperforming the market.

10/04/2016



Leave a Reply Cancel Reply

Your email address will not be published.


Comment


Name

Email

Url


Blog Archive

2020

  • The Stock Market

2019

  • Behavioral Investing

2018

  • Trumped
  • Warren Buffett vs Wall Street
  • Globalism, 1982-2000 Bull Market

2017

  • Volatility Underlying Calm Market
  • What’s new with CB&I?
  • Passive Investing
  • Economic Cycles
  • Current Stock Market 2017 Comment

2016

  • Global Plastics Summit Highlights
  • Value Investing vs Index Investing
  • How to Play an Index Bubble
  • Successful Investors
  • Is the Market Overvalued?
  • Operating Earnings
  • Article by investment manager in Bay Hill Living
  • Building Foundation

2015

  • 3G Culture – Dream Big
  • Myopic Loss Aversion
  • CBI Nuclear Energy
  • St Joe Company
  • What’s in a Word? Plastics.
  • Are Bonds Safer Than Stocks?

2014

  • Chicago Bridge and Iron
  • CAMEX 2014
  • Global Economy October 2014
  • Fluor Corporation
  • Interesting Quotes from Daily Journal Annual Meeting
  • The Daily Journal Annual Meeting
  • Albemarle Corporation
  • Triumph Group
  • The American Energy Revolution
  • Singapore

2013

  • St Joe Company Update
  • Hedge Fund Managers
  • Triumph Group Inc.
  • Bitter Brew
  • An Antifragile Portfolio

2012

  • Leucadia National Corporation
  • This Time it is Different
  • Successful traders psychology
  • St Joe Company
  • Learning from Pain

2011

  • Long Cycles – Part II
  • Long Cycle
  • Nasty Month for Market
  • Make a Buck with Fortescue Metals Group
  • Berkshire Hathaway Look Through Earnings
  • St Joe Company Inc
  • Successful Investment Management
  • A Look Into Latin American Market
  • The Mother of all Quarters
  • 2010 Investment year results

2010

  • Fault Lines
  • US Market 2010
  • Berkshire Hathaway Third Quarter 2010
  • The Stock Market 2010
  • Berkshire Hathaway Second Quarter 2010
  • Berkshire Hathaway Performance
  • Long Term Greedy
  • Goldman Sachs
  • Berkadia and Leucadia
  • USG corporation
  • Berkshire Hathaway 2009 2010
  • Why Capitalism Works

2009

  • The Lords of Finance
  • The $44 Billion Dollar Train Set
  • Berkshire Hathaway 3rd Quarter 2009
  • Career Risk for Investment Manager
  • Berkshire Hathaway financial statements
  • Berkshire Hathaway Preferred Stock
  • Moral Hazard
  • Credit Default Swap
  • The Shadow Banking System
  • Learning Things the Hard Way
  • Our C-System
  • 2008 Investment results

2008

  • Investment Risk
  • Bear Markets
  • Generational Events
  • Orange sheets – Money is doing better
  • Inflation Not The Problem
  • Tipping Point
  • Long Term Capital Management
  • Financial Insurance
  • Western Refining Inc
  • Berkshire Hathaway Year To Date
  • Berkshire Hathaway Cash Flow
  • 2007 investment results

2007

  • Investment results 4th Quarter 2007
  • Greenspan on Inflation
  • Berkshire Hathaway Third Quarter 2007
  • Berkshire Hathaway Operating income 2007
  • Berkshire Hathaway Hedge Fund
  • Leveraged Buyouts
  • Stability Unstable
  • Weak Dollar
  • Berkshire Hathaway Chairman’s Letter
  • Steel Dynamics
  • Breakwater Resources
  • 2006 Investment year results

2006

  • New Investment Stocks
  • Equitas
  • Berkshire Hathaway Third Quarter 2006
  • Hurricane Synergy
  • Berkshire Hathaway Second Quarter 2006
  • Fat Pitch
  • Perfectly Obvious
  • Berkshire Hathaway Growth Rate
  • Berkshire Hathaway First Quarter 2006
  • Berkshire Hathaway Annual Report 2006
  • Inflation Is
  • 2005 Investment year results

2005

  • Exogenous Events
  • The Easy Money
  • Look-Through Earnings
  • High-Risk Mortgages
  • Unintended Consequences
  • Rydex Ursa Fund
  • Warren Buffett Premium
  • Private Equity
  • Latticework Mental Models
  • Buffett’s Lackluster Performance
  • 2004 Investment year results
  • Professor Smith’s Second Bubble

2004

  • Hedging Currency Disaster
  • Risk Assessment
  • Too Many Bears
  • The Chinese Century?
  • Patterned Irrationality
  • Timber
  • Costco’s Cash
  • Physics Envy by Charlie Munger
  • Asset Allocation Berkshire Hathaway
  • The Balance of Payments
  • 2003 Investment year results

2003

  • Hedge Funds
  • The trade deficit is not debt
  • Secular Bear Market
  • Which Index Funds?
  • A Different Drummer
  • Costco’s Float
  • The Power of Float
  • Berkshire Hathaway Annual Meeting 2003
  • Psychology of Human Misjudgment
  • Sitting on the Sidelines
  • Berkshire Hathaway intrinsic value
  • 2002 Investment year results

2002

  • Insurance company Moats
  • Bond Bubble
  • Berkshire Hathaway Cash Flow 2002
  • Behavioral Economics
  • The Bear Market 2002
  • Greenspan Put
  • Second Quarter Cash Flow at Berkshire Hathaway
  • Berkshire Hathaway Annual Meeting 2002
  • Red Wire – Green Wire
  • Stupid FED Tricks
  • The Bottom Line
  • 2001 Investment year results

2001

  • Don’t Fight the FED
  • Buy and Hold? – It all Depends
  • Ben Laden and Berkshire Hathaway
  • The Dinosaurs Dance
  • Costco Moat
  • Bubble Watching
  • Sit on your Ass investing
  • Berkshire Hathaway Annual Meeting 2001
  • Carnival Cruise Lines
  • 450000 Square Ft Furniture Store
  • Lunch Money Indicators – Annual report
  • Other People’s Money

2000

  • Bear Tracks
  • Build It and Money Will Come
  • Efficient Stock Market
  • Style Drift
  • Lunch Money Indicators – Options
  • Identifying Problems
  • Small Retail Stocks
  • Charlie Munger comments
  • Big Al and the Bubble Machine
  • Berkshire Hathaway Cheap
  • Index Funds
  • 16 rules for investment success
Make an appointment or contact us by phone: +1 (689) 246 49 49
© 1999 - 2022 Losch Management Company
Support by Global AGM