Value Investing

The Value people insist that they are investors, not vulgar traders.  They buy companies, not squiggles on a chart.

The belief is that you can determine the value of a stock, buy it if it is undervalued and then sell it when it becomes overvalued.

If the stock goes down after you buy it, it's no big deal - the market will eventually realize the value of the stock.  The only reason to sell is if the company does something that changes the value equation.

Vince Farrell on CNBC mentioned the value trap where you hold a stock that is valuable for a long time, but you do not make any money because it just hangs around as dead money. KO is a good example.

Value Investors do not use stops - after all, they know what the stock is worth.  I think that this is nonsense.

Example of Value Investing:  Barton Biggs shorted oil in August 2004.  He just knew that it was overpriced.  When it went up, he shorted more.  He may still be short oil, for all I know.  He knows what oil is really worth.

Even worse is the following statement from the article above, which is not necessarily a part of Value Investing:

... interestingly, even the legion of investors who believe the market is always efficient have no reason to use stop-loss orders. If the market price is always the "correct" price, then every stock will provide the proper risk-adjusted return at all times. There is no reason to switch to other stocks or cash unless an investor wants to change his or her risk level, but this decision is not affected by price changes, either. Remember, a stop-loss order is an action driven by price changes, which means putting the cart before the horse.

Suggested Reading:  Mandelbrot:  The MisBehavior of the Markets.  Using fractal mathematics, and some good (as opposed to phony) statistical analysis, this completely debunks the Efficient Market Hypothesis.  Stocks do not fluctuate according to a normal distribution, or based on random walk.

Value Investors do not worry about the day-to-day fluctuations of their stock; they just know that they will go up eventually.  

There is the contention that eventually a stock will trade at it's proper valuation, but consider that:

Different value investors may have different valuations, so there is no way to prove or disprove that contention - it is essentially untestable.

Valuation measures often include the yield of T-bills or some other bonds, and this changes - so a stock that was undervalued may become overvalued independently of anything that the company has done.

To properly value a stock you have to know everything about the company, its industry, its competitors, and its management - and nobody really knows that much, not even management.

In my view, the real value of a company lies in its management, and it is really difficult to determine if a company has good management - Enron had good management according to many Wall Street analysts.

Value Investors often talk about the tech bubble, and how they knew that it would collapse.  They never talk about how many of us made a lot of money during the bubble period, and how we did have sense enough to sell when the collapse began.  People who did not get out in March of 2000 were just not paying attention.

Value Investing may work for some people, but I do not want to try it.