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The Investing Show: Why value investing beats the market

The Investing Show: Why value investing beats the market

Published on Jul 30, 2016

The Investing Show: Why value investing beats the market
Simon Lambert, Richard Hunter and Nick Batsford are joined by Tim Price, of PFP Wealth, who reveals value investing’s winning formula
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What-works-on-Wall-Street

0:05welcome to the investing show where we discuss the news and investing ideas to
0:10help you make more of your money
0:11i’m simon Lambert this is money and with me in the studio I’ve got Richard hunter
0:15head of equities at Hargreaves Lansdown Nick moose batsford CEO of tip TV coming
0:20up later on today show we’ve got Tim price of PFP wealth is coming to talk to
0:24us about Y value works
0:26why investors should be rethinking how they invest where you can look for
0:30winning value at the moment we’ve also got the money tip of the week which has
0:34got some savings accounts from some graph or unusual names but first a quick
0:38look at some things that caught our eyes this week
0:41Richard you going to talk to us about the footsie and how it’s completely
0:43dominated by some sectors on you
0:45yeah that’s right and Andy chairs we were speaking previously on on one of
0:50these shows about Joe what factors move markets and what factors move share
0:54prices
0:55I thought it might be useful just have to have a look at what what markets are
0:58because i’m generally speaking when you read in the press or read online indeed
1:02about the market in the UK
1:04we’re talking about the foot you 100 but the question is often asked why has the
1:10future 100 underperformed other developed economies and some of that is
1:14down to the way that it’s made up so we’ve got two slides the first of which
1:18is to look at the footage 100 by sector and that there’s a you know it’s a big
1:24chunks of the market they’re on there
1:26there are indeed in fact it’s only way to change we’ve been saying for some
1:29considerable time now that the the top three sectors in the foot 100 banks or
1:34sand miners the mining sector has recently just dropped out of the top
1:38three it’s all about 7.2 percent but numberless not in the top three
1:42interesting that at one point banks or minus had fairly equal proportions of
1:47the index between itself but what it does show and the simple purpose of that
1:51graph is in those three sections alone account for more than a third of the
1:55value of the foot you 100 so inevitably if you’re trying to work out what’s
2:00holding the market back or indeed White’s moved
2:03there’s a third of a chance that you’re gonna have to look any further
2:07you would also then expected on the basis there are a hundred stops within
2:11the first 100 students making a hundred one cuz there’s two lines of
2:16fucking shell and that they wouldn’t be such as a kind of waiting between any
2:22given stocks and the next slide which is not quite as complicated as it right
2:26first look shows why i was going to just keep it simple i was going to make it in
2:31the top five stocks but time from a very simple perspective on your phone and and
2:35be 80 at the bottom know that they have
2:37there’s just nothing between and so those in the top six stocks and we
2:41currently have these are the companies that we read about when we read in a
2:44market report we’re listening to market report these are the companies that if
2:47their share price moves a decent amount has the power to move the whole index
2:50doesn’t it absolutely and in the one in the same way we just saw the three
2:53sectors account for thirty six and a half percent of the footsie just these
2:57stocks alone account for twenty-eight percent of the index so that’s a no
3:02again getting on for a third just these six stocks and in fact in terms of the
3:07very top one rolled out a shell
3:09that’s coming its market value of hundred 21 billion or six and a half
3:13percent that’s without the BG group going through which is set at the bottom
3:19of the slide would add another 30 billion or two percent so again if we
3:24have looked past the sectors because the market is moved today
3:28it’s almost worth putting these somewhere in your subconscious as a
3:32trigger because any sort of bird decent movement in any of these shares more
3:37than likely have a disproportionate effect on the index
3:42I think the other thing that is worth noting here because it is very visible
3:48these are obviously the biggest companies in the fortune 100 and they
3:52change to be pretty much
3:55globally focused and they also tend to be fairly cash generative and if you
4:00look at the current dividend yields of those stocks
4:02bearing in mind that the foot 100 on average is yielding about three and a
4:07half percent obviously getting next to nothing on cash in your bank or building
4:11is our society at the moment there are some fairly pun children there from
4:15these cash generative businesses equally interesting thing is what the market
4:20commonly think of those no one is shouting from the rooftops
4:23in terms of event any of these which could suggest that a few of them are
4:27priced pretty much where they should be I mean obviously there are individual
4:31stories you’ve got to just a cautious by shell and hold for BP
4:36we all know about oil similarly we’ve got to hsbc recently weakened to a weak
4:42hold obviously there’s the strategy day still being judged electric students
4:46well as whether they do or don’t remain in the UK and then of course
4:51so in terms of dat british american tobacco that they’ve been other various
4:56parts of my education flying around this the globe at the moment as you are
5:01likely to have with any sort of tobacco shares but again it is worthwhile having
5:05a kind of exercise subconscious picture of factors that might be affecting the
5:11movement for each 100 quite apart from the usual list of the China’s and the
5:16u.s. is and the greases and so on then you can be thinking well how much is
5:20what’s happening at this index level going to affect my investments how much
5:24have I got in those and also if you hold a track of funds then this is a quite a
5:29lot of what you’re buying really isn’t it
5:30absolutely and you might also find of course structure even if you a fan – or
5:34foot 100 income fund for example just looking at those punches huge alone
5:39you may well find that particular fund is loaded with some if not all of those
5:43storms place you could talk to us about the party so I am its sales misery
5:49reporting this wednesday and I just sort of picked a few thoughts from the major
5:55newspapers and just wanted to create a picture of perhaps is not quite such
6:00good news ahead and spicy sainsbury’s losing the fight against forward in
6:04sales
6:05red generate the weekend headlines same reason sometimes brace for the sixth
6:09consecutive quarterly fall of sales price more and falling commodity prices
6:14continue to by Britain’s third-largest grocer and the suggestion is a two and a
6:19half percent drop in sales over the last three months excluding fuel and crunched
6:25by the price war deflation the record price of staples such as meats and fish
6:29and fall of the three years gone to the British Retail Consortium the terms of
6:34some of the Telegraph they basically don’t
6:36highlights insane reason to enjoy a decade of unbroken sales growth the list
6:40of groceries shares a basic in full of almost twenty percent in the last two
6:44months and that’s across the sector which I hadn’t picked up and test goes
6:48are expected to talk with similar to climb when it updates later this month
6:52a respected industry search by the rgd will last week the supermarket’s would
6:55suffer falling sales for the next five years up to 22 NZ the research
7:00highlights and have a big for have reigned in plans for new shops now the
7:04mail on sunday was talking about the discount stores by comparison LD is
7:08doubled its size in the UK in three years
7:11600 stores in britain by Christmas turnover expected to top six billion
7:16pounds by year end and planning to open 65 new stores this year
7:20germany and people forget this LD little account for thirty-seven percent of the
7:25market when the Germans as we know quite sensitive to to reach her out in little
7:30doubled market share in the UK in the last four years
7:34the reasons for that the suggestive the arrivals have been naive snooty party
7:40supermarkets not sure about that
7:42LD make me spread in the Midlands were first established in the UK in the
7:45nineteen nineties now heading to the south which has been traditionally
7:49dominated by saying screw some waitrose not my point was going to little mouth
7:54and check out the prices and I can’t disagree i’ve been to both recently and
7:58it’s just so much cheaper
8:01it isn’t it I mean I think the one of the other reasons why people have been
8:03attracted to the missus good stuff that’s what you know what the produce is
8:06pretty good about it
8:07yes it’s in low and you either need to be offering stuff that’s very cheap
8:10what you need to be awfully stuff is very good and I think a lot of the UK
8:13supermarkets fell into the middle with their it’s interesting what you say
8:16about share prices actually because they had a real bounce at the start of the
8:19year that so yeah it’s didn’t after having a terrible time at the end of
8:22last year they bounce the start of the year and then they have slid back over
8:25the last couple of months and I think that sort of that bounce at the start of
8:29the year that was a bit of a trading opportunity now what was that was a
8:31training opportunity then I think
8:33and now you’re looking at the more in the long term investing picture and say
8:36is that a good investment
8:38well i’m still negative on the big 4 and you have more questions everybody’s does
8:42it matter it with a grocery sector accounts 54 points of every one pound of
8:46retail spending in the UK
8:48so this is not be a huge sector for consideration i would really be taking a
8:51look if I had those shares my portfolio and sort of looking for the next five
8:55years out
8:56yeah i mean certainly it’s been it’s been something of a sign of the times if
9:00you look at the market consensus for the three that are quoted in the UK change
9:04morrison and test go
9:07it’s not if it flip flops between but what you know what we tend to find is
9:11there any given time the highest or strongest market consensus is a hold
9:16you’re not finding even a cautious by out their lives i’m gonna buy
9:19it’s just that the best of a bad job at the moment and then there’s very little
9:23question that we’ve still got a lot a lot of things to work through
9:27not least of which there are you said the ongoing threat of violent encounters
9:30well something that caught my eye
9:33this week was an interesting little number from the always always excellent
9:37motivator . com website which has its weekend reading and it highlighted a
9:41post from a site called oddball stocks and this is the fidelity released a
9:45study discussing a performance breakdown for their accounts the clients that did
9:49the best with the ones who were dead
9:51the second best performing serve clients forgot they had fidelity account
9:55so basically this is this appears to be a classic bit of investors do way too
10:01much chopping and changing and thinking are welcome
10:05goodbye that i’m going to buy that and it I think there’s other I’ve seen other
10:08bits of research that say that actually most private investors don’t manage to
10:12get their active funds performance because the active funds performance
10:15runs over you know the year the three years 25 is the 10 years for the
10:19investors are buying and selling at the wrong time and by buying in selling out
10:23of the funds and so you know the suggestion from this fidelity report is
10:27is probably not to die because that’s not normally considered investing win
10:31but it is to maybe take your time
10:34sit back and allow things to work and I think it highlights that the thing that
10:38everybody’s looking for that idea of that lock up and leave portfolio
10:41selection of shares that you could just leave the dividends to roll up
10:46active funds or invent your investment trusts we could do the same thing or a
10:50tracker fund
10:51you know but make sure that you’ve got the accumulation version of those funds
10:54if you’ve got them so that though that income is rolling up and then you can
10:58allow it to do the work in the background
10:59now you’re absolutely right and there’s a big debate going on at the moment of
11:03course about the way that executive pay structured because we know from our
11:07market and we know from the US market
11:09they’re on a quarterly basis any given company has got to show some massive
11:14improvement almost always on where they were three months ago
11:18a lot of the executive remuneration is also kind of focused or short-termism
11:24where is the fact of the matter is all that is a sign of our society as often
11:28as not
11:29and there are some companies actually saying that they might go trying to be
11:32reporting twice a year is often is not the old buy and hold strategy
11:36just hand out some of those wrinkles this is market time is the most
11:39difficult game in the world isn’t it
11:41we say you should chip and chip away for the long term yes I be a bit less
11:46hyperactive that he can only go away
11:49I didn’t realize yeah we’re not advising die anyway so before we move on to Tim
11:54price after the break he’s going to come in and talk to us about value which is
11:57something that you do need to leave a bit of time to allow to work
12:01I was just going to give our money tip of the week and the money tip of the
12:03week today surrounds looking for savings accounts away from the big banks so
12:07don’t just go to the bank and put the money in their savings account it’s easy
12:12it’s simple but you probably won’t get the best rate
12:15move your money as well your old money they’ve got SAT there if it’s been
12:18allowed to fall onto a rate of less than half a percent or something the bank’s
12:22doing the turkey on you move it
12:23there’s a new best buy savings account coming out from the unlikely name and
12:26that’s renault rci bank which is the finance on of renault the comic of the
12:32french carmaker has launched the best buy savings account but one and a half
12:35percent
12:36I’m sure everyone will be rushing down to get that one and a half percent but
12:40it does highlight something else that we’ve also written about this is money
12:43this week which is about challenge of banks and some of the names I’ve got
12:46here you’ve got some of the best accounts around we’ve got some Baltimore
12:50charter savings bank
12:52harrods sherbrooke look away from the big boys if you’ve got some money to set
12:56aside and even when rates below the more you can get the more accountable
13:01that’s the money tip of the week and coming up after the break we’ll have ten
13:04prize to talk about value
13:10welcome back to the investing show joining us here now we’ve got Tim price
13:15partner and director of investment of PFP wealth
13:17Tim welcome to the show thanks very much you’ve come in to talk to us about
13:20something that’s very close to your heart
13:22yeah value investing only thing that matters is the only thing that matters
13:25so tell her to tell the people watching
13:27what is value investing and why does it matter yeah the the acknowledged father
13:32or dean of value investing was a guy called Ben Graham who was a he was
13:37actually born in Britain but it would be spent his life in America and he to give
13:41him his due he he told Warren buffer and he didn’t just teach Buffett he told of
13:46a number of other highly successful investors but essentially will touch on
13:49it in one of the slides and a while but the the the real nature of value
13:54investing is trying to identify quality stocks and then having a discipline not
13:59to pay over the odds for them
14:01so the reason I think it’s particularly relevant in the market today is the most
14:05markets are trading at on their all-time highs some of that happened because of
14:10QE some of us happen because of money printing and stimulus
14:13so I’m not sure those valuations can necessarily be adjusted Abby to be
14:16trusted or justified but if you ensure that you do overlay a value filter to
14:22your investments if you ensure the first you’re buying high quality stuff
14:25and secondly that you don’t overpay I think you’ll you’ll end up doing
14:30you should do very well I know that you you make the mention of quality a couple
14:34of times as well so this is this is different to the idea of that sort of
14:37cigar bar investing way you just pick up someone’s got a couple of puffs left on
14:41it
14:41you know for way below his price yeah we’re not I don’t think we’re looking
14:45ATS a bargain-basement stuff the cigar butt type an attitude investments but it
14:51I suppose with at least the way we look at value
14:55it’s all about there’s three things its people business and price
14:59all of which are important so if you look at a typical business your ideally
15:03looking to effectively co-invest alongside really credible high quality
15:08people must think the executive in other the board of the grouper in question
15:11then you’re looking at the business itself what kind of business is it is it
15:15that you use warren buffett’s phrases something that has a wide moat is it
15:19something like a near-monopoly that’s just got a bulletproof franchise
15:22clearly the more
15:23the more characteristics like that the better so you’ve got a bulletproof
15:26business and then you know once you’ve got the first two
15:30can you get that can you get those shares at an attractive enough price so
15:34many investments today might well qualify on the basis of high quality
15:39people high quality business but what they fail if they fail at that third leg
15:43which is a can you buy it cheap enough money by a good idea to get a discount
15:47to its inherent value and if they do feel that for a test
15:51hold fire caribbean Russia a great because you know that I mean this is a
15:54fabulous metaphor that buffett users about having a punch card with with 20
15:59little sort of holes in it and that the baby had that sensational as an investor
16:04how you should look at your entire investment history
16:07so every time you make an investment every time you make a new investment
16:10you’ve used up one of those hole punches so if you start with 20 you’re buying
16:14you start it out of 19 and that’s got a lot of your life and it’s a tremendously
16:18powerful analogy really great advice to anybody which is I think really
16:22carefully
16:23firstly about you know what you got going to look to buy and then trying to
16:26assure you have the discipline to only buy that the right kind of value and for
16:30a lot of value investors they made they may be completely inactive
16:34you know months if not years at a time they’re waiting for stuff to get you
16:37know it to their level of of genus which is actually something that reflects what
16:42we were talking about earlier on in the show but this fidelity study that showed
16:45that best fits your guest today all had forgotten they had an account
16:49so you’ve got some slices you’re going to talk just a little bit of our index
16:53is around the world and sometimes follows on from what are you talking
16:55about earlier in terms of for the benchmarking issue
16:58so in the first slide ignoring disease is the advice we decided to pretty much
17:03anyone that can operate without having to worry about indexation just ignore
17:07the indices so the the pie chart on the left as the current waiting for the msci
17:12world equity markets MSCI World indices over half of the global market cap is
17:18taken up by the US which is all well and good because it’s clearly a big economy
17:22the largest economy but it’s been a question of how cheap is it
17:25so if you look at the chart on the right what we’ve done is we’ve broken up to
17:29markets the u.s. and Japan to try and make a point
17:32a classic value metric is to try and buy stocks at or below book value or
17:38replacement cost
17:39if you look at the US market very little is available on sale like that so on on
17:44the basis of a buying stocks at a price-to-book of less than one you’re
17:48only looking at ten percent of the market then something like twenty
17:51percent of the u.s. you can buy between one and two times book which is probably
17:54reasonably priced
17:55but then you look at the rest greater than 2 and that’s seventy percent of the
17:59whole market so we would argue that something like seventy percent of the US
18:03equity market is quote expensive
18:05compare that to Japan which is saying the MSCI World accounts for less than
18:10nine percent of the index but look how cheap it is so something like forty
18:14percent the Japanese equity market you can buy below book value that’s
18:18astonishingly cheap then the next metric price of what we wanted to and that’s
18:23another thirty percent so it this is a complete reverse from where the u.s. is
18:28us is expensive
18:30if you do you say the shilla p the 10-year cyclically adjusted p
18:34the US has only been more expensive than its current 28 times twice in history
18:391929 and 2000 at the peak of the dot-com bubble butt
18:44but Japan is is exactly the reverse and it’s a market that I reckon quite a few
18:49investors to start looking at the moment
18:51and if you would go out and i’m one of the points about that index waiting is
18:55if you were to go out by a global tracker which is you know the sort of
18:58most the passive investing holy grail for a 157 but that’s what you’re missing
19:03it where and when you talk about price to book their just for anybody who isn’t
19:07aware of what that is that’s basically the value of that company if you had to
19:11break it up and sell it off exactly some of these liquidation cost
19:14so something that Ben Graham a really advocated with so-called net net and
19:18what he defined as a net-net stock was a company where its net current assets
19:23less all of its liabilities was still worth more than its market
19:27capitalization
19:28so in other words if he had the money you could buy the entire company in the
19:31market
19:32liquidator and you still come out with a healthy profit so book value is
19:35basically liquidation or replacement cost its reach what you’ll get if you if
19:38you basically just to sold everything
19:41ok and what have you got shirt on the next slide ok so here’s a question about
19:45indices and index composition so said where the value in this case in msci
19:49asia ex-japan now a lot of institutional fund managers will be tracking msci asia
19:55ex-japan and we said that the real problem in that the reason that you’ve
19:59got an asia ex-japan index is because for 20 years the japanese market was in
20:03a bear market it was just going nowhere or south
20:06but the problem with that today is that Japan is no longer going south japanis
20:10and our perspective it’s the most attractive any of the developed markets
20:13for those reasons achievements that we looked at earlier
20:16so if you’re tracking msci extra points are tracking the wrong index so this
20:21whole point about which index your tracking if any is hugely relevant and
20:26with the japan question why what do you think people are still not investing in
20:31Japan I mean it’s gone up a lot
20:32it’s like that shows your topic so this is the sort of broad japanese market
20:36going back to 2010’s are clearly 2010 2011 2012 going nowhere and then since
20:41the end of 2012
20:42you know the topics is more than doubled and one reason for that is is abba
20:46nomics and one reason i ask you and the Japanese have been as aggressive
20:49probably more aggressive than anybody in in queue and money printing but I mean
20:53it’s not just for investors is the Japanese themselves the Japanese haven’t
20:56yet bought into their own market
20:58so you know there’s a bit if you like normally people have home country bias
21:01but in the case of Japan even their own investors aren’t sufficiently you know
21:05confident yet so i think the Japanese market will be climbing the wall of
21:09worry for for some time to come
21:11ok and what’s the next slide that you’ve got first here ok so we said we’re going
21:15back to bhangra dance is a quote from bank grant is a quote from his probably
21:19his most famous book the intelligent investor which was published in nineteen
21:22fourteen is that investors do not make mistakes or bad mistakes in buying good
21:27stocks at fair prices very difficult to go wrong doing that they make this
21:30serious mistakes by buying poor stocks particular ones that are pushed for
21:34various reasons brackets by Wall Street brackets and sometimes in fact very
21:38frequently they make mistakes by buying good stocks in the upper reaches of bull
21:42markets now that last line is the one we’re highlighting that’s the one we
21:46suggest is the big problem potentially today that people might correctly but BB
21:50buying high quality businesses but they’re paying too much for them they’re
21:54buying them
21:54the top of the market and there’s no quote margin of safety in whatever bye
21:59and you’ve got some numbers to back that up i think uh Mandy yeah so this is the
22:03last slide and we have touched on this one before but we’ve done in a slightly
22:07different way this way so we’ve looked at the compounded returns
22:10this is from a book called what works on Wall Street by James Shaughnessy was
22:14published I think 2003 and what he did was he looked at basically some of the
22:18best performing strategies from the broad US markets over appeared over 50
22:23years so he bought that effectively the 50 stocks that that best demonstrated
22:27these different metrics and then he read balance them every year
22:30that’s 52 years with of compounding I think this town is a huge story he’s
22:34like the holy grail I think that exact described as when we were talking about
22:37this before
22:38whether you’re looking at price to sales ratio which is the first or price to
22:43cash flow or price-to-book again for price to earnings if in each of those
22:48categories you went to err on the side of growth in other words paying up for
22:52prospects of of more aggressive growth your $10,000 ended up being worth
22:58well actually not much more than ten thousand dollars if however you be
23:02skewed your bias explicitly in favor of value so you went for low price to sales
23:07low price to cash flow low price to book a low price-to-earnings you know you you
23:13give you made it literally millions so your your initial 10,000 in the case of
23:17low price to put which is probably my favorite metric your 10,000 ended up
23:22being worth twenty two million doesn’t make them that is utterly some amazing
23:26stuff
23:27the point is the great thing about this value approaches I doggy over the medium
23:31term she doesn’t necessarily work all the time but over the medium to longer
23:34term you’re actually taking less risk buying value stocks and you’re buying
23:37growth
23:38so this is the perversity of of investing you do not have to take big
23:42risks to enlarge returns because a lot of this is coming from the miracle of
23:46compounding so you looked at the other composition of the footsie earlier and
23:50all those stocks are quite rich in terms of dividend yield if you’re running five
23:54percent + per annum
23:55you know it doesn’t take long before those earnings really compare that quite
23:57a attractive right
23:59I’m afraid that is all we’ve got time for today because it’s fascinating stuff
24:02i think we should pick some more of that up another time and look into it more
24:05detail about it but Tim thanks very much
24:08going to keep Richard thank you chose thank you join us next time for the next
24:12edition of the investing show