The Investing Show: Why value investing beats the market

Updated on

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
Thanks For Watching! Please leave a like if you enjoyed and tell me what you think in the comments! Thanks ^.^
If there are any copyright issues with any video posted here I will remove them, please contact my email: [email protected]


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

Leave a Comment