Published on Sep 14, 2016

Ben Inker, Co-Head of GMO’s Asset Allocation team, discusses the advantages of long-term valuation-based investing and why GMO is Keeping the Faith in this approach.

Unique Value
Image source: Steven Depolo – Flickr

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in the long run there is no factor which is as important as valuation to the

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returns from asset classes and that’s because most pieces of information get

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digested from the market and then slowly disappear value is the only factor which

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as time moves on continues to have its value so the longer your time horizon

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the more value matters

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we think the basic driver is the fact that fundamentals are actually much much

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more stable than market prices markets are far more volatile than they need to

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be as long as that’s the case we’re going to find situations where markets

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have moved well away from fair value and the real fat pitches for evaluation

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based investing are going to come when markets have moved well away from fair

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value so as we look at the markets what we’re looking for is situations where

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the markets have been too volatile we do see that today we have seen it over the

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past five years even though in general markets have been going the opposite of

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the ways that a long-term valuation based investor would be they are still

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creating the opportunities that valuation based investors need to

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exploit to make money in the long run

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if you look at any given day whether the market is cheaper expensive going back

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as far as we can

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the value of being cheap is only three basis points so okay three basis points

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that’s not enough to do anything about because your transaction costs are going

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to be higher than that but the interesting thing is that one day return

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is repeated the next day having been cheap the first day is worth three basis

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points the next day and the next day and a month from now it’s also worth three

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basis points in six months and a year in two years and three years so that three

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basis points which is in the noise for an individual day over three years

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turns out to be the difference between making 42-percent in making fifteen

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percent for just the cheap-ass versus the expensive half of all days in the

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market and so as the time gets longer because value is so slow burning the

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importance of it compounds in a way that there is no other factor that can come

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close

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the problem with value investing is not so much that it is hard to do in

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principle of the problem is it’s hard to do as a professional investor basically

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in order for something to be a really really awesome opportunity for a

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long-term value investor it has to have gone from a pretty good opportunity to a

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quite good opportunity to a really good opportunity and then to an extraordinary

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opportunity every step along that way you’ve got the cheap asset

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underperforming or the expensive acid outperformance so just at those times

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when you’ve got the best opportunities you’re ever going to have those are the

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times when the clients are likely to have lost faith in you and where you as

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a manager may have lost some faith in yourself

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you know as we look at the various things you can try to do to add value

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over time the really cool thing about long-term value is that it’s one of the

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things that is hardest to imagine is ever really going to go out of style

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it’s one of the things where the markets are going to have the hardest time

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trying to arbitrage away these discrepancies and it’s one of the things

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we’re a really good fundamental understanding of where value comes from

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where Returns come from what are the actual long-term drivers of asset

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returns gives you a leg up and gives you an advantage so why are we so passionate

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about long-term evaluation based investing we know it works in the long

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run we understand why it should work and we understand the circumstances that are

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required for it to work and that combination means we can have far more

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confidence and that is a strategy than anything else

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