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Charlie Dreifus Is Sticking With His Contrarian Risk Averse Approach

Small Cap value investor, Charlie Dreifus on why value lags growth.

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Charlie Dreifus

Value Lags Growth: Dreifus Sticks With His Contrarian Risk Averse Approach

Transcript

Well there are at least two reasons. The first reason is that post great financial crisis despite the efforts of the central banks to flood the system with liquidity the words. Minimal growth we didn't have economic growth anywhere else including the United States. So there was liquidity ended up in financial assets lifting prices and bringing yields even further down. But the economy was not strong enough that companies exhibited growth. So those fewer companies. That had a growth story. Were sought after because that was something that you would pay up for because of the scarcity value. The other thing that works with growth stocks is that they are generally one way of valuing them is discounting the present value of future earnings. And the future earnings are discounted at a discount rate which. Has to do with the interest rate and interest rates being low. That adds to the value of the growth stocks as well. But the primary reason was the absence of growth in the economy and people desiring to own growth. The other thing which is much more subtle which very few people have picked up on but I have actually because of my mentor April off I'm trying to do something that I think he would be doing these days. The proliferation of non gap. Which has really occurred more in the growth segment today and how much you have to a kind of that size non gap is using. Not not generally accepted. We doubled earnings before bad stuff. So what you do is you add back to earnings things like stock compensation or amortization of intangibles that you that are the result of you buying the business. So you're not accountable for any of these things and those items are much more prevalent in growing companies. And what it does it is embellishes the numbers and makes the numbers bigger and makes the valuations seem less excessive.

The value companies and explain what you mean it was special equity by value. I mean you're categorized by Morningstar and others and you know Royce as a value shop and so but what does value mean.

It's barring a company. And they're different even within Royce there are different right colors. What is the value to me is buying a company at a price such that if I bought the entire company the earnings that I really receive and I have to make a judgment as to the sustainability of those earning right they don't necessarily have to improve in special equity or a lot of prosaic companies are not particularly fast growers. But the essence is you have to have confidence as to the stability of that level of earnings. But at that level of earnings if I borrow the entire amount to buy that company. The costs the interest cost on the borrowings would be substantially below what I would receive. So it's an entrepreneurial it's a business way. I dub it absolute value absolute value is different than relative value relative value says this stock is cheap compared to the market.