What To Do If Value Sucks For The Next 10 Years

What To Do If Value Sucks For The Next 10 Years
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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed What To Do If Value Sucks For The Next 10 Years. Here’s an excerpt from the episode:

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What To Do If Value Sucks For The Next 10 Years

Tobias: It’s a good one for you, Jake. What do we do if value sucks for the next 10 years? Keep the number for that truck driving school.

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Jake: Yeah, here’s the thing. I’m sure I will regret these words later. I think you’ve already gotten most of your returns for the next 10 years, if you’re an index investor, if you’re towards the growthier end. In those sideways, choppy markets, I think value tends to do okay there. Value did pretty good in Japan if you paid attention to when you were buying at multiple different periods. I would say value has a really good shot. What I’m going to say is that if anyone has a shot at it for the next 10 years, it’s value. Maybe no one does, I am willing to concede that, that maybe everything might suck for the next 10 years, potentially. But who knows? Don’t ask me, I’ve been wrong for–

Tobias: You’ve been wrong for decade. [laughs]

Jake: Yeah, no one should be listening to me. [laughs]

Tobias: Well, I’m in the same boat. So, let me take a swing at it. I got ARK fund up on the– by the ARK fund. I hedged out with ARK. I think a lot of people are doing that. The main ARK fund is now more heavily traded than SPY. There’s more flows, all the Ark funds are in the top 100 ETFs in terms of flows, Cathie Woods running $50 billion, there’s a lot of money flowing into tech stocks.

Jake: It was 2 billion or something, what, like, at the beginning of the year? I might be off on that. I read somewhere it was just like this absolute rocket ship.

Tobias: She might have been seven at the start of the year, might have been to last year. It’s been a ridiculous ride. She’s been right. I do worry a little bit if there’s a little bit of a Janus Fund– For folks who don’t know, Janus Fund in the late 1990s was something like ARK that were getting flows and they were jamming into the same stocks, which then turned up as further returns in most stocks. It looks really good when it’s going in one direction, when it turns, it’s pretty ugly, on the other side, too. I don’t know, Cathie has been right for a long time.

I would just say this, when I look at value now, there are two things that were missing five years ago, when Jake wrote his great article. The spread is now very, very wide between the most overvalued and the most undervalued.

When I look at the undervalued stocks, if you do a back-of-the-envelope valuation of these things, you can go and look on Morningstar at the portfolios of mine that are up there and you can have a look at them on any metric, they’re better than the index and they’re better than– this took in yield growth, take your pick, cash flow earnings book, I think it would be very hard from here for value to at least deliver reasonable returns.

I don’t know how that’s going to go relative to the other stuff, but I’d back it over the other stuff. I mean, I am, so I’m talking about book to be completely clear, but I feel this is what it looks like when if you’re a value guy and you get really bombed out, this is the time to make you burn. Who knows what’s going to happen in the short term, longer term?

Jake: I would say, if you believe reversion to the mean is dead for whatever reason, then keep doing what we’ve been doing, or what’s been working. But there are so many places, so many data sets where reversion to the mean is going to be bad news for a lot of these things, whether it’s growth rates, interest rates, valuations, returns on capital.

I mean, just a million different ways that you can lose if there’s reversion to the mean with what’s been working. Other ways to win if you get reversion to the mean in the other way. If somehow, we found some new permanent place where the mean no longer– were like we’ve moved beyond means and we’re in a new world, then we’re probably going to have a rough go.

Bill: Slight addendum to that, is I think it’s the pace at which it reverts to the mean because I don’t think anybody that’s buying like Snowflake who expects perpetual 180% growth. It’s just they fade it probably a little bit more aggressive. Well, dude, the first four or five years they might. I mean, they might. You got to believe things for a really long time, and I think that’s where people like the three of us disagree with people that are willing to take the shot on goal on something like Snowflake. I also think that it matters how big you have it in your portfolio. If it’s 0.5%, I could care less if it’s in your portfolio, it really doesn’t do much.

Jake: Yeah.

Tobias: I understand the pitch for Snowflake, it’s a SaaS creating a new cloud, and Buffett’s Berkshire has bought it. What other signs do you need to take a swing at it? That’s a pretty comprehensive list of reasons to own it.


Bill: –sticky it is. I think there’s more to it than just that.

Tobias: I’ll bet you that if you asked a lot of people, that’s the full extent of the reason why they bought it from here.

Bill: Yeah, that’s probably true. I don’t think [crosstalk] going on.

Tobias: I don’t think that’s wrong. It’s got a lot of qualities that– Buffett’s bought it. I mean, that’s literally all I see all day long on Twitter is people speculating about which– Buffett’s going to buy PayPal, stuff like that. People speculating about which Buffett’s going to buy Tesla, it’s just laughable.

Jake: I would be shocked if that was actually Buffett that bought Snowflake. Come on.

Tobias: Yeah, it’s probably right.

Bill: Yeah, I think you’ve got to do your own work.

Jake: Let’s not get in the weeds of nuance of these things. [laughs]

Bill: It’s a sticky business.

Jake: It’s a good story.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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