Is pure Value Investing a gamble?

[yyt]

I recently spoke to a seasoned investor which provided me a lot of inspiration.

One of the points that he said was that Value Investing is like a gamble, a speculation that a stock will revert back to it's intrinsic value. Nobody knows when, one can only buy a value stock and hope in some day it'll be recognized by the market.

Thinking through, this seems very logical.
Take the SSE 50 ETF or any ETF for example, they are under-valued compared to the future Stock market. So as a value investor, it makes sense to buy all the stock market's ETF. They'll most likely increase in future, providing you a healthy capital gain.

But is the opportunity cost worth it? Do you get rewarded for holding the ETF through good times and bad? It seems that the rewards are pretty limited, at most restricted to a small dividend(1%).

Thus is pure value investing a gamble?
Would like to hear from those that have experience practicing pure value investing, have it brought you the same success similar to ben graham of the past?

[Musicwhiz]

Would like to hear from those that have experience practicing pure value investing, have it brought you the same success similar to ben graham of the past?

I would like to categorically state that ALL investing is value investing, and that it all involves risk, uncertainty and some form of "gamble" (expectation of uncertain rewards). As value investors, the idea is to tilt the odds to your favour so that you gain much more than you lose, both in terms of probabilities and absolute $ amounts. This is why bigger bets are placed on companies with more stability and predictability as compared to say a growth company with not much of a track record.

As an aspiring "pure" value investor (though I think the word pure is redundant), I have been practising Ben Graham, Warren Buffett and some of Philip Fisher's principles. But my investing timeline is only about 3 years+ (if you are looking at value and not anyhow hantam investing which I used to practice), therefore it's not much of a robust record to speak of even though I've survived one bull/bear cycle with capital intact.

Perhaps one should measure success with how much money one can AVOID losing, rather than how much money one can make - within a specified period of time. I certainly think that's a very important concept which is mostly lost on new investors.

[egghead]

All investments can be seen as our bets on future outcome. If the use of the word "bet" makes all investments a gamble, then everyone in the whole World is a gambler.

Value investing, or TA or any other methods, are the tools that we use to help us decide what, when to invest.

I cannot understand your reference to ETF as under-valued as compared to future Stock market. Care to elaborate?

[arthur]

Ever thought about this question deeply before. And my conclusion was that both of you are actually correct.

All investments are actually a "gamble" as we do not know whether it will be up or down the next day or even in the long run.
Yes, history showed us that in the long run, good strong, undervalued stocks should be up but then again, we aren't God thus, there's always the probability of being wrong even once.

As for all investing are "value investing", in a very strict sense, we could actually say yes as we seek to find stocks that are really worth that what they are now. Even in other forms of investing like growth investing, sector investing, thematic investing, black swans droppings investing (made this up myself ), etc.. all forms of them are seeking to make a profit out of a discrepancy in current price vs. actual price.

Cheers

[newborn1000]

(To the Thread starter.........)

Who says stock market will definitely rise in the future?!?!?!?!

This assumption that the market will always rise is largely base on USA's experience...................

The Japanese market has been a decline, for example in 1997 Nikkei 225 is 22750pts........fast forward to 2000, Nikkei is 20833....fast forward again to 2007 Nikkei is 18269.........2010 Nikkei is 11204 (Each successive peaks has been lower than previously attained)

The STI has been no better, it was only until 2006-2007 that it managed to "break form"..........

The future, can make your investments look under-valued, but it may well make it OVER-valued too.............You can go check creative's history for more evidence.......



Is value investing gambling???

You cannot equate uncertainty as gambling...............

For example a basketball player takes a 3 pointer shot.........Is he gambling?

If so, then why hire professionals to play basketball???


There are many urban myths about investing/Technical Analysis.............But there is only one truth, you only invest during the end of the bear market<----------When I tell people, that my best picks will come 2-3yrs later, they are always "jawed-drop"

"Buy when there's blood in the streets, even if the blood is your own"

[freedom]

understand the strucutre of SSE 50 ETF. it is more like ETN than ETF. huge risk involved.

[yyt]

Hi MW, I used the word "pure" to differentiate investments that are value+dividends and those that are only value.
I understand it's a little hard to separate dividend from value since most of the time it's part of the value equation.
But for e.g would you invest in a stock that is below it's intrinsic value, even if it's not paying any dividends?

I cannot understand your reference to ETF as under-valued as compared to future Stock market. Care to elaborate?

Just as an e.g. Let's take the SSE 50 ETF
In the near future, say if one did his sums and concluded that the SSE50 will rise by XX% for the year 2011, but the current market is depressed due to bad market sentiments, and the country's P/E ratio's at record low, etc.
He's convinced that the ETF is below it's intrinsic value with most of the 50 companies it too. Would you buy into the ETF at this point, since we're looking at potential value without dividends?

Who says stock market will definitely rise in the future?!?!?!?!

Thanks newborn for pointing this out. You are right, we can't say for sure it'll definitely rise.
I chose the words "most likely rise", for this particular reason, we have no control over it

[newborn1000]

Hi MW, I used the word "pure" to differentiate investments that are value+dividends and those that are only value.
I understand it's a little hard to separate dividend from value since most of the time it's part of the value equation.
But for e.g would you invest in a stock that is below it's intrinsic value, even if it's not paying any dividends?

I cannot understand your reference to ETF as under-valued as compared to future Stock market. Care to elaborate?

Just as an e.g. Let's take the SSE 50 ETF
In the near future, say if one did his sums and concluded that the SSE50 will rise by XX% for the year 2011, but the current market is depressed due to bad market sentiments, and the country's P/E ratio's at record low, etc.
He's convinced that the ETF is below it's intrinsic value with most of the 50 companies it too. Would you buy into the ETF at this point, since we're looking at potential value without dividends?

Who says stock market will definitely rise in the future?!?!?!?!

Thanks newborn for pointing this out. You are right, we can't say for sure it'll definitely rise.
I chose the words "most likely rise", for this particular reason, we have no control over it

The way, you structured your first post already gave me the impression that your "most likely rise" is 99% of 100%

[kazukirai]

But for e.g would you invest in a stock that is below it's intrinsic value, even if it's not paying any dividends?

If there's an adequate margin of safety, why not?

Nothing is a guarantee in the world of Investing. Ditto for dividends. As such, I see dividends as a component of total return and can/should be factored in the likely return from investing. All a company with a likely dividend payout does for you is increase your MOS. Of course, you face the uncertainty of reinvesting your dividends but let's assume that you prefer your returns today rather than tomorrow, then dividends would be nice.

He's convinced that the ETF is below it's intrinsic value with most of the 50 companies it too. Would you buy into the ETF at this point, since we're looking at potential value without dividends?

See above on MOS.

I'm assuming here you mean ETFs in general and their purpose for allowing smaller investors to be able to hold a basket of securities that match whatever index the ETF is designed to track.

Freedom-san has brought up a valid point on ETNs being dangerous but I'm assuming you (yyt-san) didn't mean to make that distinction.

[egghead]

Take the SSE 50 ETF or any ETF for example, they are under-valued compared to the future Stock market. So as a value investor, it makes sense to buy all the stock market's ETF. They'll most likely increase in future, providing you a healthy capital gain.

yyt, thanks for clarification. Your earlier post mentioned any ETF so I was puzzled why would all ETF be under-valued.