744: The Values of Value Investing by Vitaliy Katsenelson of Contrarian Edge on Smart Investments


This is optimal. Finance daily episode seven forty four the values of value investing by Batalli, cats and Elson of contrarian edge dot com. And I am, Dan. I'm your host here on the show. And this is where I read to you from some of the very best, personal finance blogs, anywhere. And today, I've got a post from metallic Katzen Nelson of contrarian edge. And if you have any topic requests for us any ideas, you'd like to hear me cover here on the show, or perhaps an author that you'd like us to reach out to to see if we can get their content, please share those with us. You can come visit old podcast dot com. And give us those ideas. And this episode is brought to you by send pro online from Pitney Bowes, send a pro online software makes it easy to save time and money, no matter what you ship or mail print shipping, labels and stamps, right? From your desk and access discounted rates. Try it free for thirty days and get a free ten pound scale when you visit p b dot com slash finance. That's PB dot com. Com slash finance. And now, let's get right to today's post as we optimize your life. The values of value. Investing by Batalli Ketson Elson of contrarian edge dot com. I organize a conference every summer called value. X Vail veal is a quaint beautiful ritzy ski resort town tucked away in the gorgeous rocky mountains about one hundred miles from Denver one day. I received an Email from a reader asking why of value investor would have a conference in an expensive place like veil, he suggested that as a true value investor? I should hold the conference in a hotel somewhere by the airport, where prices are much cheaper his precise. Comment was I thought value investors were supposed to like cheap stuff. This Email changed my value investment hood. It made me question my value. Investing values was that reader, right? Was is straying from value investor traditions. Maybe I should rename the conference value x motel six and hold it at thirty six dollars a night remote airport hotel. I recognized that the notion was slightly silly. But it started me, pondering, what are the values of value investing? Let's think about the bible of value investing. Then. Grams nineteen forty nine book the intelligent investor Graham spent a lot of time talking about cheap stocks. He defined them as the ones that trade at single digit price earnings multiples trade at a discount to book value or trade below their cash value net. Nets Graham, placed great emphasis on statistical cheapness his flavor of value. Investing is tangible staring you in the face it requires very little imagination. You just need to close your eyes. Plug your nose, take a deep breath and buy whatever you scrape off the bottom of the stock market abyss what? Warren Buffett calls the cigar but approach to investing. But if the only thing you get out of grams teachings is to buy statistically, cheap stocks than you are shortchanging yourself. This analysis is one dimensional ending nor as much that is important in one of my articles. I called Charlie Munger, Warren, Buffett's sidekick, Geoff Matthews friend, and the author of pilgrimage to Warren Buffett's, Omaha sent me an impassioned note saying Charlie is not a sidekick, Charlie change. Buffett's investment philosophy? Sidekicks don't do that. He went on to say, quote at mongers ninetieth birthday party buffet pulled out an old yellowed letter that Munger had written back in the day where among actually told buffet explicitly that he had to change that the cigar butts stuff wouldn't scale that it was better to buy good businesses. Even if the price wasn't dirt cheap. I thought that was astonishing maybe the most inciteful thing I'd ever heard about Munger. He didn't just talk about it. He actively pushed buffet to change literally without Munger. There's no Berkshire as we know it and quote Munger turned buffet from being a one dimensional to three dimensional investor the two dimensions. He introduced are quality and growth a statistical value investor does not even have to be good at math, the counting skills you acquired in kindergarten or enough as long as the P E of the stock. You want to buy doesn't exceed the number of digits. You have on two hands. You are a Ben Graham value investor, but as Munger pointed out this one dimension. Strategy is not scalable, quote, you have only a very few opportunities in your lifetime to assemble a portfolio of in-your-face statistically, cheap stocks. That are decent businesses. All other times, you'll end up owning a lot of melting ice cubes, and quote, the quality and growth dimensions may lack in your face tangibility. They are often more difficult to quantify, but are very important sources of value. Let's look at quality a high quality mature company that is barely growing earnings. Think Coca Cola is like an inflation protected bond. This company dominates its industry and its existing keyword business generates a high return on capital, but it cannot put this capital to work at these high rates because it already has a large market share in an industry with GDP growth as an investor. You'll collect dividends that will grow with inflation. You'll make or lose money on the stock price depending on the pendulum swing of price to earnings around the fair or par value, which will also appreciate. In line with inflation from today's perch in a world where investors are starved for yield mature, high quality businesses trade like very very expensive bond substitutes their p pendulum puts their valuation much above par growth is a tricky dimension on a standalone basis, it means very little and can often be dangerous a company that grew earnings at a fast pace in the past. But lacked a sustainable competitive advantage, a bedrock of quality will invite competition that will destroy current and future profitability when you combine growth with quality. However, the mixture is magical and will result in a lot of value. Think apple this value? Lies in future earnings another way to say the same thing is a high quality company with a high return on capital married to a significant growth runway the ability to reinvest at a high rate in the future will create significant value, which will not be observable in last year's or even next year's earning power. But years. Now think about some of buffets. Best investments American Express and Geico both had significant competitive advantages in the case of Geico it's sold directly to consumers, and thus was a low cost producer in a commodity industry. American Express simply had an unassailable brand both had a huge growth. Runway ahead. When buffet purchase them. If grams intelligent investor is the bible of value investing. Then what should we learn from it don't trade stocks like you would trade sardines view them as partial ownership of businesses? Mr. market is there to serve you not the other way round. And of course, there is margin of safety buying stocks at a discount to what they are worth. But a discount to worth doesn't equate to statistically cheap. A thirty six dollars a night room motel six by the airport. Overrun by cockroaches and bedbugs and with questionable plumbing may be statistically cheap. But it's not a bargain, if I held my investment conference in a hotel like that, it wouldn't be attended. By anyone other? Than the vermin that are already there. You just listen to the post titled the values of value investing by Batalli cats, Nelson of contrarian edge dot com. 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Thanks again for listening, and I will be back with you tomorrow where I'll have a post from tiny Buddha while see there in the Friday show where your optimal life awaits.

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