Value Investing

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  • 1.  Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-08-2023 11:30
    Edited by Jenna Brashear 02-08-2023 11:48
    Hi all,

    Welcome to the Value Investing Community! We had numerous AAII members write to me asking for a value investing strategy community and so I am happy to say we have made that happen!

    For our first discussion topic, I wanted to take a look at a popular AAII Journal article written back in November 2021: Warren Buffett and the Evolution of Value Investing. Robert Hagstrom discusses value as having progressed through three stages: Classic Value Investing, Valuing a Business, Not a Stock and The Value of Network Economics. He also touches on his thoughts of Buffett's allocation and overall strategy. What were your initial thoughts when reading this article about Hagstrom's personal observations about value investing as a whole as well as Buffett's strategy?

    Thanks in advance!

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    Jenna Brashear
    AAII Community Manager
    Chicago, IL
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  • 2.  RE: Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-12-2023 08:43
    Edited by ROBERT ADAMS 02-12-2023 16:22

    Thank you, Jenna (and anyone else who was involved in the decision to create this "community")! 

    I read Hagstrom's book, The Warren Buffett Way, back in 1998 and thought it was pretty good, although I'm not sure how complete it was in illuminating Buffett's thought processes. My favorite takeaway from Buffett is the notion that you should buy good companies at reasonable prices and then hang onto them unless and until you find a substantially better bargain.

    Jenna, I think the discussion in the article you reference highlights the biggest problem investors have, which is HOW to value a given company. Accrual accounting only adds complexity to that task. It seems that many, if not most, of the numerical techniques for valuing companies are merely attempts to translate from accrual accounting to a more real-world, cash-based evaluation. I wish publicly traded companies were required to publish cash-based P&L statements and balance sheets. (The statement of cash flows helps but doesn't quite get there.) About the only way to fudge the numbers on cash-based statements is to outright lie about them, and such fraud is much easier to detect than accrual-based shenanigans.

    Considering the current volume of cryptic notes to accrual-based financial statements, explanatory notes to cash-based statements wouldn't be any worse.



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    Rob Adams
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    Original Message


  • 3.  RE: Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-18-2023 09:35

    HI Jenna I am new here but have over 35 years of trade system development experience.   I would suggest your readers explore some of the return attribution studies on value strategies including the book value, low price stock and small cap effect.     I have been using a very interesting book value strategy to buy low cap financials that has produced superior returns over the last 5 years with a relatively low standard deviation.  



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    Thomas Wagner
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    Original Message


  • 4.  RE: Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-18-2023 16:20

    Thomas, welcome to the club! I'm wary of any strategy that produces superior returns over only the past 5 years. Recent history often provides returns that are not consistently reproducible. I want long-term strategies that have worked throughout the past 50 years or more. Personally, I don't give a hoot or holler about volatility. All I care about is long-term growth, and maximizing growth always seems to require increased volatility.



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    Rob Adams
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    Original Message


  • 5.  RE: Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-18-2023 17:02

    Hi Robert I have been using it for the last 5 years but the strategy has been the subject of a number of white papers going back over 30 years.  Best of luck. 



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    Thomas Wagner
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    Original Message


  • 6.  RE: Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-19-2023 11:27

    Thomas, if you'd be willing to share any citations to those papers, I would be greatly appreciative. I'm always on the hunt for the optimal long-term strategy. 



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    Rob Adams
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    Original Message


  • 7.  RE: Hagstrom, Buffett and the Progression of Value Investing

    Posted 02-20-2023 10:46
    Edited by JOSHUA DONALDSON 02-21-2023 10:22

    Great topic, and one that I think investors will be forced to migrate toward in this new environment of 'normal' interest rates and higher costs of capital.  The investment idea of buying high priced investor-funded  "growth" stocks, and selling them higher, is a money-losing idea for at least the next decade imo.   It may take another year of losses for the growth crowd to come around :-/

    Value investors don't care so much about revenue growth and TAMs they care about buying stocks at currently depressed prices (relative to earnings, book value, cashflow, etc.) and selling them when the value has recovered, and earnings may have recovered at the same time further increasing value.  This has served numerous famous investors very well and it has served me very well including in 2022 (I was in the black, albeit not by much).

    Granted value investing isn't as exciting and volatile, but its a chance to apply knowledge and reap the rewards.  Its not just a gamble that something will be price higher just because its a popular ticker symbol (or the opposite can happen).    Why does a growth stock sometimes trade at 40X earnings and sometimes 100X and then drop back to 20X and who can rightfully predict that?  Nobody.

    Thanks for acting on the suggestions to create this discussion topic Jenna.  I look forward to seeing more activity in this area.



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    JOSHUA
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    Original Message