The Death of High Flyers

Investment Analysis Clubs Value Hounds
21

Phaz, welcome to the “Value World” but tread carefully, it’s not all it’s touted to be! I’m writing a longer reply to Randy’s previous post that I think will be interesting.

One of the difficulties of investing is that most people look at the minute details like earnings reports but don’t know or understand the nature of the system as a whole, how wealth works, even after it has been revealed to the world by Vilfredo Pareto in 1906, over a century ago:

In 1906, he made the famous observation that twenty percent of the population owned eighty percent of the property in Italy, later generalised by Joseph M. Juran into the Pareto principle (also termed the 80–20 rule). In one of his books published in 1909 he showed the Pareto distribution of how wealth is distributed, he believed “through any human society, in any age, or country”.[11]

https://en.wikipedia.org/wiki/Vilfredo_Pareto#Economics_and_…

You wrote:

He asks the question: “What are the returns that I can sustain for the longest period of time?”. For most folks, I imagine it would be hard to beat an index fund.

The Pareto principle confirms that most people will underperform the market average, i.e. Index Funds. Take the brightest Ph.D.s with Nobel Prizes in economics and they can crash the market, the story of Long Term Capital Management:

Long-Term Capital Management L.P. (LTCM) was a highly-leveraged hedge fund which was bailed out in 1998 to the tune of $3.6 billion by a group of 14 banks, in a deal brokered and put together by the U.S. Federal Reserve.[1]

https://en.wikipedia.org/wiki/Long-Term_Capital_Management

The founders had million dollar resumes and developed a perfectly logical system based on the mathematics of uncorrelated securities (Modern Portfolio Theory, MPT). The problem was that one day these securities became correlated and LTCM collapsed like a house of cards. (a very simplified version but one that goes to the heart of the matter, the nature of the investing universe).

While you are right about index funds you are wrong about growth vs. value:

Over very long periods, growth stocks and value stocks have the same returns

It depends on your time horizon. If you mean from founding to dissolution you are likely right but the company and its stock have gone though several stages, idea, startup, maturity, decline. Growth, as properly defined, is that stage in the company’s life where it is growing vigorously and it tends to be the middle years. While the Sigmoid or “S” curve does not apply to companies but to technologies, a most important distinction, companies that are provide those technologies benefit from those growth spurts. Some companies, like Apple, provide successive technologies, iPod, iPad, iPhone, iEtc, each with its own “S” curve. The Sigmoid growth rate is also a law of nature, not of physics but of complex systems.

https://www.google.com/search?client=safari&rls=en&q…

The growth vs. value over time is best illustrated by comparing the S&P 500 with the ‘tech heavy’ NASDAQ

https://bigcharts.marketwatch.com/advchart/frames/frames.asp…

Over the past two days the market demonstrated how it reacts to uncertainty,

Wednesday: What is going to happen in Ukraine? NASDAQ -2.57% (Denny -5.4%)
Thursday: Russia invades Ukraine? NASDAQ +3.34% (Denny +6.7%)

Those are huge moves. Not everyone can handle this kind of volatility. Cathie Wood sold out Palantir a few days ago. Yesterday PLTR up 13.42%!

One last point, most people value their portfolio by its daily valuation and it makes sense for traders but if you are investing for the long run, it you are investing as an owner, no matter how the stock price changes, the number of your shares, the share of the company you own, has not changed. If you buy shares that will bounce back you have nothing to worry about volatility. Which brings me back to Saul’s board. Currently the mantra is revenue growth but if you don’t understand the business the company is in then you cannot tell if it will bounce back or not. Saul does talk about ‘confidence’ but what is that confidence based on? The business model or the recent performance?

Phaz, I hope you join that top 20%. The odds are 5 to 1 against you! I didn’t but I had a lot of fun and excitement learning and did well enough to cover my needs.

Denny Schlesinger

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22

Right on Denny…so much of it is just math and physics. Nothing we can really do about it but understand.

And let’s talk Morgan Housel. Especially for the newer investor, on a scale of one to ten, Morgan is a solid eleven. So much of what he writes and discusses is not about investing, per se, but how the system(s) work. That is very valuable information, and a piece with what Denny is talking about.

We can all tell stories; one of my most relevant now is ATVI, which is the stock I’ve held the longest; since the mid-1980s. I bought 200 shares for $2 each when they announced their first profitable quarter. If the MSFT buyout happens, I’ve done pretty well, right? That’s a CAGR of 11%; I’m a genius.

But wait…there was a reverse split…and then another…and my 200 shares are now…2 shares. It took me 35 years to turn $400 into $180. Of course I could have doubled down, bought the dip(sssss), whatever; and nobody will tell you that the company has become irrelevant. There have been a lot of lessons along the way that were worth $220, and I’ve kept that stock as a reminder. Though if I’d put that $200 in an index fund it’d be worth something like $7000…so maybe an expensive lesson after all?

And I’ll close with this: S&P vs NASDQ. Just compare the charts. For the longest time, S&P reigned. But not now. So is something different? That, IMHO, is the first question. To the math of it all, there is “reversion to the mean”…and that can be a very mean thing if you are on the wrong side of it. That is something that has to and will happen…sometime.

I doubt there is anything truly different…maybe, but probably not.

-Randy

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23

Hi Phaz!

A few thoughts for you:

  1. There is no right" way to invest; there is only the right way for YOU, with your specific financial circumstances, goals and risk tolerances.

  2. Most folks start investing without a long-term financial plan; having one and adjusting it annually makes for a “Ready, Aim, Fire” investing approach, versus some other order.

  3. I think you are wise to look at many investing approaches, and then find the one(s) that fit you.

For me, it turned out to be a core strategy of dividend payers/growers, plus the use of options and a splash of high-growth aggressive stocks. ( https://discussion.fool.com/long-term-financial-plan-34745319.as… )

Good luck on your investing journey!
Cheers!
Murph
BL Home Fool

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I did a table-pounding ALL CAPS conclusion to my Apple analysis on another board here when it was almost at the lows…it was trading at something like ~4.0-4.2 EV/ebitda at the time. Crazy.

If I ever see another situation like that, I’ll definitely mention it. Probably was the best opportunity for value investors since tobacco stocks at their lows in 1999-2000. BTI, to pick one at random, was a $4 stock, now it has a $3 divy.

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“What is Apple’s not so secret sauce? Smartphones? Computers? NO! It’s the Apple User Interface! It’s MacOS, iOS. I see the same theme repeating at Tesla. Autonomous driving requires AI. Once you have the AI you can apply it to all sorts of other consumer products.”

As long as the AI does not drive you up - or into - a wall, expanding what is basically a
printed circuit board to run many consumer products can be workable.

Howie52
One wonders if the recurring need to power off, wait 30 seconds and power back up will be
part of all consumer activities in the future.

Oh, what brave new world!

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As long as the AI does not drive you up - or into - a wall…

As long as the Titanic does not sink, as long as jets don’t fall out of the sky, as long as you don’t get food poisoning, as long as there are no car accidents…

There are so many fun ways to die! LOL

Denny Schlesinger

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