Value Investing Works Because It’s Painful And Very, Very Difficult

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During their recent interview with Tobias, the team from Tweedy Browne discussed Value Investing Works Because It’s Painful And Very, Very Difficult. Here’s an excerpt from the interview:

Tobias Carlisle:
Let me ask you, given the very long history of Tweedy and the enormous combined experience in the room, when you look at today’s market, are there any obvious analogues from historical markets or do you think that this is unique in some way?

Bob Wyckoff:
Well, yeah, nothing. What did Mark Twain say history repeats-

Tobias Carlisle:
Rhymes.

Bob Wyckoff:
…That rhymes, it doesn’t necessarily repeat itself. I think that’s absolutely true. Tom mentioned something earlier that, and of course, it’s different today. It’s not 100% like this, but I couldn’t help but think about parallels back to that Nifty 50 era when I think about the FANG stocks today and that era between 1965 and mid 1973 was an era where a group of securities performed extraordinarily well. Ended up trading at more than double the market multiple and the market multiple was high during that period, and these were the technology stocks of the day back in those days. It was companies like IBM, Hewlett-Packard, Digital Equipment, the Texas Instruments-

Tom:
Eastman Kodak.

Bob Wyckoff:
The Eastman Kodak.

Tom:
Polaroid.

Bob Wyckoff:
Polaroid, and of course, you can add Philip Morris, Avon, Walmart-

Tom:
Disney.

Bob Wyckoff:
Disney. All these stocks were part of the Nifty 50. And I think people would be shocked to know that in late 1973 and 1974, these stocks absolutely collapsed. Disney was down over 80%. Hard to imagine that kind of thing happening. But it reminds me today a little bit of the feeling we have about these dominant technology stocks and full disclosure we own shares of Google, which we bought many years ago at a point in time when we thought the stock was cheap, but many of the others we don’t own. And of course, that’s where the action has been of late as you know. And those stocks are group. You’ve probably heard Rob Arnott presentations where he talks about the valuations of these companies. I seem to recall he said, “As a group they’re worth four to $5 trillion which is greater than the annual GDP of most developed countries except Japan and the United States or something.”

Bob Wyckoff:
I mean, truly dominant companies growing quickly, no doubt, and will continue, obviously, to be good businesses, but maybe priced for perfection, hard to know. But the Nifty 50, that era reminds me a little bit of that aspect of today. And another thing I think back on I think the Barton Biggs, who was the strategist at Morgan Stanley years ago, I want to say in early March of 2000, wrote a piece called Even Monkeys Fall From Trees. And the piece was about value investing was once again being declared dead. And Barton had great courage. Came out in a piece, talked about this is no time to be abandoning value. You should actually be thinking about putting money in that era. The dot-coms were in ascendancy. And within three weeks of writing that piece, the technology bubble burst, and these stocks came tumbling down. So that’s another thing that comes to mind in the press lately, particularly in the last year, value is no longer relevant. It’s dead. It’s dying, I could give you a pile of press-

Tobias Carlisle:
I have it, don’t worry.

Bob Wyckoff:
You know it. And I just think it’s… I can tell you, my career, I got here in 1991 and values been declared dead three times in my career. This is the third time and I suspect it’ll be declared again down the road, right? And value is the most, Jay likes to talk about the reason why value works is it painful at times and psychologically very, very difficult for people to practice because almost a condition proceeding to value success are these sometimes unbearably long periods of underperformance and we’re obviously in one of those. There’s one thing you can count on at Tweedy, we don’t change our stripes. And we think we’ll come out of this. But it’s been a tough time.

Tobias Carlisle:
I don’t know if you saw Cliff Asness published a piece saying he advocates for… He says it’s very hard to time when any strategy will start working. So when will value start working? Nobody really knows. But he says, “When the opportunity gets stretched as it has been, it’s time to sin a little.” And he advocated for allocating a little bit more to value than you may ordinarily allocate. And then he had to follow it up six weeks later with another piece that he called, Never Has a Venial Sin Been Punished So Quickly, also [inaudible 00:47:36]. Because it was the worst six weeks in what has been a very tough decade. But I saw something very encouraging the other day. I look at the French data, Ken French’s website, he has all of the factor data. Ken French of Fama French.

Jay Hill:
Yeah.

Tobias Carlisle:
And I looked at price to cash flow I saw that you can divide it into all the deciles. And I looked at the cheapest decile against its own long run main. And it is since 2019, for the first time in a very long time, it’s actually cheap to its long run main. And the only other two times where that’s happened in recent memory was 1998 to 2000. And then 2009 right at the bottom, both of which were very good times to get started as a value investor, and the performance thereafter was quite good. So how do you feel? Like without really looking at the data anecdotally, how do you feel about the prospects for value at this point in the cycle? Looking at your own portfolio, how do you feel?

Bob Wyckoff:
I would mention one thing. I sense a certain fragility in markets over the last couple of years. There have been pockets of volatility. They last very briefly, and as Cliff said, you get punished very quickly as stock prices come back. But we have had pockets of volatility and I think that is a reflection on the fact that we have very high valuations. And facing a lot of macroeconomic issues all over the world, I think back to the Nifty 50 era and what… It’s hard to know exactly what brings stocks down and what causes a correction. But I remember back in that era, it was the oil embargo played a big role.

Tobias Carlisle:
As the supply shrunk.

Bob Wyckoff:
Saudis embargoed oil. Oil prices quadrupled in the United States, prospects for recession were knocking on the door and we got a big decline in stocks. It’s hard to know what’s going to cause that. Is it going to be a virus? Is it going to be any trust scrutiny of technology stocks and some disappointments there? Is it going to be simply the fact that at some point people begin to think about low interest rates, rather than being a catalyst for market performance, maybe indicating something else.

Tom:
It’s a symptom, maybe.

Tobias Carlisle:
Yeah.

Bob Wyckoff:
Something that could be an indicator of bigger problems. So who knows? We don’t know. But because of this fragility and the pockets of volatility that we’ve been seeing, I sense we’re closer to that time. And it’s probably as Cliff would say it’s, we probably should be sinning a little right now.

Tobias Carlisle:
I think that the Nifty 50 is a very good analogue for today. And I agree with you because when I look at the companies that do have the highest valuations, they do tend to be the better companies that are growing very rapidly, throwing off lots of free cash flow. It’s just that I think that they’re extremely expensive when you look at Microsoft at one stage got to a 2.8% free cash flow yield. No question that Microsoft is a fantastic business with incredibly high margins and likely expanding margins and growing at a very high rate. It’s just that at 2.8% it’s getting to that point where it doesn’t have anywhere to go and if it backs off a little bit from there, it’s still not really cheap at three and a half percent. So that’s why I agree with you completely that that year was a good one… Is a good analogue. What happens there after? Do you avoid value in the interim while the volatility in the markets takes over or do you remain steadfast? Do you hold a bit more cash in the portfolio? How do you deal with that?

Tom:
We’ve don’t know how to do anything else except we value investors. We have a little bit more cash than the normal. We are above 10% I believe we are around 12 or 13.

Bob Wyckoff:
Mm-hmm (affirmative).

Tom:
But we’re still looking for value. That’s the only thing we know how to do.

Tobias Carlisle:
So you could be fully invested in short or if the opportunities presented themselves?

Tom:
Right, right.

Roger:
Maybe in a volatile environment you look for the better businesses rather than the ones that are likely to get it on the chin if the heavy weather continues, right? So we prefer to do that. So the rougher the environment you’re in the higher the odds you buy better businesses at decent prices, and then those are the ones that can compound that you can hold for a while.

Tom:
But only if they fit.

Roger:
Yeah sure that’s all we do.

Tom:
[crosstalk 00:52:38].

Roger:
That’s all. [crosstalk 00:52:41] going to pay up for anything. We do the same thing, I mean, we just get a little bit more excited that we can buy better businesses when markets fall.

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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