Before you write me off as some kind of heretic, let me clear something up. I am actually a diehard value investor. And yes, for a long time I bought in to the allure of buying low and selling high as the road to investment success.
Value investors will offer different examples or definitions of what value investing is to them, however; there are points on which I believe we all agree. Buying a stock at a discounted price that provides us with a margin of safety which limits the risk of the investment or improves our likelihood of preserving our capital - a main goal. Today, I learned that this style of investment really doesn’t work.
Actually, my early investing days were strictly a momentum style, not too much dissimilar from the style Mr. Reitmeister goes on to describe. Having discovered Benjamin Graham, Warren Buffet, Joel Greenblatt, Seth Klarman and others many years later, the truth is, I am unable to ever go back. Occasionally, Mr. Market get things a little crazy and you will discover stocks that suit both styles of investing, but this is an accident and tells us nothing about the stock. I will maintain decorum and not refer to this style Mr. Reitmeister promotes as speculation. Ok, it is speculation.
For instance, I currently am long on PDL Biopharma (NASDAQ:PDLI) and ViroPharma (NASDAQ:VPHM). PDLI is held by Seth Klarman, Joel Greenblatt and Jean-Marie Eveillard. VPHM is held by Joel Greenblatt. If you go to the Investor’s Business Daily website and research PDLI, you will discover that no “growth” style investor would probably touch it. I’m up nearly 12% in 1 ½ months. I’ll just buy some more when it dips. They don’t need to buy it. VPHM, because the stock has been going up since….well, the first day it started going up…..is loved by the website and has a Composite Rating Score (the most important rating) of 99. This is the top score a stock can receive. Does this really mean anything? Does it give me more reason to buy VPHM? No. Why would it? After buying it, it went up. I want all my stocks to do that. When it started going up, the momentum crowd says “buy”.
Ken Fisher discusses stock price movements in his book, “Debunkery”. He states:
Think this through: If stock price movements dictated later movements, you could just buy stocks that have gone up a bunch. But you know instinctively, that doesn’t work. Sometimes a stock that up a lot keeps going up, sometimes it goes down, or sometimes it bounces along sideways….
There’s a school of trading dedicated to momentum investing. These folks believe (contrary to a vast body of scholarly research) that price movement is predictive. They buy winners and cut losers. They look for patterns in charts. But momentum investors don’t do better on average than any other school of investors. In fact, they mostly do worse. Name five legendary ones. Or even one!
I would suggest to all investors, that they add another book to their shelf which will forever convince you of the wisdom known as value investing. Read “Value Investing – Tools and Techniques for Intelligent Investment” by James Montier. It is a highly technical but very readable and somewhat irreverent book that places all styles of investing under a microscope.