Quantitative Value Investing: Ideas & Practices

• News
• 2024-09-17

What is Value Investing?

When it comes to stock investing, the concept of value investing advocated by figures such as Graham and Buffett is undoubtedly unavoidable. However, what exactly is value investing? In fact, many value investors themselves are not clear on this. Of course, many Chinese stock investors become followers of value investing more out of being "trapped" and holding onto their investments passively for the long term. For this "foolish" behavior, there must be a rational explanation, and value investing is thus revered as the golden rule. As more people get trapped, value investing naturally becomes popular!

So, what exactly is value investing? Combining the views of Buffett, Munger, Li Lu, and Duan Yongping, among others, I summarize it as a set of investment philosophies, which include the following core points:

1. Stocks are certificates of ownership in a company; investing in stocks is investing in the company. The vast majority of stock traders do not understand what they are trading and speculating on daily, nor do they know what rights and obligations they have. Value investors, however, are very clear that stocks are certificates of company ownership, and the value of stocks is due to the value of the enterprise.

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2. Stock value comes from the discounted cash flows generated by the company's future operations. If a company is managed well, it will generate future cash flows, and these cash flows, when discounted to the present, represent the value of the enterprise (which can be understood as the value of the assets on the left side of the balance sheet). The remaining value after deducting the value of liabilities is the value enjoyed by the company's owners (shareholders). This value is also called the company's intrinsic value. Therefore, if a company fails in its future operations or cannot generate sufficient cash flows, then the stock has no value.

3. The future is full of uncertainties, and it is difficult to accurately assess the value of a company. To combat uncertainty, there must be a sufficient margin of safety in valuation, meaning that the stock price should be significantly lower than the assessed intrinsic value, making it cheap enough. Moreover, it is crucial not to invest in what you are not familiar with. If an investor's capabilities do not allow them to see the future of a company, it is best not to participate in the investment.

4. Non-income-generating assets without cash flows are not capital goods and should not be invested in. For example, Bitcoin, gold, and oil are not the preferences of value investors. Why? Because there is no basis for calculating intrinsic value.

5. In the short term, stock price fluctuations are influenced by various factors and cannot be accurately predicted, but in the long term, they are only affected by the fundamentals of the company's operations. Therefore, after investing, there is no need to pay attention to short-term price fluctuations; instead, hold long-term and expect the price to revert to its value.

6. Prices come from the stock trading market, and price is not equal to value. The market exists to serve you. This market can never tell you what the true value is. It only tells you what the price is. You should not regard the market as a teacher but rather as a tool that can be utilized.

If an investor possesses the above beliefs, they can be considered a value investor. Of course, in reality, value investors also have different styles and types. For example, if divided according to the life cycle of the invested enterprises, value investors can be categorized into three types:Here is the translation of the provided text into English:

(1) Selecting undervalued companies from the garbage companies, commonly known as the "cigar butt" strategy. Graham and early Buffett both enjoyed playing this way;

(2) Picking dark horses from companies that have not yet grown large, buying a company that will become better in the future;

(3) Closely monitoring good companies and investing when they have a good price, expecting value to return.

If we categorize value investors based on whether they take action after investing to actively promote changes in company value, they can be divided into active and passive value investors.

Passive value investors invest and then do nothing, waiting quietly for the flowers to bloom. Obviously, we, the vast majority of ordinary investors, are passive value investors. The most famous active value investor is not Buffett, but Bill Ackman, the founder of Pershing Square. He has a classic quote: "Value investing is like painting an oil painting and then patiently waiting for it to dry. That's not wrong, it's just that I brought a hairdryer."

The above is my understanding of value investing.

In fact, it can be even simpler, in one sentence: value investing is buying stocks that are priced below their value. True value judgment is entirely subjective, and value investors can only rely on their own cognition and ability to judge the value of a company.

Duan Yongping has a very brilliant statement on this, saying: "(Stock investment) The most important thing is to understand the value of the invested stocks. If you don't know the value of this stock, you can't touch it. It's difficult to understand the business, and it's difficult to hold onto what you don't understand. Most people can't hold on because they don't understand. If you don't know what you're buying, you can't keep up with the 'masters'."

Although the theory of value investing is very simple, it is extremely difficult to practice. Because you need to really understand a company's industry structure, business logic, and operating conditions, and also judge the team's personality and ability. These meticulous "on-site knowledge", rather than grand concepts such as economic cycles, monetary policy, and inflation, are the key and focus of value investing.

Value investing requires investors to know too much and too deeply, and the threshold is very high. For ordinary people with small fund sizes, the huge initial learning cost is daunting. Even if they sincerely recognize the value investment philosophy, the few who can really engage in value investing are rare.