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There is no ‘hack’ for value investing

Others may tell you there are short cuts to value investing – but the reality is valuation metrics only ever point you towards where to look and there is no way of avoiding the hard work that is integral to the strategy

24/04/2019

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

Are there short cuts to successful value investing?

Is it possible to save a few minutes here, avoid a little effort there and generally, to coin a phrase, hack the investment strategy?

Here on The Value Perspective, of course, we have always argued the opposite – that you have to put in the hours, sift the detail, crunch a lot of numbers, take hard decisions and above all, having done so, be patient – none of which comes easy to people.

Yet what if we are wrong?

Or, heaven forbid, what if we are not being straight with you?

After all, the internet is not exactly short of people telling you how easy it is to make money – type ‘value investing cheat sheet’ into your search engine of choice, for example, and you will receive more than nine million hits in a little over half a second.

So have we been leading you astray? Of course not – value investing really is hard work, as is anything worth doing.

If you want to pass an exam, you put in the hours revising. If you want to get fit, you put in the hours in the gym. If you want to learn to play an instrument, you put in the hours practising. Why would making money from the stockmarket be any different?

As we have written before in Stay clear of ‘Peppa Pig’ fund managers, if you want to perform better than other investors, you cannot simply buy the great stocks that everyone else likes.

Some sort of sacrifice is necessary to generate outperformance and, here on The Value Perspective, our process is very clear about what that sacrifice needs to be: we have to be prepared to buy businesses other people hate.

We buy unloved companies

Even then, however, there are those who would argue there are short cuts to achieving this: all you have to do, they maintain, is look at a particular metric or indicator of value – for example, price/earnings ratio – and, if that suggests a business is cheap, then fill your boots. (Oh – but do remember, as one ‘value cheat sheet’ we found exclaims without further explanation: “Always think about intrinsic value! Don’t buy a value trap!”)

We have focused before on the dangers of an overreliance on valuation measures – warning in Desperate measures, for example, the more passive investors focus on one metric, the less worth it can have.

In Be wary, meanwhile, we argued investors should be careful about using individual metrics because “regulations, technology, fashion – almost everything changes”.

“Almost everything that is,” we added, “except value.”

Companies are coming up with ever more intricate metrics to identify different types of investment – a recent Financial Times article, whose headline Not all measures of value stocks are created equal was always going to attract our attention, noted for example how data group Style Analytics had measured the performance of stocks fitting no fewer than 10 different definitions of ‘value’ since July 2009.

These included metrics such as price-to-book value, free cashflow yield and forecast earnings yield [links to our glossary] and the piece went on to observe that just three of those outperformed the market over that period – before mournfully concluding: “For now, then, that’s the (even worse) news for value fans. Even if the market does eventually turn in their favour, picking the right flavour of value could be tricky.”

Stockpicking is more than just metrics

Rather than making us worried, however, that only underlines the crucial point that investors should not look to cheat or even pigeonhole value.

You can try to be cute about it and use lots of different metrics but those will only ever point you towards where to look.

Even so (and would-be value hackers beware), you are still going to have to do all the fundamental work to identify which businesses stand a chance of seeing their share price rebound and which are cheap for a reason – those so-called value traps.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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