Value investing - Finding stocks of interest.

[UnderscoreEX]

The difficulty is that most of the stock market's performance comes from a handful of companies, on a small number of days. If you miss those companies or those days you also miss the bulk of the gains.

Yeah, that is completely true. I agree that overall growth of the market does come from those few companies and I think the majority of those would be within the index funds.

This might be a issue with my explanation of value investing, but the goal of value investing is not to pick those companies that will grow like those few companies necessarily. I assume this is the main difference between 'growth investing' and 'value investing'.

The goal is to find companies with a steady, respectable growth (roughly 10%+ per year) and calculate/estimate the actual value of their stock. These companies would not be worth an investment at their everyday 'equilibrium' price because 10% growth is not worth the risk that comes along with it. However, when these company's stock price drops considerably due to irrational speculation, you can snatch them up at a discount (which could even be 50% or more) and wait for the market price to return to the 'equilibrium' in a few years. At this point you can sell, without ever caring if the company itself has grown at all.
This strategy doesn't rely on the growth of the company performance (like the handful of companies mentioned above), but simply relies on the short term irrationality/fear that caused the drop + the ability for the market to accurately value stocks over the long term.
Theoretically, the company's performance and growth rate during this time could be exactly the same as it always was, yet the price went crazy.
Of course these is more to the analysis of the company and the specific event that has caused the drop.

It will be interesting for you to compare how your indexes have done compared to your individual value stocks in a few years.

Haha I will keep everyone updated over time. I'll take the blame if I'm wrong but I am happy to give credit to you and the forum for helping me get started a few months ago.

[captainspoke]

Let Buffett do it for you? BRK/B or A.

Or, these ETFs are large cap value.

[EmaxisSlim Cultist]

The more I talk, the more it sounds like I am missing something. If I am wrong, I would really want someone to tell me.

The simple truth is regardless of how much time or energy you put into this endeavor you are extremely unlikely to outperform an index.

If you are in love with the idea of small-cap value, I would just buy Vanguard VBR https://investor.vanguard.com/etf/profile/VBR

Or buy all of the value sector with VTR https://investor.vanguard.com/etf/profile/VTV

These indexes are almost assuredly going to perform better over the long term than individual stock picking.

[UnderscoreEX]

I am definitely maintaining my investment into index funds with steady dollar-cost averaging.
But I still don't understand what it is about the additional value investing strategy that is a problem.

The simple truth is regardless of how much time or energy you put into this endeavor you are extremely unlikely to outperform an index.

If we were to compare yearly growth, that might be true. As an index fund's 8% growth might outweigh a non-existent value investment.
However patiently waiting for additional deals is likely to net much more than an index fund. Its Growth investment vs Value investment.

Even within index fund investing this can be true. For example, in addition to my Nisa with Emaxis slim, I made an additional bulk purchase last week during the dip. The price dropped due to Omicron, but everyone knows the price will come back up soon, so it was an easy choice. That is basically all I am talking about.

These indexes are almost assuredly going to perform better over the long term than individual stock picking.

I'm not picking a stock for growth investment purposes. You are correct that I would be unable to pick a winner in the long term, or even in the short term. I'm not betting that a company is going to succeed greater in the future, I am betting that the company that was already succeeding up until 10 minutes ago will continue to succeed, despite the irrational drop in price. Even if the company never again exceeds the performance of 10 minutes ago and only regains its previous performance level, the stock price will increase.

Assuming a company's stock has a roughly knowable intrinsic value of x, and the price drops from x+10 to x-10, is it wrong to see that purchase as a good deal? Even if it only returns to x (never reaching x+10 again), I will still have made a money.

Apart from the opportunity to find a bargain being very rare, I haven't heard other reasons why this strategy wouldn't work.

Perhaps I can ask the question this way:
Given the Emaxis slim (S&P 500) has proven long term growth, and given that the omicron scare had caused the Emaxis slim to drop x% overnight, was it a good idea to buy more stock during the dip, or should I have simply invested the normal monthly amount?

[TokyoWart]

Assuming a company's stock has a roughly knowable intrinsic value of x, and the price drops from x+10 to x-10, is it wrong to see that purchase as a good deal? Even if it only returns to x (never reaching x+10 again), I will still have made a money.

Apart from the opportunity to find a bargain being very rare, I haven't heard other reasons why this strategy wouldn't work.

In practice I think you will have trouble finding that anyone has succeeded with this strategy. If you can cite an example of this working over a 10+ year period please do. The successful investors we usually hear about who think a lot about value (eg Buffett) and the academic researchers who showed Value is a “factor” associated with outperformance (Fama & French) never advocated a selling strategy based on a stock exceeding “intrinsic value”.

[mighty58]

You are unable to determine this intrinsic value. You can only make a guess what you think it should be, but it will only ever be an estimate.

You are also unable to predict when these "irrational" price drops occur because, by your own definition they are irrational and occur due to factors external to the company.

You will also be unable to determine how big these "irrational" drops will be. You see something go from x+10 to x-10 but is x-10 the time to buy? How do you know? It could go to x-30 x-40, and might never recover to x for another decade, if ever. That's because the fundamentals of a company, ie this "x" so-called intrinsic value you guessed at, is just a guess. The real value is only what the market says it is.

Whether a drop is "irrational" or rational can only be determined in hindsight. It's always fun to look back at charts and and see drops that recovered, and to think "if only I bought there". But in the moment itself, it's going down for a reason, and you never know how far it's going down. You gave Facebook as an example, but it went down because there was a real risk that its money-making abilities could have been significantly curtailed by the US Congress. That it ultimately didn't' happen, was unknowable at that moment in time, and the market priced in the risk at that time.

If you believe in rational markets (which it sounds like you do because you believe everything reverts to an intrinsic price) you must also believe that any "edge" or opportunity that exists due to mispricing will immediately be exploited and thus disappear as fast as it appeared. If there were opportunities to consistently make more money because of the growth of index investing, you can be sure that people would be flocking there.

Index fund investors realize that nobody, professionals included, can outperform the index consistently over long periods of time.

[EmaxisSlim Cultist]

Perhaps I can ask the question this way:
Given the Emaxis slim (S&P 500) has proven long term growth, and given that the omicron scare had caused the Emaxis slim to drop x% overnight, was it a good idea to buy more stock during the dip, or should I have simply invested the normal monthly amount?

https://engaging-data.com/market-timing-game/

Timing the market is not that easy.

Investing when you have the money is the best strategy.

https://www.optimizedportfolio.com/dca/

[RetireJapan]

Something to keep in mind: you don't need to beat the market or beat other people. As long as you reach your goals you win.

You can reach your goals with substandard results too. If so, you still reached your goals.

[EmaxisSlim Cultist]

Something to keep in mind: you don't need to beat the market or beat other people. As long as you reach your goals you win.

You can reach your goals with substandard results too. If so, you still reached your goals.

If you go to all that trouble and don`t beat the market, or at least meet the market, you wasted a lot of time and effort. You will not get that back.

[captainspoke]

A comment/principle that I read recently: "Focus on participating in the market rather than beating it."