Value investing at a “new era”

At its roots, value investing is based upon the premise that it is possible to consistently find assets that can be purchased at a discount to their true worth. The notion of value investing is made possible due to reliable valuation benchmarks that can be used to determine the true worth of any security, and the belief that these benchmarks remain relatively stable despite fluctuations in an asset’s price. Value investors are constantly evaluating how to consistently apply this premise to a changing investment environment.

In looking at value investing in today’s market, it is important to understand the historical roots from which it originated. Value investing as a method for selecting stocks was created by Benjamin Graham and David Dodd in the late 1920s and early 1930s. Value investing as described by Graham and Dodd worked extraordinarily well at the time.But today’s technological innovations and speed of market moves have completely altered the models used in 20’s, 30’s even in 90’s and early 00’s! Today we see herding, trending and quickly adopting principles to account for most of the valuations in most asset classes. Information has become readily available and easy to extract while at the same time its value decreased in absolute terms. A very important element for today’s valuation exercises, is relative perception regarding an asset. As a result the franchise value of an asset becomes a key element to its final value. Questions to consider in looking at franchise or niche value include: (1) is the asset class or asset profitably maintaining/gaining market share? (2) Can the asset/asset class leverage its franchise to enter new markets profitably over time? (3) Has franchise value (the earnings driver in the case of a company) increased over time?

All of the above would have been enough if the asset class in question were equities and not Cryptocurrencies..! But in this new era, where millennials account for more than one third of the professionals, bitcoins of this world have the same notional value as the most important consumer value and tablets are as good as their virtual assistants. In other words, the value of any product can increase or decrease as the result of the current valuation of the “coin” the vast majority of the population uses versus the community’s favorite fiat money. During 80’s and 90’s everything had a relative value over physical US dollars which were the means of counting international value.  Today, most of dollars or euros trading around the globe are virtual computer records and their real value is benchmarked over their purchasing power of goods and not some “gold standard”.  An imminent result of such a development, is no other than the fact that any means to acquire the same above goods can have the same or even higher value as these fiat currencies. If someone adds to this equation the internal need of anyone to store value into something, which increases its value over time, then a new whole world may appear in front of them. And at this point we come back to some fundamental valuation principles, one of which is no other than the scarcity of the asset in question in relation to the overall demand. Here is a basic metric of this scarcity: In January 2009 Bitcoin “hit” the general public as a new currency with 10.000 BTC of coins in circulation through an auction. During the crisis and especially that of European Sovereign, and as all major central Banks where issuing new fiat money in tones, BTC in circulation remained almost stable. But demand was growing at a very fast pace. From 2M BTC in early 2010, today we have reached almost 18M BTC, while the demand side have grown enormously. Wallets have grown from some hundreds in 2010 to 3,2M in 2015 and almost 32M today. Potential users of the new exchange mean, have grown spectacularly while the supply side remained relatively stable…

Building a value-driven portfolio using also new asset classes today, is not significantly different from building portfolios in general. Our portfolio construction guidelines are driven by the desire to build a portfolio of the highest quality, most attractively valued assets. In addition, we want to selectively diversify a portfolio to minimize longer-term volatility and outperform the market over the long term. To realize this goal, five key proprietary factors have been identified over the years:

1. Concentration – avoid being overinvested in one asset class

2. Selecting only the “best” assets – “best” is a relative notion and always related to the general view over the asset.

3. Use of both fundamentals and technicals – the fundamental mispricing may not disappear for a very long time if momentum is not present.

4. Covariance – avoid too much of correlation between the asset classes in your portfolio

5. Weightings/Diversification – spread your investments covering most of the available investment space.And one final note: At any given point, there are and will always be anomalies in the market—good assets with favorable long-term growth characteristics trading at attractive relative valuations. 

The question is whether an investor can establish and maintain a discipline that allows him or her to identify and exploit these anomalies.

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