A Value Manager on How Most Value Managers Are Getting It All Wrong

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, one of the things that we discussed a fair number of times in 2020, but also maybe before, is just sort of the, I guess you would say, permanent state of crisis that you might call it in so-called value investing.

Tracy Alloway (0:34)

Yes, it's certainly been a long running theme, hasn't it? And I feel like we've done quite a few episodes on it at this point. But 2020 didn't exactly turn things around for value investors either.

Joe Weisenthal (0:48)

No, definitely not. And I think like, you know, there's really two strands that tend to emerge in our conversations.

And I would characterize them as this. One is that there is some like cyclical element to value investing and that this cycle just hasn't turned around yet. So it's like we have this sort of long, multiple expansion. It's kind of low growth, fed driven economy that sort of creates this permanent bid for growth companies at the expensive value, weak GDP growth, et cetera, just like certain industries aren't going to thrive in that environment.

And then I would say the other half is that no, the problem is that we are not good at defining value. And there are people who sort of take a more accounting approach and say traditional measures of the stock's cheapness, like, say, price to book value. It just these measures don't work in a world where so much value is intangible.

Tracy Alloway (1:46)

Right. This is the idea that as companies. Well, the sort of successful companies nowadays are investing a lot. They're investing a lot in things like their brands and other intangible assets that just aren't captured by price to book value. And so a company that's positioning itself for a really good future performance might not actually look that way if you're just glancing at, you know, something like price to book.

Joe Weisenthal (2:14)

You know, like it's sort of a joke. And I think we've talked about it with Michael Mobison last year, Jared Woodard.

But it's like you can rescue value investing if you call Netflix a value stock or if you call Facebook a value stock and someone would say, OK, these companies don't have like big factories that can easily be measured. But if you could somehow like put a number on the value of the Facebook network as an asset, then you could then you could theoretically imagine a world in which on some traditional value screen, Facebook comes up.

Tracy Alloway (2:50)

I mean, the thing that still makes me uncomfortable about value stocks is that you're still investing in something on the basis that the market has somehow mischaracterized its future, which I think you touched on this with with your two narratives. But I think in the current environment where we talk a lot about flows based investing, a lot of momentum trading, things like that, it feels like the market is quite consistently directing capital to a few firms and then it just keeps doing that. And those firms get overvalued and overvalued and overvalued.

And if you're not in that cycle, I don't know. I just feel like it's unlikely that you're going to get back in it. And the longer it takes you to get in, the more you're sort of losing out in terms of valuations. But anyway, sorry, I'm going on a tangent.

Joe Weisenthal (3:41)

No, no, it's great. I mean, the other thing, and I think it's sort of related to your point is, you know, it's nice to say like, okay, like there's some intangible value that we if we could only measure it at Netflix or Facebook or whatever it is.

But it seems hard to know in advance that it's there. And so it's like, okay, if you have some like factory, then you can at least say, okay, this exists. And historically speaking, it will, you know, we would project it over the next 10 years, it's going to throw up this cash, and that's a good value.

It feels like with a lot of these sort of like backing into the value approach, that it's very much easier to say in retrospect or ex post facto, oh, this turned out to be a very valuable asset that they have, which is sort of nice, I guess, from maybe an intellectual standpoint, but it doesn't really help you like pick stocks today, which is what people ultimately care about these discussions. It's great to say, okay, the Facebook network is worth a lot of money. But you know, I wish you had told me that six years ago.