🔺All Investors Make Investments with the Expectation to Make Money – Otherwise they Wouldn’t Make the Investment in the First Place

All investors make investments with the underlying expectation to make money, otherwise, they would not make the investment in the first place. This is precisely why there should not be any delineation in style between value and growth investing as both styles fundamentally are being made with the expectation to make money.

Quite simply, 1). Growth stocks arbitrage actual and implied growth rates and 2). Value stocks arbitrage actual and implied intrinsic values. Yet, when intrinsic value is being calculated, growth is inherently a component, which is why both styles (growth and value investing) collapse to arbitrage both the actual versus implied growth rates/intrinsic values. If you take this iteration to its next level, the only thing being arbitraged are actual and implied expectations. This is why I agree with Warren Buffett that value and growth are inherently joined at the hip.

Arbitraging expectations comes in four forms: 1) Arbitraging the fundamentals; 2) Arbitraging human emotion; 3) Arbitraging structure and/or 4) Arbitraging the derivation of expectations. The best solution is to utilize a strategy that arbitrages all of those components. The real key is understanding what is driving the underlying expectations in the first place and how far into the future the markets can actually see (that is my latest model).

For purposes here, I will use the term value investor because it is part of the investment lexicon. A particular concern that I have is blindly following a strategy as defining value stocks as merely those that are “relatively cheap/cheap” (where “cheap” is simply defined as a lower P/E ratio) against the backdrop of persistently low interest rates to prop up markets and the search for Yield, here is why.

The extraordinarily low interest rate policy has been utilized to prop up markets along with aggressive management of expectations to the upside. Remember, the more expectations have to be managed at the expense of the fundamentals, the more downside risk there is as that is a sign of weakness. If markets have been propped up by relatively low interest rates and particular value stocks that were cheap before remain cheap or are even cheaper, then that means they are a bargain and will benefit from mean reversion, right? No! Those are stocks that have fundamental/structural issues and purchasing those companies will result in a permanent loss of capital or dead money via opportunity costs. Also, purchasing those aforementioned value companies with the belief that they are already poorly performing businesses and will benefit to the upside on a relative basis if the market declines because their downside risk is already priced in is nonsensical.

Published by Diamond1

I have an extensive background throughout the financial spectrum with high-level experience on the sell-side, high-net worth private banking, portfolio management, international finance, public pensions, VC, PE, and economics. I enjoy working and collaborating with people that I admire and trust.

"Fit Models to Problems, Not Problems to Models"

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: