Really nice. Here are some of my comments as a value investor. First of all, you are not referring to the basis of the theory but to certain elements that are later additions (mainly under the influence of Buffett, who in my opinion did an injustice to small investors). Ben Graham (the father of value investing theory) really did not believe in holding for a long time, but only in waiting for the value to overflow. The main point of the theory depends on the understanding that the value of a stock is ultimately derived from the value of the company, and its ability to generate money. Therefore, you need to find a stock that is trading below its "true" value, in order to maximize the profit potential and also be insured against declines that do not originate from fundamental changes. The idea of a "margin of safety" at least as I perceive it, only means that buying a stock that is only traded at a small amount below its "true" value is not worthwhile, because then the insurance is weak and so is the potential. It is not necessarily long-term. Regarding your argument about diversification versus lack of diversification, this issue itself is a dispute between Graham, who was a great supporter of diversification, and Buffett. (On this issue, my personal opinion actually leans towards Buffett, if you know what you are investing in, ten positions are more than enough, certainly if the positions are from different sectors). Regarding the advantage of holding for the long term, I agree with both of your arguments: a. It is not unique to value investors (who act as written above, like Buffett) but also to passive investors. b. That the magic of compound interest does not belong only to value investors. And alpha is ultimately more important. What is important to note is that the advantage of holding for the long term is the compound interest on the capital gains tax that is taken only upon realization. And annual taxation certainly bites into returns (certainly in countries where its rate is 25%).
I agree, this isn't directed against value investing as a strategy, and that there are many value investors who don't even believe these tenets I discussed.
However, where I take issue is that the entire discussion of value investing is misleading, which leads to faulty investing decisions - for example, treating a company as better because it has years of growth - when each year is an independent entity - makes that company have a premium for being long-term, and lowers its expected value.
Loved this. One more framing: any claim of ‘value alpha’ implicitly has to clear an EMH hurdle. Either you’ve identified a genuine mispricing (edge/friction/constraint) or you’re really just being paid a risk premium that looks like alpha in hindsight.
Off the top of my head, perhaps value investors are getting a risk premium for holding with such high uncertainty, with returns possible after more than 2 years.
Regardless, do you find not clearing this hurdle an issue specific to value investing?
Thanks for the thoughtful question. I’d frame it this way: EMH is really about liquid, competitive markets. Within that domain, any claim of intrinsic mispricing has to clear a high bar, and value investing most explicitly makes that claim. Other sources of return often rely on stepping outside EMH’s assumptions such as liquidity, constraints, or insurance provision, so they do not necessarily imply knowing more than the market.
Thank you!!
Glad it resonated.
Any specific highlights?
Really nice. Here are some of my comments as a value investor. First of all, you are not referring to the basis of the theory but to certain elements that are later additions (mainly under the influence of Buffett, who in my opinion did an injustice to small investors). Ben Graham (the father of value investing theory) really did not believe in holding for a long time, but only in waiting for the value to overflow. The main point of the theory depends on the understanding that the value of a stock is ultimately derived from the value of the company, and its ability to generate money. Therefore, you need to find a stock that is trading below its "true" value, in order to maximize the profit potential and also be insured against declines that do not originate from fundamental changes. The idea of a "margin of safety" at least as I perceive it, only means that buying a stock that is only traded at a small amount below its "true" value is not worthwhile, because then the insurance is weak and so is the potential. It is not necessarily long-term. Regarding your argument about diversification versus lack of diversification, this issue itself is a dispute between Graham, who was a great supporter of diversification, and Buffett. (On this issue, my personal opinion actually leans towards Buffett, if you know what you are investing in, ten positions are more than enough, certainly if the positions are from different sectors). Regarding the advantage of holding for the long term, I agree with both of your arguments: a. It is not unique to value investors (who act as written above, like Buffett) but also to passive investors. b. That the magic of compound interest does not belong only to value investors. And alpha is ultimately more important. What is important to note is that the advantage of holding for the long term is the compound interest on the capital gains tax that is taken only upon realization. And annual taxation certainly bites into returns (certainly in countries where its rate is 25%).
Thanks for your detailed response.
I agree, this isn't directed against value investing as a strategy, and that there are many value investors who don't even believe these tenets I discussed.
However, where I take issue is that the entire discussion of value investing is misleading, which leads to faulty investing decisions - for example, treating a company as better because it has years of growth - when each year is an independent entity - makes that company have a premium for being long-term, and lowers its expected value.
this is a fake, beware.
Love it! Love all three points mentioned, never thought that way!
Wow!! Love it. Beautiful insight!
Hey you’re a fruad, pls get off substack and stop using my name.
Loved this. One more framing: any claim of ‘value alpha’ implicitly has to clear an EMH hurdle. Either you’ve identified a genuine mispricing (edge/friction/constraint) or you’re really just being paid a risk premium that looks like alpha in hindsight.
Great point.
Off the top of my head, perhaps value investors are getting a risk premium for holding with such high uncertainty, with returns possible after more than 2 years.
Regardless, do you find not clearing this hurdle an issue specific to value investing?
Thanks for the thoughtful question. I’d frame it this way: EMH is really about liquid, competitive markets. Within that domain, any claim of intrinsic mispricing has to clear a high bar, and value investing most explicitly makes that claim. Other sources of return often rely on stepping outside EMH’s assumptions such as liquidity, constraints, or insurance provision, so they do not necessarily imply knowing more than the market.