Topic: Tech. Analysis vs. Value Investing vs. Growth Investing vs. Narrative Economy - page 2. (Read 550 times)

I think we've reached the point, on this particular issue, where we agree to disagree (for lack of a better characterization).  I think ultimately that the venn diagram of value investing and growth investing can have overlap, it's not necessarily that a value investment can't be made in a growth company. After all, all growth investors are eventually counting on profits if they're long term holders and not just momentum trading, which describes the Berkshire approach specifically and also mine, it's just that when they make the decision to invest they had a different thesis about how/why the stock is going to go up. But my whole entry into your response was just to rebut the notion that Munger and Buffet are anything other than value investors.

Tesla stock outperformed Apple, yes, but the company definitely didn't. Apple makes over 50 billion in profit per year and Tesla only just became profitable at all. Tesla revenue growth currently far outpaces Apple, but that's obviously easy to do when you're starting from such a insignificant base (relative to Apple).

Yes, you are correct in your analysis from my perspective, Bitcoin is a mixture of those 4 themes, but so are the rest. There's no true "black" and "white" in this world, therefore there's nothing entirely driven 100% by TA, value, growth or narrative investors. However, we can generalize and simplify in order to better analyze, otherwise we couldn't even come up with a unified GDP measure or P/E




Lol, yes I noticed that we got a Buffet fanboy here Which is alright, just don't idolize someone too much, learn from the greatest about their success in their times, and apply what is suitable to the changed time which might require a different approach (if we would follow old norms and methods - we still would be riding horses and thinking electricity is sent to us by Gods from the sky).

As for drug companies and Apple, we will never reach a consensus, what is value to you or Buffet - growth for me, what is TA for me - narrative for others. In the end as they say "value of an asset depends on who is paying the valuer".

Furthermore, we could even go on for a discussion of:
- Intrinsic Value (IntV) - asset or security valuation by someone who has complete understanding of characteristics of the asset or issuing firm (used for most investment decisions); vs.
- Fair Value (FV) - the price at which a hypothetical willing, informed, and able seller would trade asset to a willing, informed, and able buyer; vs.
- Investment Value (InvV) - value of a stock to a particular buyer, depending on the buyer’s specific needs and expectations, as well as perceived synergies with existing buyer assets (usually for M&A and LBO); vs.
- Equilibrium Value (EV) - any market price that clears the market at any point in time when there are no more buyers or sellers as no market inefficiencies exist (economic term and usually unachievable condition); vs.
- Market Value (MV) - anything you observe on the market at any point in time for any asset; vs.
- Discounted Present Value (PV) - all future expected cash flows discounted to current period of time (commonly, but not always equals to IntV); vs.
- Book Value (BV) - book value of assets as per accounting records (sometimes equals to IntV).

All above will change from person to person depending on own understanding, and depending on the valuation purpose, and "... who pays the valuer". And what is IntV or InvV to Buffet, won't be same to the "average Joe" from down the street. Because the fact that Buffet invested - is a game changer to the market, moreover, he personally can affect the company, but others - not so much. And, as you correctly noted, some of the investment decisions were made by younger investment managers, which deviated from Buffet's strategy, so that means: either 1) Buffet hired not so intelligent people who don't fully understand "value investment" theory, either 2) those people don't believe in "value investment" theory so much, or in it's future, either 3) We don't fully understand "value investment" theory (Snowflake P/E ), or 4) We don't know the whole picture and truth. I believe the last reason is the most reasonable to assume. Therefore, I don't see too much point arguing around those here, as here we discuss a different thing, however, would be happy to share own opinions on that in a separate thread if you would like to

That YOLO thing was funny but did make sense , I do think that we have to get ready for the worst case scenarios since right now we have newer generation which are going to take over the economic situation and if we think about the previous generation being YOLO , I really don't know what will happen now 😂.


At the same time I like to believe that bitcoins is something which is a mixture of everything, we cannot just categorize it in terms of one particular stocks. That is why it is indeed more successful since it's attracting the attention of everyone involved and which is an amazing thing.


Tesla even outperformed Apple for sure and the way they radiated their boundaries to every place is actually commendable. They even went to space lol and all those people who doubted them ever are now buying them.

I would generally agree with your characterization between value and growth with the main emphasis being that value investing is primarily focused on stocks that are undervalued based on an analysis of their intrinsic value vs. what the market is paying for them, and growth stocks are primarily defined by not being concerned with earnings because all free cash flow is being deployed to grow revenues.  

However, none of the drug companies you listed are growth investments, those are all value plays.  If there's one thing Warren Buffet likes, it's a a broad defensible moat around the business and high barriers to entry for competitors, and this pretty much sums up the biopharma market perfectly where there are high regulatory hurdles and the cost for new entrants in the field is incredibly high. Further, those PE ratios don't even suggest they're high growth companies, this was definitely a value play.

Apple was definitely a value play when Buffet invested, and it was also only made after his younger portfolio managers kind of taught him how to value tech stocks.  https://www.youtube.com/watch?time_continue=143&v=mOgAJnwQxzw&feature=emb_title

StoneCo is a Brazilian tech firm that deals in money transfers and I would characterize it as a growth company (I've followed the company closely, ironically because Berkshire invested in it), however a portfolio manager at Berkshire is responsible for this investment, not Warren Buffet.


Since Buffet and Munger are quite old, they have succession plans in place for when they leave the company.  This has lead to more younger portfolio managers at Berkshire taking the reigns of ever larger swaths of the investment portfolio.  I am quite confident that you will find that any investment in growth/tech stocks were due to the younger portfolio managers, and not Buffet or Munger.

Again, read the Berkshire shareholder letters. It's a primary source.  Buffet's own words tell you he's obsessed with intrinsic value, not growth.

(Kind of a Buffet fanboy here. I've read a lot of his writing over the years.)

There is definitely some truth to this, there is a great deal of momentum investing with tech stocks. Tesla is currently the best example of this, but other very high growth tech stocks are also in this boat, like Shopify, MercadoLibre, Jumia, and Twilio (just to name a few). These all have sky high PE ratios (or no PE ratio because they're not profitable yet) but the thesis is that the rapid growth will eventually fall to earnings when the rapid growth phase is done and the business won't have to spend so much to sustain it.

To me, Bitcoin seems to have included all of these investment types and is a mix of them.

Tech Analysis is used in trading of BTC to understand important buy/sell levels where high liquidity is available and that BTC could go towards in order to liquidate such areas.

Value and growth investing had been a part when people saw the old records of others buying it for very low and then they bought it even at highs because they believed in the technology and waited for the growth of the project as well as its value. So these 2 are correlated here.

And narrative economy? Ah, Bitcoin got its mass adoption through the power of word of mouth advertising and there are so, so many success stories available in the markets about people earning great returns through this investment.

I personally don't think P/E is of great use to any of the mentioned company for several reasons:

1) P/E comprised of:
 - Price: subject to supply & demand on the market (which can be manipulated even by some articles on popular blogs)
 - Earnings: include accounting statements-based data which can be outdated ("P" of 17/01/2021 but "E" of 2020H1 for example), include items which are accounted for differently from company to company (depreciation, pensions, liabilities, intangibles, financial expenses, COGS, and even revenues)
 - from the above it's like comparing how much someone is willing to pay for a tomato NOW divided by how much I personally declare about how much pesticides I used to grow that tomato a year ago... doesn't that sound insane? And this is what you effectively do with any financial multiple (P/E, P/B, P/S, EV/EBITDA, P/CF, etc.)

2) Even with P/E of 500x or more you cannot clearly say that the stock is overvalued and you need to short it, as again with Chinese example - there are stocks with even higher P/Es which continue to delivery outstanding returns as opposed to the "fairly valued" or "undervalued stocks"

I really understand your point about why you think Buffet and Munger are value investors, but let's go point by point:

Value stocks   
•   Currently undervalued   
•   Generally low P/E ratios   
•   Generally high dividend yields
•   Expected to be appreciated by the market to the intrinsic value   

Growth stocks   
•   Currently overvalued   
•   Above-average P/E ratios   
•   Usually low or no dividend   
•   Expected to deliver outstanding growth which is not priced in current market price

I believe you won't argue on the above, as those are pretty much the main points of difference between the two strategies. Now let's take a look at the latest investments of Buffet for example:
•   AbbVie (ABBV) P/E 23.8, Pfizer P/E 23.7, Eli Lilly P/E 31.3, Merck P/E 18.4, Johnson & Johnson P/E 19.9 (yes I know he invested in several others from this list too)
•   StoneCo (STNE) P/E 132.03
•   Snowflake Inc. (SNOW) P/E negative (I'm sure you know when that happens "Since such a case is common among high-tech, high growth, or start-up companies, EPS will be negative producing an undefined P/E ratio (sometimes denoted as N/A)" source: https://www.investopedia.com/terms/p/price-earningsratio.asp)

These are just few examples, but you can take a look and also analyze Amazon.com (AMZN), Apple (AAPL), Biogen (BIIB), among others. Do you think Apple or Amazon for example are undervalued? Furthermore, Buffet has always saying that you shouldn't touch industries you are not familiar with, but yet, exactly in 2020 he increased % of portfolio in BioTech & Tech - 1st deviation from own principles, these two areas are especially to be known either overvalued, either being growth areas - 2nd deviation from own principles, and the examples above are just an additional evidence of that.

As I noted before, don't pay too much attention to what people say or write, but instead watch out for their real actions.

As for Bitcoin and Tesla, as you said correctly - they follow different cases, yet both might be good examples of recent shift to narrative economy. However, I don't necessarily foresee crash of Tesla (possible, but not necessary), while both can be argued to be undervalued (value investing), to have fundamentals which we don't account for with old-school metrics, and to have huge growth potential (growth investing), and be heavily driven by their pop stories (narrative investing). But those are topics for a different discussion I guess.

Sorry. Was looking at wrong chart. You are right


Just wanted to show a scale in simplest possible way.


Its more to me like retail investors FOMO into popular stock rather than someone intentionally is accepting 80 P/E because in far future maybe competition will not overtake netflix (HBO GO, Amazon Prime), netflix will be able to cut spendings and current price will be relevant to fundamentials.

First, NFLX's PE ratio is around 80, not 500, so there's nowhere close to 20x growth needed to justify the valuation or bring it down to more traditional PE levels. And why are you extrapolating users based on PE? That makes no sense because the PE ratio encompasses more inputs (earnings reflect revenues AND costs, not just revenues which is all you're accounting for in your example extrapolating user growth). You would extrapolate earnings, because you can reduce costs to increase earnings, which is what people who are valuing Netflix at 80 times earnings are doing when they judge that NFLX will eventually be more profitable than it is today, when they don't have to spend so much on content acquisition to fuel user growth. If that investment thesis doesn't pan out though and it doesn't become more profitable when revenue growth slows (for example because they have to keep spending the same amount to retain users), the valuation will fall. It is only because it is still in a high growth phase that people cut it a break on earnings, trusting that when the high growth phase is over, costs will rapidly fall to boost profitability.

Thats part of current narrative. That 1 $ earned from selling tomatos is different from 1 $ earned from selling PCs. I could have agree with you if we were talking about P/E 10 from tomatos and P/E 30 from graphic cardas (nvidia) but we are talking about 10 vs 500-5000. Netflix has P/e around 500 and has around 200 mln registered users. To justify current valuation netflix should grow 20 times to 4 bilion users while "4.66 billion people were active internet users as of October 2020,". So netflix should sell its product to every person on earth that has internet to justify such evaluation (btw. you can share one account with others). People no longer take care of fundamentials and there is no super spacial force that may push evaluation of company back down to "fundamentals and profitability." since as you said by yourself "P/E (AKA fundamentals and profitability) ratio is only useful when comparing like companies. "

I'm just trying to understand why you think Munger and Buffet are growth investors. Your posts though lead me to believe you may not know the difference between value investing and growth investing, or else you just don't know much about Munger or Buffet as neither would be described as growth investors by themselves or anyone who knows anything about stock investing.  Buffet's biography on wikipedia attests to this:  "He went on to graduate from Columbia Business School, where he molded his investment philosophy around the concept of value investing pioneered by Benjamin Graham... He is noted for his adherence to value investing, and his personal frugality despite his immense wealth."

A better example might be reading Buffet's own words though. You can read all of Berkshire's annual letters to shareholders on their website. In fact, if you start at the most recent and work your way backwards, you'll see they start nearly every letter with a discussion of "intrinsic value."  It is universally at the top of every letter because intrinsic value is what Buffet and Munger care about because they're value investors to the core.  Look for yourself:  https://www.berkshirehathaway.com/letters/letters.html

As for Bitcoin in the above context, I wouldn't say anything about it because it's not applicable. Bitcoin doesn't produce income, so it can't be valued on fundamentals because there are no fundamentals. It's purely a speculative asset and as I stated, the ultimate example of narrative investing.  Telsa, however, as much as the price is driven by speculation, will eventually have to produce profits to justify its valuation. If growth slows before turning big profits, the price will crash. Bitcoin and Tesla exist in two different universes, they aren't subject to the same rules.

P/E ratio is only useful when comparing like companies. You can't compare high growth tech stocks like NVIDIA or Netflix to an entire index and generally conclude they're overvalued because the NASDAQ is such a broader base, and growth stocks are so speculative in general. But one thing remains universal, the moment the growth that was anticipated slows, the prices crash, no matter what the narrative is. Because eventually, it all comes back to fundamentals and profitability.

Okay, here we go:

Charlie Munger



Warren Buffet



Bitcoin


Tesla


Do I need to provide more comments or arguments about who is the greatest investor? While Charlie Munger and Warren Buffet surely WERE the best investors of THEIR times, for now, I am not so sure they still remain so. We must recognize when the times and leaders and "greatest investor" title changes. Otherwise it's like observing Bitcoin, but still calling U.S. Dollar the greatest currency in the world.

Well, I believe just a simple data of Charlie Munger vs Warren Buffet vs Bitcoin vs Tesla show my entire answer and argument, so I don't need to add more to that.

As for why identiffying the aforementioned two as growth investors, you can take a look at their portfolios and latest investments. Some of their assets show clear "growth-investor"-like patterns, while they don't publicly disclose that. Irrespective of that - what people say in public is not always what they actually have in mind.

And about Tesla, I gave a comprehensive explanation above why even if Tesla fails to deliver solid revenue in the near future, their narrative-driven market cap can turn the company and force it into a great business eventually. That's not something good or bad, that's just what it is.

Using your own argument about "won't keep trading at this valuation indefinitely, no matter the narrative around it.  Eventually, it's going to have to turn mega-insane profits to justify this valuation." - what would you say about Bitcoin in such context then?




I really agree with you in regard to how people tend to generalize one thing to everything else. Just an additional point to your comment is that if for example, the previous commenter would take a loot at Chinese BioTech P/Es or HighTech P/Es or some very popular companies (premium alcohol, social media, content production, new media, KOL factories) P/E of 1,000-1,500 would be very very normal. Nobody will be concerned that such stock is "overvalued". It's just the way it should be because it's the top narrative now, everyone wants it, and "tomorrow will be more expensive than today as more people will get to know it". And I personally don't know what new paradigm will come next, but I for sure don't foresee the current one changing in the nearest future - nobody is going to care about fundamentals anymore.

I love it when people put forward theses and justify them with 1 extreme case. I could say that it always rains in my city, because a moment ago I looked out the window and it was raining.

The fact is that popular assets (not only tesla) had p/e around 50 and were overvalued, and should dump to around p/e=20 (average for nasdaq is 30 - and nasdaq is overvalued too), but after 5 years has p/e around 500. (f.e nvidia, netflix), and in another 5 years can have 5000. You know why? Because we broke off the foundations not 2-5 months ago (tesla) but 8-10 years ago on every popular asset, because ... for 10 years the foundations do not play a role, because ... "2010-onwards" we deal with "narrative investing" exactly like described it by the OP. Dump, you are talking about, will come with the emergence of a new narrative. But whether it will be in 2021 or 2030 is not known.
 

Lol, Charlie Munger and Warren Buffet are two of the greatest value investors in history. What on earth would make you identify them as growth investors? Growth and value investing are completely antithetical to each other.

As for narrative investing, I don't agree.  Eventually, fundamentals of the underlying business matters. The best example of this is Tesla.  Tesla won't keep trading at this valuation indefinitely, no matter the narrative around it.  Eventually, it's going to have to turn mega-insane profits to justify this valuation. 

Ironically, bitcoin is only valuable because of narrative investing.

Thank you for your kind comment. Actually that's something I recently noticed too (after writing the post and reading it again) that as we move along to the current era/times investors are less and less numbers-driven, with one extreme being TAs who rely entirely on numbers/charts, value and growth being in the middle as those metrics can be interpreted differently (even EBITDA, EV, Equity, etc. can be calculated differently depending on which accounting standards and which logic you chose to use), and narrative-investing being another extreme and we can say numbers-agnostic.

And yes, some funds still do use TA and trading data to make investment decisions, but those are mainly either arbitrage funds (thus yearn stable but super low returns), and others being high-frequency trading firms with the direct links to the exchange to get the data first in the world so they could legally "front-run" the market. But they are not that profitable usually too. But at least they don't have human error factor in

This is a great summary of investment strategies over the last 100 years. We can see a change in investors sentiment and what kind of financial tools they use for making decisions. Even though people already focused on trends in the 20s I think its still a major tool in today's world. Relying on chart analysis is still the bread and butter of many financial advisors in today's world. There are quite a few trading systems out there which have very fast access to the exchange and use intra day data of stocks to make a good profit.

Value investing vs. any other style I think is more of a personal preference and beliefs. But you might want to look at the top funds' performance that follow value investing strategy (here: https://money.usnews.com/funds/search?category=large-value, and here: https://www.moneycontrol.com/mutual-funds/performance-tracker/annual-returns/value-fund.html).

Similar patterns would be for growth, and usually worse patterns for TA-based (yet in professional finance that's not TA-based, but arbitrage funds or quantitative funds or high-frequency trading firms).

As for Bitcoin, well only the history will show what it was and what it is. When we look at current events, we are always biased, but such things are better analyzed in retrospective historical way, once we have more data, free of short-term biases (narratives? ) and can make well informed and comprehensive analytical decisions.