Everything you never wanted to know about Value Investing

It’s true though

I would recommend all of you reading along to swallow the grey pill. What the hell is that? The grey pill is where you respond to crazy people by just not caring, because you’re too busy enjoying your own life. You go to the shopping mall to get yourself a new designer handbag and some people are pretending to lay dead on the floor over police brutality.

“Black lives matter!” Someone shouts at you. “What? Oh yeah uhh I agree, black lives matter! Sorry, really busy right now, but I agree this famine stuff in Africa with the locusts is terrible, I will donate some money to Unicef when I’m home, thank you for raising my awareness!” Boom. Now you go back to living your life.

“What? No that’s decadent. You need to wear a swastika armband and grow a little moustache, we have to fight back against the Jews and the Africans!” Some people will argue. The thing is, you people feed off each other. I don’t even mean that in the sense of how we continually find evidence of intelligence agencies funding actual nazi’s, or cases of minorities painting swastikas on their own houses.

No, I mean it in the sense of how you people emotionally feed off each other. Honestly, the whole lot of you should just fuck and get it out of your system. It’s the only way you’re going to move on at this point. Find yourself an overweight blue-haired feminist sociology student with cutting scars on her wrists and get it out of your system. Hurry up please, the rest of us want to go back to the shopping mall without having to fear for our lives.

Here’s a funfact: The more a white woman is attracted primarily to white men, the more she feels guilty about it and the more she insists on virtue signaling. In a different timeline, the skinny blonde ladies with wealthy parents at the Black Lives Matter protest would have been nazi’s. It’s the exact same social demographic.

I encourage every neo-nazi to go to a black lives matter protest, start flirting with the women there and get it out of your system. Of course, if I have to go by the track record of the white nationalists I have personally known, chances are the lot of you are going to screw up and bring home a black lady instead of converting a nubile white college student to your cause.

The thing is, most of us who have our shit together just don’t really care about your petty racial grievances, at least not in the sense that it becomes a defining aspect of our personality. We want to live out our lives and get along with other people. Yeah sure, old white working class Dutch people are upset that they’re expected to stop dressing up like black people every year, but most of them don’t spend their whole day angry about it.

Similarly, Dutch black people are upset that they face discrimination, but most of them have shit to do and despite the occasional racism they still recognize the Netherlands as paradise compared to their country of origin. I see this quite a lot, of Dutch black celebrities, who face awkward comments from middle-aged Dutch white trash. Some black people get angry and start whining on Twitter, but the Dutch black celebrity will brush it off and say “meh, she meant well, don’t take offense to everything”.

People who have their shit together typically don’t jump on every opportunity for racial conflict. The reason we see such extreme racial conflict in the past few days is because we’re faced with a sudden extreme spike in youth unemployment.

I fully understand that a lot of working class white people are upset about mass migration. The thing is, you’re just not going to do jack shit about it, because wealthy white people don’t really care about it, they enjoy having low wages and exotic food. If it really upsets you to live around non-white people and you can’t get over it, get a better job and move to some part of the country where people look like you.

Of course, you are all free to ignore my advice. Leftists, go out onto the streets and protest against police brutality. Get rubber bullets shot in your face, inhale pepper spray, spend the remaining years of your life physically mangled and pretend it made a difference. Funfact number two: Six month old babies are racist, so you’re probably not going to eliminate racism anytime soon. Don’t let some scientific studies stop you from feeding police dogs with your thighs though (unless you’re into psychedelics, witch house and/or arthouse movies, in which case you should ask me to play the police dog ma’am).

Rightists, go out onto the streets instead of getting banned on Reddit twenty times per day, say something offensive to a crowd of protesters, see a video of yourself on Reddit, get fired from your job and live off welfare for the remaining years of your life. Knock yourselves out, I have no desire to join your ceremonial suicide.

I’m not going to pretend that my life is perfect, but I’m not going to waste it by obsessing about various grand societal problems I have very little influence on. I spend my days trying to make my own life more fun. If your racial conflicts escalate, I’ll probably just emigrate, either to Eastern Europe or if I’m doing really well to New Zealand. Your life becomes more fun when you have to spend less time at work. The most self-evident way to spend less time at work is by having more money. That’s what I want to talk about today.

I have a number of ways to earn money, my favorite way of earning money is through value investing. I have other ways of earning money, but those only tend to work as long as I’m one of the few people who know about them. Value investing is a way of investing that revolves around trying to determine the fair value of a company by analysing the fundamentals of a company.

You have been visited by the ghost of Benjamin Graham! Mechanical watches and houses with gardens that you don’t share with roommates will visit you in your sleep when you say “THANK YOU PROFESSOR GRAHAM!” three times in a row.

Benjamin Graham is basically the founding father of value investing. Back in his days, after the Great Depression, most people were afraid of stocks, so companies were trading at a huge discount. You could occasionally theoretically buy a company back then, sell everything it owns and be left with twice as much money as it cost to purchase the company.

In our days it’s generally a little more complicated because people have gotten smarter since then, but the fundamental principles still work. I can recommend anyone who wants to understand this stuff, to read “The Little Book That Beats the Market”, by Joel Greenblatt. It’s an updated way of using effectively the same principles that Benjamin Graham used. Basically, it explains two very simple metrics. If you follow those metrics, you will effectively always beat the market.

The question you’re going to be asking now is: “How is this possible? If it’s so easy, how come wealthy hedge fund managers don’t do this sort of stuff?” Well, I have to explain a very simple principle to you: Slippage. Imagine I see a small 100 million dollar company, trading at a very low price relative to its real value. If I have to invest 10,000 euro, I probably won’t move the price. If I have to invest 1 million euro on behalf of clients, the price will go up and the opportunity I saw will disappear.

This simple principle is why small hedge funds get higher returns on average than large hedge funds. Hedge funds as a whole might not beat the market, but small hedge funds do beat the market. There’s a simple reason for that: They can make use of opportunities that the big players can’t use. And you my dear reader, are probably one of those small players who can use opportunities not available to billionaires, pension funds and banks. So why do big hedge funds even exist then? Their main purpose is to offer very rich people stable growth in assets, rather than the unstable growth of the stock market.

Warren Buffet confirms this simple principle when you listen to him. He once said: “If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

I believe that Mr. Buffet is right. That’s why I don’t pump my money into an index fund. Rather, I have invested a relatively small portion of my assets in the stock market, in stocks that I consider undervalued. For value investors, March 2020 was effectively an ideal opportunity. Not for Mr. Buffet, he had the misfortune of managing billions of dollars, but for value investors with relatively little money like me, it was a nice opportunity.

I’m going to be really tacky and immature now, by revealing to you my own portfolio (as of Friday 5 june, I’m at about 20k in profit right now):

The only thing even tackier than posting my portfolio is probably posting the Tommy Cash video I rock out to when I’m up by 5k on a day, so I might as well get that over with too:

Anyway, here you can see all the companies I own. I’m going to be honest here: I’m embarassed by the fact that Norwegian Air Shuttle was once on that list. They didn’t fit my criteria, I sold them within days, as soon as I properly checked them. Other than that, I am quite proud of the result I have so far accomplished after little more than two months in the market. Of course, I do regret that I’m actually still 80% in cash right now, but at least we’re getting somewhere. Even Mr. Buffet has huge sums of cash on the sidelines now, so I’m in good company I guess.

With two months of investing, I now earned as much money as I do in half a year of work, if you take taxes into consideration. In contrast to my day job, I genuinely consider investing fun. The part that I like most about it is being right when most people are wrong. I already sold some of my stock, because they’ve shot up so rapidly that I can no longer consider them undervalued.

I know that some of you will be critical and tell me that I was just lucky and that my own gains are mostly a product of the overall recovery of the market. To some degree you are correct, but here’s the thing: The overall recovery was part of my expectations too. If you wonder why I spent so much time, writing article after article explaining that this new virus was not such a big deal, now you know why: I had to know how the stock market would respond. This has basically been my job for the past few months.

When everyone around you believes in scenario A, while the evidence suggests to you that scenario B happens to be the case, that’s when it’s interesting to take a look at the stock market. You want to participate in the market, when the collective wisdom of the people around you is wrong. This all depends on your expertise of course. Imagine you’re a doctor who is convinced that some new experimental treatment is completely missing the point. You can then short-sell a biotech company that is researching the particular treatment.

Of course, one big problem that investors like me face is the question: Do you want to tie your name to that? That’s always a difficult question. I can stomach investing in airline companies: When those companies have stable valuations, they are better able to make the transition to renewable energy.

However, I refused to invest in Seaworld, because they lock up cetaceans. Instead, I simply went for Cedar Fair, because the same principle applied (they were undervalued because the normies thought the lockdown would last forever).

Fortunately, I rarely run into problems like this, because companies that are unethical tend to have a worse future than companies that are involved in ethical activities. If you’re using the Value investing techniques to invest in oil for example, it will probably blow up in your face. Those companies are worth far more on paper than they are worth in reality, because a lot of their “assets” are oil fields that will never be extracted.

Stupid things to avoid doing

Honestly, for the average person who has no idea what they’re doing, the most straightforward option would generally be to stick everything in an index fund. Right now I find it somewhat difficult to recommend that, because the American stock market is ridiculously overvalued right now. If you want to invest in a market that has basically gone sideways for twenty or thirty years, like Japan or Italy, it does make sense to step in now, but the American stock markt right now looks like the kind of market that could move sideways for the next twenty to thirty years. That problem is largely the result of a handful of tech companies with ridiculous valuations.

However, there are a few other common traps I want to point out, to anyone who wants to embark on the not-so-noble art of earning money by turning a pile of money into a bigger pile of money:

-/r/wallstreetbets is a good place to avoid. That’s where college students gamble away their money on Robinhood. Essentially everything people there do is how you lose money.

-Avoid trading options. Besides the fact that spreads are typically very large, trading options requires far more knowledge than the knowledge you need to do well with stocks. I could only recommend trading options for two reasons:
1.You want to shield yourself from extreme risks.
2.You’re convinced that you have some sort of arcane knowledge nobody else has.

-Don’t daytrade. When you daytrade you try to surf the madness of the crowd, but that crowd is composed of people like you and their madness is unpredictable. You buy a company when it’s undervalued and you sell it when it ceases to be undervalued. That can take weeks, months, sometimes even years, but that’s how the game works.

-Before you buy anything, analyse the fundamentals of the company you’re buying. Don’t buy some company simply because you use their product, or because you heard positive news about them. Here’s the thing: Everyone knows that they’re using an Apple laptop, or drinking Coca Cola, so people buy into companies like that. Do you know the name of the Chinese company that produces the food packaging you use?

Rather, look at the P/E ratio of a company. If it has a ridiculous value of 60 or something, like Paypal and other tech companies do, well congratulations, that company is ridiculously overvalued. When will it stop being overvalued? You probably don’t know, so just don’t touch it. Also, look at the Price to Book ratio. For companies without huge debts, this gives you an indication of a margin of safety. It can drop below 1, but generally speaking, it won’t stay below 1 for long.

-Try to understand how human cognitive biases are reflected in stock markets. Make sure that you don’t fall for such biases yourself. One of our human biases is that we overreact to bad news. That’s why the batsoupflu panic was a ridicously great moment to step into the stock market.

-Avoid cryptocurrency, Forex, Daytrading, seminars for this sort of nonsense and other scams. Avoid gold and silver, those are not investments because they don’t produce something.

My methodology

How do I look for companies that I like? I often go to the Yahoo equity screener. Here I fill in the data that I want to filter on:

-Region: I want places I can actually invest in through my broker, that are politically somewhat stable. I trust that Japan won’t have a communist revolution tomorrow, same with most of Europe. We add the United States too, because that’s where most publicly listed companies are located. Perhaps you are brave and want to add Russia and Eastern Europe too.

-Market cap: We only want to look at Small Cap and Midcap companies. That’s where you find the gems.

-Debt / Equity (D/E) %: We put less than 5 here. This way, we filter out companies with large debts.

-P/E ratio. This is where we use between values. We fill in 2-10. Anything below 10 is a low P/E ratio, which is good, you want to buy cheap companies that have high earnings. Anything below 2 is rather weird, we don’t want to waste time figuring that stuff out.

-Price to Book ratio. This is how you compare the value of a company’s balance sheet, to the price at which the market values the company. With most modern American stock, that ratio is very high, because the stock are overvalued. You want this ratio to be rather low. Sometimes strange things happen that lead a company to be valued less than its balance sheet would justify. Often this is for good reasons (a scandal happened, the balance sheet needs to be updated), but sometimes the market is just being stupid. What do we fill in here? We fill in 0.250-1.5. What this means is that we now have a margin of safety, while the low range value again allows us to filter weird companies that we don’t understand.

-Return on assets. We only want companies that use their assets in a manner that allows them to earn high profits. For this reason, we filter on companies with a return on assets of at least 8%.

Now you get a list of companies to look at. This is where you start having to use your own common sense and inspect them manually. Why is a company part of our list of potentially undervalued companies? Many are oil companies, for an obvious reason: The price of oil has crashed recently and our metrics mean we primarily look at how companies did in the past. Other companies are companies with weird shenanigans. Occasionally you’ll see good companies here, typically in Japan or other Asian countries. In times like March 2020, you’ll also see plenty of good companies in Europe, especially in the tourism, travel and hospitality industries.

What about the normies?

The normies will tell you that this sort of stuff can’t work. “You can’t beat the market, because the market is efficient!” They will tell you. And sure, they’re not even wrong. The price on the market reflects the level of knowledge of all market participants. The average person thus can’t beat the market, because their knowledge will end up reflected in the price of the companies they’re buying.

The thing is, you don’t have to be very smart to beat the average person. And ironically, the reason you don’t have to be very smart, is because the average person became convinced that they can’t beat the market. If you don’t believe me, listen to Michael Burry.

The ideal time to be a value investor is when everyone else has given up on trying to beat the market. What is the average person doing? They’re buying the SP 500, which means that companies like Microsoft with ridiculous valuations are being bought by people at those ridiculous valuations, because the normies fooled themselves into thinking that it no longer matters what you buy.

The difficulty of rewarding yourself

You don’t really build up the savings to invest with, if you live hand to mouth, as most people do. I grew up with parents who were extremely frugal and unemployed throughout most of my life. Whenever I bought something, they would tell me: “Why did you buy X at store Y, when you could have bought it at store Z for 50 cents less?”

We never went to restaurants either, except for McDonalds. I shouldn’t complain too much, as every family has its own oddities, my parents oddity is that they are extremely frugal.  They’re frugal, but they’re not good with money. They’ve always had 100% of their savings in cash.

The difference between rich people and poor people is that rich people look for ways to increase their income, while poor people tend to look for ways to cut their expenses. Always focus on increasing your income, rather than cutting your expenses.

I invest with a friend, he grew up effectively in the opposite manner, in excessive luxury. It’s important to meet people who are different from you, they help cure you of your own irrationalities. At this point in time, I’m in the process of learning to treat myself with dignity.

What do I mean with that? Well, I’m right now learning to stop asking myself with every single thing I purchase whether I genuinely need it, whether it’s too expensive, whether I’m genuinely going to use it, whether it causes environmental pollution etc.

I feel that I’m in a position where I’m allowed to spend some money on myself. Besides the fact that I can afford it, I’m convinced that I have a negative carbon footprint, because I have made money by bringing down environmentally polluting cryptocurrencies.

But here’s one more thing I need to point out: People like me, who were willing to step in and buy up companies at ridiculously low prices, helped save Western civilization. “Dude you poured 30k into stocks, stop beating your chest, you didn’t save civilization.” All of us who bought stock in the middle of the crash helped.

When dumb people around the world lost their minds and panicked, we stepped in to avoid the disaster from getting worse. We prevented pension funds from failing, we prevented banks from collapsing, we helped reduce the economic impact of the disaster. The normies got angry at us, because we went outside to go jogging. They thought the virus was one or two mutations away from “airborne AIDS” and that our lungs would be permanently scarred if we walked around in the supermarket too long.

But you know what? We deserved to go out jogging. We literally prevented people from dying deaths of despair. Poverty and unemployment kill people, extreme stock market crashes cause poverty and unemployment. You know what? I’m proud of it and I believe I deserve to be rewarded for what I did. Deal with it.

So, with no further ado, here are some of the basics I’m spoiling myself with:

-Indian Psychedelic Wall Tapestry. Here is how it looks, (not my house):

-Four different new pants, clocking in at 200 euro. Yeah, new. None of that “35% off” shit like I’ve gone for my whole life.

-Raw microbial cultures, that I will use to make vegan blue cheese (3bourgouis5me). Yeah I’m gonna be spending 30 euro to make a pile of cheese. That’s my new hobby.

-10 Kg weights and a pull-up bar, so I can effectively work out in my own house without having to visit the gym.

-I’m taking two of my friends out to Indian restaurants. Indian cuisine is a work of genius, with plenty of options for vegetarians like me.

-New furniture. I have a guest room where I’ll move the old furniture, I’m going to turn my living room into something decent, something that doesn’t scream “forever stuck trying to get his shit together”.

-An original Francesca Woodman:

No, just kidding. That’s more of a long-term goal.

And finally: I deserve a mechanical watch. Battery powered watches are worthless. Mechanical watches on the other hand, now we’re talking. They’re filled with hundreds of little parts, that all work together to keep the time running. This is real artisanship. The clock continues to work, while you wear it, it powers itself through your movement.

My good friend has a collection of mechanical watches, including Rolexes and Omegas. He recommended me to buy one too. The value of a mechanical watch goes up over the years, it can even serve as a heirloom. It’s a living memory of the fun we had together, fun that we will benefit from for the rest of our lives. A watch is also the only piece of jewelry left that genuinely looks good on a man in the 21st century.

Now you might be thinking to yourself that I’m greedy, or that I’m selfish, or materialistic. I would beg to differ. I have 25,000 reserved for my brother, so he can make a down payment on a house. He grew up in the same situation as me, so even though we hardly talk, I would happily help him out. He just needs to ask. If any of my friends asked for something, again, I would happily help them out. Unfortunately, Dutch men are excessively proud.

Charitable givings? I get literally nothing in return for that. I would happily give to my friends and family, because I can see the substantial impact. Similarly, I readily give to the homeless, even if only to spare them the pain of hearing no and having to ask someone else. Charitable givings on the other hand, mean that some numbers in a spreadsheet are changed. I understand that charities are important, but this should be the responsibility of our upper class, they have the kind of vast fortunes that can make a measurable impact.

To make a long story short, I recommend all of you who are not members of the 90IQ 90k college debt crowd to look into value investing. You might be edgy now and say “hurr I’m not how much money I have in the bank”, which is fine with me, but remember that this number in your bank account determines whether you have to wake up at 8 AM in the morning to go to some shit job and do what someone else demands of you. If you look at it that way, you’ll eventually say to yourself: Thank God I took the effort to understand the stock market.

5 Comments

  1. I totally agree re helping acquaintances and homeless people versus giving to charities.
    Global poverty can only get worse going forward. Giving to charities to battle global poverty is like trying to stop the tide coming in with a little dam of sand IMO.
    Interesting article as usual mate.

  2. “Don’t buy some company simply because you use their product” – Oh I wish I wish I had read this line before I revived my old trading account which had been in mothballs since 2014. I’ve not invested a lot so my losses are not bad and I hope that in time I will recoup although I doubt I will profit. Only Royal Dutch Shell came up trumps for me, but given I had no strategy in buying it, that was an accident. Based on your recommendation, I’ve just ordered the Greenblatt book off eBay. Some dude is trying to sell a knocked off PDF of it for £4.95 – it’s clearly a sought after title and I notice it holds its secondhand value very well. So I’m seeing the paperback copy I’ve just ordered as an investment in itself.

    • >I’ve not invested a lot so my losses are not bad and I hope that in time I will recoup although I doubt I will profit.

      The long term trend for stocks is up.

      There are a few aspect to investing that are worth noting in my opinion:

      -Invest in stocks. If you´re very cautious, invest in bonds. Things like Gold, Silver, Bitcoin, oil etc are not producing anything, so they´re not proper investments. Worse, the people who produce them need to be paid, so that money is effectively lost.

      -You can use the Stock market to GDP ratio, or the Shiller P/E ratio, to get a rough indication whether a country´s stock market is overvalued. The US stock market is overvalued by most metrics. The main reason the US stock market is overvalued is due to a small number of tech stocks with huge market caps.

      -Historically, stocks with low P/E ratios and high return on equity deliver better returns than the overall market.

      -Don´t panic when you´re down. It´s much easier to predict what will happen in the long run than in the short run.

      I think if you keep these things in mind, you´ll do fine in the long run.

      • Thanks for those tips. I’m not going to invest anything more until I have wrapped my head around those concepts. Stuff like the Schiller ratio is all new to me. Cheers.

  3. Buy mining company stocks.

    Gold mining, uranium mining

    The company that did the best in the market in the Great Depression was Homestake Mining Company. Outperformed the entire market the rest of the decade by significant amount. That was also back when gold & the dollar were more intertwined. Gold is going to roar this decade.

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