A lot of people think I don’t like value investing because, as a macro guy, I don’t generally advocate stock picking. That’s not true at all. I am just very specific about how I think value investing should be utilized. You see, value investing involves picking individual securities. And that’s fine. I just think stock picking is extremely difficult on a secondary market like a public stock exchange. There are a multitude of reasons for this:
- Competition is absurd. You’re searching for value against computer algorithms and MIT nerds.
- Information is too abundant. Once a company has gone public you’re scouring over data that has been parsed by MIT nerds and algorithms. Those damn MIT nerds will get you every time!
- Once a company goes public it’s already experienced most of its amazing growth. This doesn’t mean you can’t find great growth stories on the secondary markets, but the odds are that you’re buying what was actually someone else’s “investment”.
- Did I mention the MIT nerds?
None of this means that I don’t respect or embrace value investing. In fact, as an entrepreneur you could argue that I am the ultimate value investor. I have made a huge personal bet on my future production and I am the sole owner of my potential future value (well, I am technically “owned” by two females, but that’s a different matter). But you could really make that argument about anyone (not the being owned by females thing, the bet on personal production). We are all making huge bets on our future production with the hope that our investments in ourselves will prove to be more valuable in the future.
That brings me to the key distinction in my view. I view “investing” as something that’s done on primary markets while most of us are just allocating our savings on secondary markets. That is, when you buy an already issued stock or bond on the secondary market you are not spending for future production. You’re not actually an investor (investing, in a technical sense, is spending, not consumed for future production). You’re just allocating your savings into instruments that have already been issued for the purpose of real investment. And that’s fine. But I like to think of real investment as being done on the primary markets where we spend for future production. And I am a huge proponent of “value” investing in the primary markets. In fact, I think “value investing” is crucial to any understanding of “investing”.
When we talk about the secondary markets I think it’s best not to put the cart before the horse. The secondary markets are where we allocate our savings and so macro indexing is generally a smart choice here – we have different priorities for our savings and gambling with them to get rich is generally not one of those priorities. You aren’t likely to get rich picking stocks on a secondary market. But you are likely to get rich picking stocks on the primary market (especially by picking your own stock). So yes, I am a huge advocate of value investing. I just think you have to be specific about where and how you go about implementing these concepts.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.