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Value vs. Cheap
There are a lot of platitudes in investing.
Things that you can say that are universally regarded as "correct"
2 of these are
1) Saying that everything is overvalued
And 2) Saying that value investing is the only way to win
But here's the problem.
We've distorted what "value investing" is to a point where value has become synonymous with cheap.
Which means every single company with a low stock price or low PE ratio gets denoted as "value" and everything else gets shoved in the overvalued category.
None of this accounts for the quality of the business.
Is Revlon... a company that is bankrupt a "value stock"?
What about Soneda Senior Living... a company with a PE ratio of 0.5... yet it's revenues are half what they were 5 years ago.
So when you see "value" in media or academic discourse, it mostly refer to 'what's cheap' with no regard to the underlying business.
This isn't illegal... but isn't value either.
It would actually be better if we renamed things as cheapness factor, cheapness index, growth vs cheapness.
Because then people would realize that just starting with "cheap" as your North Star is actually a TERRIBLE way to invest.
Warren Buffett actually wrote about this in his 1992 letter to shareholders (and it's well worth reading - especially if you consider yourself as a "value investor")
What to do instead?
What we do is we start with quality and safety... and then find cheapness within that subset of companies.
Just how we recommended Meta and Shopify in the past 12 months.
Because there are quality companies now at a point where the stock is relatively cheap compared to 2-3 years ago.
And this approach is far more fruitful than just starting with cheap
Oliver
P.S.
If you're looking for a way to identify quality companies - then using a moat screener is a great way to do so.
We talk about that in our book
Fantastic Moats and Where to Find Them
You can grab your copy by going to the link below
https://www.amazon.com/Stock-Investing-Beginners-Fantastic-Financial-ebook/dp/B09L3GYF3N
The Investing Coach
Become a better investor in just 3 minutes a day. Daily newsletter read by 7,400 smart investors including CEOs, professional wealth managers and FAANG Executives. Recommendations are beating the S&P 500 since inception.
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