Part 1: Fundamentals, value, momo, and how markets are priced
In the last week or so I have had an interesting insight into how other people view the market and the securities tha compose it, how I do, and got a comment from my former biz partner that shed alot of light onto all of this.
First, an insight into how I, and other people, view the market. I tend to look at stocks from a value only perspective. I don't care if they are dropping or if the technicals are bad, I just look at vaue, for better or for worse (sometimes its worse, sometimes better).
However, some other people tend to notn see value at all and see only fundamentals. This occured to me first when readin Whitney Tilsons most recent investor letter. In it he said this:
" Our analysis of Netflix generated much more attention than we anticipated, which resulted in dozens of emails with great feedback, both agreeing and disagreeing with us, which is what we’d hoped for. The most interesting feedback, which we hadn' expected, was from the CEO of Netflix, Reed Hastings, who emailed us in a friendly way, saying he had no problem with short sellers, but disagreed with our analysis and published an open letter telling us why we shouldn’t be short his stock (http://seekingalpha.com/article/242653-netflix-ceo-reed-hastings-responds-to-whitney-tilson-cover-your-short-position-now). He made some good points and it helped us learn more about him and his company and we appreciated his friendly tone (other CEOs should take note that, if one is going to espond to a short seller, this is the best way to do it…). He sure makes it tough to be short his stock - he's been a great CEO and how do you not like a guy who served in the Peace Corps for two years in Swaziland?
As we made clear in our letter, we think highly of Netflix, just not its valuation and as value investors,price matters a lot. If we were to summarize the main deficiency in Hastings letter and nearly all of the bullish-on-Netflix emails we've received, it's that there's no discussion of valuation. They would read the same if the stock were trading at 15x earnings or 75x earnings…but from our point of view, that x valuation gap is the difference between a great long and a great short."
And precious-metals lovers often offer similar sentiment. I can easily imagine this conversation occuring:
Checklist says "why would you want to be long gold, its way, way above its historical trend of bein worth $1 adjusted for inflation???!!!"
PM lover says "you dolt, governments are printing money, this will debase the currency, this will result in inflation, and gold does well in inflation as does silver, commodities, etc."
Checklist says "but gold has already priced in a drop in the value of the dollar of 50% AT LEAST, if not 60% or 70%"
PM lover says "you just don't get it. fiat currencies are being debased and there will be inflation. Golds going up, way up"
Checklist says "at what price do you think gold is fairly valued?"
PM lover says "gold is in short supply, its goin up"
A WHOLE LOT, AND I MEAN A WHOLE LOT, of precious metal discussions don't consider valuation, only fundamentals. And that is true of commodities in general as well, "goldbugs" (no offense at all intended) aside.
To the value frame of mind, the "fundamentals only" frame of mind seems a bit crazy, people chasing things regardless of any valuation as long as the story makes sense and the momo is good. Presumably, to the "fundamentals" frame of mind, checklist and other value frames of mind seem at least as crazy. "what is that moron doing buying banks in july 2009, doesn't he know that the banks have more problems than a guy with steaks taped to his back in a lions cage?". I am not knockin the fundamentals only frame of mind, I am just observing that it is one I cannot remotely relate to, and I wonder if a value frame of mind seems equally odd to those folks. To some people NFLX is a fantastic buy because it has growth, good balance sheet, and good momo. To some people its insane because it has a pe of 75. Ditto gold, etc. Apparently, neither side understands the others viewpoint.
This discrepancy between value and fundamental/momo frames of mind is fascinating to me. I think that the majority of people are probably wired for fundamentals/momo. I think, frankly, it would be extremely hard to argue this point. Simply take these:
exhibit A) at the march 09 bottoms (at or around) one was widely mocked for buying stocks, especially financials, because the fundamentals of banks were so bad. Banks were broke, they were going down, they were screwed. Never mind that my portfolio of financials (almost all insurance and BDCs) had a price/book of 0.11, for real, at the march bottoms. By late 2009 it was trendy to own financials, even at 0.5 or 1.5 x book.
exhibit B) the same, but opposite, in the tech bubble
exhibit C) in 2000 the #1 reason given by proponents of stocks and buy-n-hold investing to buy stocks over gold was recent performance history. i'm guessing here, as I wouldn't have read much about the markets back then
exhibit D) in 2010 an EXTREMELY common plug given for gold and commodities is how badly they've outperformed stocks since 2000.
I submit to the group that overall I think that the human mind, in general, is wired for fundamentals/momo more than value. Thats the basic hypothesis for part 1: the average human mind is more wired for fundamentals/momo than it is for value.
And now I shall observe tht, in writing this post, I have come to realize that this is true for me as well, hugely, in my personal life. I don't think i'm a "value" friend, i'm a fundamentals/momo friend who spends more of his time hangin with his latest and shiniest friends than oldest and, at the core of things, most dear. Interesting.