What is Value Investing? With Wes Gray Ph.D – Alpha Architect

Value investing at its core is buying stocks on sale. Today we’re talking with Wes Gray, Ph.D. of Alpha Architect on why value investing can be an excellent component to long-term investment success.


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Full transcript:


Anthony Saffer 0:00
Value Investing at its core is buying stocks on sale. Today, we’re talking with Dr. Wes Gray of Alpha Architect on why value investing can be an excellent component to long-term investment success.

If you’re interested in taking your investment game to the next level, or simply understanding the philosophy better, stay tuned.

Anthony Saffer 0:26
All right, thanks, West for being with us. Let’s dive right into it. What is value investing?

Wes Gray 0:33
Sure, well I appreciate you having me here. Value Investing at its essence is trying to buy a stock or a company for less than its fundamental value.

And as a value investor, all else equal, if we have a company that costs $100, and it generates $10, in earnings, we would prefer that to a company that costs $100, and it generates one penny in earnings.

So we want to buy those firms where you know, we can get them on the cheap, basically for less than or fundamental value.

Alex Okugawa 1:05
Got it. So when does value investing tend to work best?

Wes Gray 1:11
Well, in recent memory, hasn’t worked hardly at all last 5-10 years.

The way I look at the market is there’s really kind of two regimes you have this sentiment-driven animal spirit heavy marketplaces like we’re in right now, where people put a lot of value on future growth, future expectations, and they don’t put a lot of value on current fundamentals, current cash flow, and current profits.

So clearly, in a marketplace that is more arguably more rational and more disciplined, value is in a relative basis going to do better than in a market like we are now where people put a lot more value on excitement.

And that’s just because of the nature of value firms, you’re really focused on cash flows and paying a low price, well, you’re only going to get that for firms that generally aren’t the most exciting, or the most, you know, enticing thing in the marketplace.

And so those firms are going to be more valued when the markets a little bit more rational about, you know, actually caring about discipline and making money and what have you, versus the market we’re in right now, which clearly prefers, you know, sentiment, growth prospects and the like.

Anthony Saffer 2:26
So you mentioned the recent years being more challenging, are there common characteristics where value just tends to lag a bit or just have more challenges?

Wes Gray 2:36
Not really in general, it’s hard, you know, because the marketplace is so noisy, it’s really hard to pinpoint. Like, you can’t say, hey, when x happens, value outperforms.

But I do think broadly, when you’re like, if, for example, in their current situation, where let’s just say that, you know, interest rates, start rising covenants on debt, like people, actually care about getting paid back, you know, all of a sudden, the marketplace may value having earnings and having profits, a lot more than, say, a firm that just is selling prospects of success.

And but they are actually losing money. Right?

So if we enter into situations where, for whatever reason, whatever dynamic in the general macro background is that enforces discipline again, on on the markets, I think value firms will generally do better relative to growth firms that have a lot of their value embedded in sentiment, essentially.

Alex Okugawa 3:36
So can you tell us a bit about how you manage the value strategy specifically for optimal performance?

Wes Gray 3:46
Yeah, so so like we said at the outset, one of the goals of a value system is obviously buy companies cheap, right?

But it’s one thing to buy cheap stuff. You also want to care about what what you pay for. Right?

Like if you shop at Kmart, sometimes you get Kmart goods. So one of the kinds of the key differentiation and things that we focus a lot on is obviously we’re value investing.

So we care about the price paid, we also care about the fundamental quality of what we’re buying.

And we look at a lot of fundamental financial characteristics on the firm to ensure that yes, they’re cheap, and yes, they’re making money today.

But can we have some confidence that in the future that they’ll also be able to make money and continue this trajectory that they’re on?

Anthony Saffer 4:35
Yeah, that’s great, Wes. And you and Alpha Architect put out a ton of great educational content for investors, a great blog, where can viewers find that information?

Wes Gray 4:46
The easiest way is Alphaarchitect.com

Anthony Saffer 4:49
Okay, that’s great. We will post that we appreciate you sharing with us here, Wes.

And for those of you watching, we will also post a link to our investment philosophy here at One Degree.

It helps to guide you on how we use value investing as part of an overall investment strategy. Thanks for tuning in.

Talk with us about your portfolio or financial plan here: Talk with an advisor

More Reading: What is Momentum Investing? With Jack Vogel Ph.D – Alpha Architect

This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. See our website at onedegreeadvisors.com for full disclosures.

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