Some well-known value investors are selling stocks they very recently thought were undervalued bargains.
When I evaluate a money manager who espouses the value investing philosophy, the first question I ask myself is "Is this person really a value investor?" This question carries more weight than you might think. For while it's not remarkable that (given its association with very successful practitioners like Warren Buffett) many describe themselves as value investors, what is remarkable is how few really are. Scratch the surface of a self-described "value investor" and you'll often find a momentum player who simply buys what's popular and is going up, a closet macro short-term speculator who says things like "in a recession people play the lottery, therefore lottery stocks will go up this year", someone who can identify a great business but not the greatly inflated price it's selling for, or some other wolf in sheep's clothing.
This first question filters out a lot of money managers. But even if I've found a value investor who actually practices value investing, I'm not done yet--there are good value investors and less-than-good ones, and my job is to separate the two. The next question I ask myself is "Is this money manager essentially a 'naive' value investor or does he/she add value as a business analyst?"
By "naive" I mean this: The value investing strategy has been demonstrated to work successfully even when relatively little attention is paid to the businesses being bought. Simply buy stocks that are "cheap" based on various historical measures like low P/E or P/B ratios and you can do OK. Fama and French, Ben Graham's "net-nets," even Magic Formula Investing all demonstrate this. It's the kind of thing you can do yourself with a computer stock screen.
Naive value investing may work well, but it's not something you should have to pay for. A jockey isn't great simply because the horse he's riding is. Nor is a money manager worth paying if what he/she is ultimately doing, when all is said and done, is buying stocks that are "cheap" based on historical measures. What makes a value investor good is the ability to go beyond the naive stock screen to really understand and evaluate the businesses being purchased. This is what I try to answer with my second question.
I won't name names, but read the WSJ article I linked to above and ask yourself whether some of those money managers, all very famous, really understood certain businesses well enough to commit capital to them.
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