Currently, we are witnessing remarkable opportunities in the realm of value investing. Discounted prices are plentiful, and sellers appear eager to negotiate.
However, navigating this landscape requires discernment; distinguishing valuable investments from less promising ones is particularly challenging in today’s economic climate. As always, caution is vital for investors, but the stakes are higher now than ever. Nonetheless, for those who know where and how to look, countless bargains can be found.
Value-conscious investors must learn to identify assets with favorable growth potential that are trading below their intrinsic value as opposed to those that are cheap for a reason. Mastering this skill is central to successful investing, as made famous by Benjamin Graham. Among his many followers is Jon Heller, CFA and president of KEJ Financial Advisors in Newtown, Pennsylvania.
For Heller, the term value investing is virtually redundant. Having led the equity analytics department at Bloomberg L.P. for many years before starting his own financial practice, he believes that the quest for undervalued assets is the essence of “investing.” While this pursuit was once tedious, it has recently become much more engaging and potentially rewarding.
In June, we had a conversation with Heller, who shared insights on his Cheap Stocks 21 Net/Net Index and other value-related topics on his Cheap Stocks blog. With the year drawing to a close and value investing opportunities seemingly abundant, it’s an ideal moment to connect with this “deep value” investing enthusiast.
Heller also marks the inaugural guest of our new podcast series, Inside View, featured on The Capital Spectator. Moving forward, we will regularly interview a range of investment strategists, economists, and other prominent figures in finance. Now, let’s dive into the conversation…
Please visit CapitalSpectator.podbean.com for additional options and episodes of Inside View podcasts.
Governments are actively deploying both monetary and fiscal measures aimed at rejuvenating strained economies. Although the timing and extent of these efforts remain uncertain, they will eventually help restore economic vitality. Over the past few years, the economy has indulged in a myriad of risky behaviors—from excessive leveraging and easy cash to speculative investing.
This period of indulgence has concluded, and the subsequent cleanup will likely take longer than anticipated. In a somewhat chaotic attempt to mitigate current and future repercussions, governments are unleashing unprecedented rounds of stimulus packages. As a result, all eyes are on the evolving landscape of both traditional and unconventional economic support programs aimed at bolstering economies worldwide.
While volatility is not the sole indicator of risk, it is a crucial one in strategic investing. Recent history illustrates just how dramatically volatility has surged, particularly in 2008. Unsurprisingly, both real and perceived risks have risen significantly.
Volatility assessment has long been an area of interest in investing and is equally examined at the macroeconomic level. However, research focusing on the interplay between economic and market volatility has been scarce. A new academic paper titled “Macroeconomic Volatility and Stock Market Volatility, World-Wide,” authored by professors Francis X. Diebold (University of Pennsylvania and NBER) and Kamil Yilmaz (Koç University, Istanbul), aims to bridge that gap.
This is what a critical juncture looks like.
Today, the Federal Reserve announced that it is establishing a target range for the federal funds rate of 0 to 0.25 percent. This announcement feels akin to a fish proclaiming that it will now swim in water.
The target rate for Fed funds has been lowered once again to just above zero, although the effective Fed funds rate (based on actual banking transactions) has already hovered at that level for some time. Nevertheless, it’s appropriate for Bernanke and his colleagues to announce this new lower range, which represents a reduction of up to 75 basis points from the prior target. However, don’t expect fireworks during the next FOMC meeting scheduled for January 28-29.
For the second consecutive month, consumer prices experienced a decline, and this one was substantial enough to evoke concerns of deflation once again.
The Consumer Price Index (CPI) dropped by a notable 1.7% in November on a seasonally adjusted basis, according to government reports. This follows an October decline of 1.0%. Last month’s decrease is the most significant monthly drop in CPI since the Labor Department began tracking this data in 1947. Additionally, MarketWatch.com reports that the non-seasonally adjusted CPI fell by 1.9%, marking the steepest monthly rate since January 1932, at the height of the Great Depression.
Meanwhile, the core CPI (excluding food and energy) remained stable after just a slight decrease in October. This key measure of inflation, favored by the Fed, clearly demonstrates that inflationary pressures have dissipated, at least for the time being.
It’s well known that risk premiums have soared in recent months, as illustrated in the accompanying chart. The cause of this increase is no mystery: prices have plummeted, resulting in elevated trailing yields and interest rates. The question that remains, however, is whether it’s time to take advantage of these relatively lucrative offerings.
Determining the answer to this perennial investment question is never straightforward. At any time, the prudence of investment decisions is debatable, varying with the prevailing context. Nonetheless, this risk is exacerbated if one’s investment strategy is overly focused on a narrow range of assets. It’s essential to sidestep potential pitfalls to ensure sound investing practices and peace of mind, even if discomforting choices and errors remain inevitable. Still, this provides a strong foundation for establishing investment strategies aimed at enhancing the likelihood of long-term success.
The specter of deflation looms large, though it may still seem a distant possibility. Nevertheless, it’s increasingly difficult to overlook the signs of what could be termed “deflation light.”
Evidence is found in this morning’s update on producer prices, which fell by 2.2% last month. This marks the fourth consecutive month of declining wholesale prices. While the debate may center on the timing of a true deflationary environment, it becomes difficult to take action once the threat is fully realized. If there’s any intent to combat the deflation dragon, it must be executed preemptively. The pressing question remains: Is genuine deflation actually upon us, or are current price declines simply transitory?
One could argue that the precipitous drop in energy prices is a primary factor behind the downturn in wholesale prices. This is valid. However, energy prices cannot continue to decline indefinitely. Indeed, crude oil prices have plummeted from an all-time high of $147 per barrel this past summer to under $50 in December. While it’s possible for energy prices to dip even further, maintaining downward pressure on general price indices, we must question whether we are nearing the bottom of this downward trajectory.
Another labor market update brings more cause for concern.
This morning’s data on initial jobless claims showed a significant rise last week, reaching 573,000 claims. With rising unemployment continuing, it’s no surprise that the lines at unemployment offices are growing longer each week. However, last week’s increase of 58,000 new unemployment claims is particularly alarming, representing the highest weekly increase in over three years.
Even amidst the growing pessimism, the rising tide of joblessness brings increasing urgency to the situation.
The Wall Street Journal reports that Bill Miller has “destroyed” his prior reputation as “the era’s greatest mutual-fund manager.” Miller’s fall from grace is not unexpected, given the profound bear market conditions this year. Indeed, many fund managers are facing similar challenges.
Miller was once seen as a super investor; after all, he consistently outperformed the S&P 500 from 1991 to 2005. As highlighted in the Journal, he achieved “a streak no other fund manager has been able to come close to replicating.”
Unfortunately for Miller, that streak has ended, and he has now returned to the ranks of average performance. According to the Journal, Miller’s Value Trust has plummeted by 58% over the past year—20 percentage points worse than the S&P 500’s decline.
While we are familiar with the overarching narrative, those interested in the gritty details—and seeking to enhance their historical understanding—should check out the Bank for International Settlements’ latest insights.
The December 2008 release of the BIS Quarterly Review serves as a sobering account of recent events. Caution is advised; those sensitive to such topics may prefer to look away.
After reviewing several similar in-depth reports in recent months, your editor acknowledges the importance of academic perspectives amidst financial chaos. Though newspapers offer immediacy, a broader context is often essential. If you only have the bandwidth for one academic document, make sure to prioritize this one.
