10 Lessons From Our 5 Most Popular Podcasts of 2021 - Rob Arnott, Michael Mauboussin, Ben Inker, Cullen Roche, Tobias Carlisle
Jan 2, 2022
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Finance experts Rob Arnott, Michael Mauboussin, Ben Inker, Cullen Roche, and Tobias Carlisle discuss lessons learned from popular episodes of 2021. They cover topics such as spreads between value and growth stocks, inflation, systematic value investing, valuing companies using simple multiples, and the rise of indexing.
Valuation multiples should not be confused with actual valuation and investors need to understand the underlying economic assumptions embedded in the multiples used.
The rise of intangible assets has complicated the valuation process, and investors need to accurately capture the economic value of intangible assets to avoid distorting earnings.
While defining market bubbles in real-time is tricky, key factors include extravagant assumptions about future growth and a lack of concern for valuation models by marginal buyers, so investors should focus on owning less expensive stocks instead of timing market corrections.
Deep dives
Valuation process and multiples
Valuation multiples are a shorthand for the valuation process, but they should not be confused with actual valuation. It is important to understand the underlying economic assumptions embedded in the multiples used. Assessing the economic implications of the multiples and their underlying assumptions is crucial. Investors should focus on understanding how a company makes money, the assumptions required to justify the multiples, and the prospects for future cash flows.
Intangible assets and valuation
The rise of intangible assets, such as intellectual property and brand value, has complicated the valuation process. Tangible investments, which are physical assets like factories and machines, have historically been capitalized and appreciated, while intangible investments, which are non-physical assets like software and training, have been expensed. The challenge lies in accurately capturing the economic value of intangible assets, as their expense nature can distort earnings. Investors need to break the link between weight and price in order to avoid overvaluation or undervaluation of stocks with significant intangible assets.
Defining and navigating market bubbles
Defining market bubbles in real-time can be tricky, but key factors include extravagant and implausible assumptions about future growth to justify current prices and a lack of concern for valuation models by marginal buyers. While bubbles can last longer and go further than expected, investors need to be cautious about shorting them. Timing the bursting of a bubble precisely can be challenging, so it's prudent to focus on owning less expensive stocks rather than attempting to time market corrections.
Implications of indexing in the market
A key concern with indexing is the disconnect between price and weight. Indexing offers a structural alpha by breaking the link with price, potentially leading to a value tilt in the portfolio. However, indexing's rise has sparked debates about potential risks, including limited price discovery and concentration of ownership. Nonetheless, price discovery will continue to happen, even if indexing represents a larger portion of the market, with active managers still involved in setting prices.
Evaluating the success of value investing
Value investing is based on buying something at a lower price than it's worth. Assessing the success of value investing requires understanding the underlying economic assumptions and differentiating between aggressive assumptions and extravagant or implausible ones. Value traps can occur when overvalued stocks are overweighted, while value stocks can be underweighted due to aggressive assumption-based valuation. It's crucial to distinguish between a statistically cheap stock and one that has sound valuation based on reasonable assumptions.
Our goal when we started the Excess Returns podcast was to hopefully use the platform to help educate investors, and to learn ourselves in the process. Initially, we didn’t have outside guests on the podcast, but it quickly became evident that bringing in voices other than our own would significantly help us in achieving our goal. Starting with our first interview in 2020 with Tobias Carlisle up until our most recent one with Dave Wright from Sierra Investment Management, we have tried to put together the best group of guests we could with the goal of learning what has made them successful investors and how all of us can benefit from their experience.
In this episode, we look back at 2021 and look at the biggest lessons we learned from our most popular episodes of the year. We feature interviews with Tobias Carlisle, Cullen Roche, Ben Inker, Michael Mauboussin and Rob Arnott.
We hope you enjoy the discussions.
ABOUT THE PODCAST
Excess Returns is an investing podcast hosted by Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau), partners at Validea. Justin and Jack discuss a wide range of investing topics including factor investing, value investing, momentum investing, multi-factor investing, trend following, market valuation and more with the goal of helping those who watch and listen become better long term investors.
