Today we got an interesting piece to read. It is the quarterly letter from Pure Value Captital they send to their participants to keep them informed of what is happening with their money. Before we get into the numbers, let me first explain what is generally assumed to be value investing. According to the most commonly used definition, a value stock is: A share that is traded at a price that is lower than its fundamental value and is therefore considered undervalued by a value investor. These shares usually have a high dividend yield, a low price-to-book ratio and / or a low price-to-earnings ratio. In other words, stocks that are cheap. Stocks that, according to the experts, are worth more than the price now shows.
We at the-wiseguy.com have a different view of what a value investing is. We have another word for that. We call it “a Wiseguy”. We believe that a share that rises 50% per year for at least 5 years is by definition a value share. Because what they go wrong is that the value of a stock or even better the value of a company is not the value it currently represents but that the share price is the future expectation of what a company will be worth over a period of time to be.
There can still be so much value in a company if it is in the wrong industry or has the wrong strategy, this value will never come out. And who determines that value? The accountant (who pays for the company)? The bank (which must first earn money itself)? Value on paper can be manipulated.
The price of a share is basically supply and demand. If more people believe that a company is worth more, the price will go up and if the majority think the company is not worth it, the price will go down. For those who doubt this, here is the definition of a share price on wikipedia click here! That is why we only look at the graph to determine what a company is worth. The price trend of the value of the share is shown in a graph. It tells the true story of what the value is so far. And we think that we know what has happened in the past 5 years. The rest are all assumption and hypothesis. If I could tell the future I would tell you but I don’t know, nobody knows. So you can add so many studies to it, no one is sure.
We call this a fundamental truth. It is one of the few data that we know for sure. The share price is the relationship between supply and demand. That is the second foundation. So back to our wiseguys. Those are the 50% / 5y shares. If the value of a certain share increases by 50% per year for 5 years, we call this a fundamental share of value (a Wiseguy on our website).
So much for the theory. Now practice. In their quarterly report, they try to change their investments by arguing that the price-earnings ratio of the companies they invest in has fallen by almost 50% (to 0.44) and that this is therefore a good time to enter. In other words, transfer more funds to the fund so that they can continue doing what they did (Einstein – “definition of insanity”). Then they discuss the fund’s performance. In 2020, the return on investment so far is – 24.9%. In other words, they have lost a quarter of their assets. Our loyal readers know that we have already achieved 35% in the plus and we are now well on the way to 40%. You can find all our returns under the heading performance (ROI) or by clicking here. For completeness, here is the link to Pure Value Capital. And we’ve put an important passage from their release below. Finally: And because we cannot resist our definition of a fundamental value investment: “A share that has proven for at least 5 years to increase the sales price by at least 50%”.
By the-wiseguy on the-wiseguy.com
