This time is different the death of valuation

Introduction: An Old Story
The Rich (expensive growth) Get Richer…and Poorer
Conclusions & Exhibit

Introduction: An Old Story

A recent article from Bloomberg counted a leading quant from one of the world’s largest asset managers as a believer that there is “no way to tell if betting on ostensibly cheap companies will work again.” Noting that Tesla’s valuation, at 10,392x trailing earnings, 33x book value, and 11x sales made no sense on those metrics, the article suggests the secret to pricing Tesla, ostensibly, lies in using big data to tap into “…social media to gauge employee sentiment…”¹ Kailash would like to note the following: if the price paid relative to cash flows is no longer the primary bridge to valuation, capitalism has changed. If markets will now allocate capital based on novel new metrics then corporations have a disincentive to seek profitability.

Unfortunately, Kailash believes the idea that things are different this time to be a very old and very flawed story big-data or no. For investors betting with managers purporting to glean market-beating information from bigdata, we encourage you to read the brilliantly written “Everybody Lies”² by Harvard trained and former Google data scientist Seth Stephens-Davidowitz. Familiarizing yourself with the curse of dimensionality might be important for you and your portfolio. To summarize the book’s finding regarding stocks, Big Data cannot predict which way stocks are headed.

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Figure 1 below shows that growth’s lead over value has exploded since we first published the chart in Growth vs. Value: A Predisposition towards the Importance of Price has been Painful. Despite this, Kailash will not abandon a previous approach whose logic we understand (although we find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which we don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital. As any student of the markets will instantly see – the bolded statement is plagiarism. Those words were written by Warren Buffett in 1967³ in response to pressure to pursue the “nifty fifty” whose exorbitant valuations were rationalized using a slew of new valuation methods.

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Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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