Value funds seem to take a defensive approach to investing by steering away from good performing stocks and favoring poorer ones. This isn’t that good of a deal though.
It’s a given that value fund investing will provide lesser returns than average, not that the average is something that we should be setting our sights on anyway. Value funds pale even more in comparison to growth funds, but they claim to make up for this during bear markets, which is supposed to be their appeal.
We won’t focus on that aspect too much here, other than to say that if you do worse in a bull market but do better in a bear market, and we’re in a bull market and have been for over a decade, why would anyone want to be in such a fund during these times?
We’re not sure that people have even thought of this very much, as obvious as this should be to them. There isn’t even anything more that needs to be said here, as if we do like this feature, we need to at least wait until conditions are ripe for it. When the bear market hits though, these funds lose money too, so the choice becomes to lose more or to just stay out of the game.
This decision therefore comes down to your being better off in even an index fund during bull markets, and your being better off out of stocks entirely during bear markets. There is only one state that value funds fit, the state of confusion.
The only interesting thing about these stocks is to look upon them and wonder just how safe they are during pullbacks. There are some investors who choose to stand pat with their positions regardless, and therefore will need to play some real defense, where they may not be able to take on the full downside risk of the good performers, or even the averages, and may be willing to sacrifice returns for more safety.
When we look to put together a good plan to achieve this, this involves sticking to stocks which are decent performers but don’t move as much to the downside either, like a utility stock does. There are some non-utility stocks that stack up well in this regard as well, and we recently featured an article on Coca-Cola as a good defensive play.
When we look to select these though, while we do want to be looking for lower betas, involving stocks moving slower than the market overall, we don’t want to just be picking them because they are out of favor like value investing does. Whether or not these stocks have this desired low beta, we don’t want to pay a bigger price then we have to for this, since this is just asking for trouble and runs completely counter to our investment goals.
In a recent interview, value fund investors Stephen Yacktman and Jason Subotky of the AMG Yachtman Focused Fund took time out to discuss why they are so high on the positions they have taken in Samsung and Macy’s. Did they really say Macy’s? This is a real eyebrow raiser as we wondered who was still holding this turkey and now, we have our answer.
Samsung at least isn’t one of the very worst stocks out there right now, like these funds like to see, but what is a value fund doing investing in a tech stock like this? It turns out that Samsung’s valuation got them in the sights of this fund some time ago, and it has done pretty well lately, but it’s the potential downside that makes this such a curious pick for this fund.
Yacktman and Subotky are particularly fussy when it comes to value investing, and see very few opportunities with U.S. stocks and are looking even more overseas to find stocks that they like. Considering that they like Macy’s, it’s not hard to imagine the U.S. market not having many stocks like this, as there aren’t that many that can compete with Macy’s in the terrible category.
If this stuff shines when markets are down, we did have a bit of a down year in 2018, so we can take a look at how these two stocks did during that year to see if we actually are spared some of the pain or are inflicted with even more pain in these plays during these times.
Taking a Peek at the Insides of a Value Fund
Without even looking, we know that Samsung is a stock that, due to its nature, should be particularly exposed to this sort of risk, as would be Macy’s, due to it just being such a bad stock.
After losing a whopping 43% last year, Macy’s is actually looking like it might be bottoming out enough to actually make this a decent value play at some point, although it does need to turn back the right way again first. This is a stock that is known for its big cycles, including the big down one we just saw, where it gave up a total of 78% over a six and a half-year period, and 61% in the last year and a half. It might look a little more stable now, but those who have held it through this period simply need to hang their heads.
The thing about shooting for value is that you need the market to co-operate for this to work, as there is no value in seeing your stock lose a bunch of money. If it has whatever you are looking for, it being so beat up presumably, and the beating stops, and it starts to get up from the ground, now we’re in a situation that may have some potential, but not before.
If Macy’s does end up recovering from here, there will come a time where the recovery ends and we may head back in the wrong direction again, but if you aren’t prepared to check out of this hotel and instead choose to lock yourself in your room, that’s not exactly what you call trying to have your money in the right places.
Macy’s can be a fabulous stock at times and rose in value by over 10 times between 2009 and 2016. It’s fallen upon hard times since, but even through this, it had some nice moves both ways, but only those prepared to seek out these moves will be the ones that captured them, otherwise you just are stuck going down the hill.
This is just not a stock that you can just buy and hold, especially with the sector struggling so much. There just isn’t much room for growth for them and the best you can hope for is that investors pile on it once it has bled enough, like what may be starting to happen, providing a possible good rebound play for you. This is as far from traditional value investing as we get though.
We hit the bottom with Macy’s last summer, and since then it has at least stabilized and has shown some initial signs of promise. Whether or not this is a good value play now, it surely has not been over the last 6 years unless you call losing a lot of money valuable.
Their holding this stock right now isn’t too terrible if it can stay above recent lows, but it’s a shame that they had to suffer so much to finally get to a point where it really is beat up badly enough to start looking at least decent. Just because it does though does not mean that it looks decent enough to make it preferable over another stock that we could have our money in instead, but for those who like bottom plays, this is one at least worthy of keeping an eye on.
The problem with this so-called value strategy is that they are prone to hold when the iron cools off as well, being willing to just give back the gains it gets during the up cycles instead of capturing this expressed value after things equalize more and wait for another such opportunity. With the roller-coaster way that Macy’s trades, it is particularly important to seek to ride it up and not up and then back down further. On the way down, if anything, we should be shorting it, and at least not be greeting these losses with open arms.
The fund got into Samsung, which trades on the Korea exchange, back in 2013. The stock beat around for the first 3 years that they were in it, and this was no time to be in this stock, although when it broke out of its range in 2016, that was a different story.
Samsung has really been a roller-coaster stock since, and while it is up 85% since its 2016 breakout, it also lost 28% in 2018, so it moves quite a bit both ways. This is not at all surprising for a tech stock, but it sure is for something that’s supposed to be a value play, one that is supposed to go down less and not a lot more during leaner times.
Samsung gained 44% in 2019, and started out 2020 strong enough until January 19 that is, and has dropped 10% since. There is nothing defensive about this, and its value is evaporating at an alarming rate now.
With 14% of their fund invested in Samsung right now, they are putting quite a bit of their money on this bet, and while Samsung does look like a good long-term play from here, they are going to need to be prepared to bear the well-above average of pain that this stock causes when it moves against us.
We Need to Make Sure Our Investing Strategies Actually Make Sense
Macy’s may be a good bottom play here at some point, although clearly not yet, but longer-term, the longer trend downward describes its outlook faithfully enough to surely want to have us avoiding it on this time line. The chart that we use to spot a bottom play is on a much shorter scale than the one we need to use to get the longer trend, the one we’re looking to play when we invest, and that looks plain ugly.
We’re left with two good value plays in the short term, but only one of them looks good on the longer-term timeframe that this fund uses. Macy’s is so beat up that it may indeed serve to be a good hedge in a bear market though, which will be needed to offset the additional risk with Samsung. Samsung is primed to move forward in the coming years, but we really need to wonder about Macy’s.
Our primary goal with investing needs to be to examine areas where we could improve our results, rather than stubbornly clinging to dogma like value funds do, refusing to change anything no matter how obvious things get.
Why we would ever want strategies that believe so strongly in their principles that even common sense takes a back seat is the biggest question. When we look at how wishy-washy this all looks, and how easy it would be to make adjustments that would both increase its returns and manage risk better, by actually confining ourselves to the times where there really is a gap to be filled between value and price, there may be something to this strategy, but not the way they do it.
This is actually the worst approach to take if you insist on not managing your positions, because the overall outlook here is diminished and we’re going to need to do something other than just hanging on if we want to seek favorable and not unfavorable outcomes.
Meanwhile, we did get to look at a couple of interesting picks here, two very different ones in fact, with one being a breakout and the other a rebound play. Both require real care, and cannot just be left to themselves, especially in stocks that are in intensive care like Macy’s. Samsung is more promising, but there is better out there right now where you can earn better returns without quite the risk, like with their cellphone rival Apple, which goes up more and is only down 3% lately compared to Samsung’s 10%.
Distressed stocks can present some real opportunities if your timing is right. This can be a nice place to visit, but it’s the poorest neighborhood in the city and no place that we should wish to move to.
If we actually are looking to take a more defensive posture with our stocks, it’s just better to use ones that have charts to match our objectives, those which are moving the right way and may move less, the price we pay here for dropping less as well, but are actually moving our way overall.
The problem with going just with beaten-up stocks is that they aren’t the stocks that can be most relied on to perform well, they are actually the most likely to perform badly. These are also stocks that require the most attention, and choosing not to act while pursuing this strategy is what really exposes its inferiority.
If we wish to pick our stocks, we really need to be taking everything that matters into account if we actually do want to be making the right decisions. By confining ourselves to a single measure, and especially one that runs counter to a stock’s trend, and refusing to help ourselves along the way when needed, we shouldn’t expect anything but the below average performance that these funds churn out.