07 February 2024

At the Money: Stock Picking vs. Value Investing

1Frameworks

7Insights

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Frameworks in this episode

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Valuation-Sensitive Diversified Investing

Anchor prices to cash flows, screen for durability, and diversify value bets

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster07:52

Higher Rates No Longer Automatically Help Small Caps

Traditional market relationships can break when corporate financing structures change. Small companies often rely on floating-rate bank loans, making them unusually exposed to rising borrowing costs and potentially more responsive to falling rates than conventional theory suggests.

Small caps were traditionally associated with economic strength and rising rates.
Many smaller companies borrow through floating-rate bank loans.
Higher rates directly increase their interest expenses.
Recent small-cap performance improved as rates declined.

“A lot of the traditional relationships are flipped on their head.”
Jeremy Schwartz · 08:12

“they're like the only people facing the cost of these higher rates is they're paying more interest on their bank loans”
Jeremy Schwartz · 08:31

#interest rates#small caps#bank loans#market regimes

Explainer· 2

Explainer06:29

Why Growth Stocks Benefited From Two Powerful Tailwinds

Large technology companies benefited from both superior earnings growth and rising valuation multiples. Schwartz argues that continued multiple expansion is less likely from elevated starting levels, leaving future performance more dependent on whether earnings can keep outgrowing the market.

Apple and Microsoft once traded at much lower multiples.
Their returns combined above-average growth with multiple expansion.
Elevated current multiples reduce the scope for the same valuation tailwind.
Future returns increasingly depend on sustained earnings growth.

“So we had two tailwinds, better growth, multiple expansion.”
Jeremy Schwartz · 06:39

“It's going to be hard for them to have the same multiple expansion ahead.”
Jeremy Schwartz · 06:43

#big tech#earnings growth#multiple expansion#valuations

Explainer10:19

Nvidia Can Deliver Great Results and Still Disappoint Investors

A highly valued company can report exceptional growth yet disappoint if results fall short of the expectations embedded in its price. Nvidia serves as the episode's example of how an outstanding business can become a demanding investment when the market already anticipates extraordinary performance.

Higher price-to-earnings ratios encode higher expectations.
Fast growth may be insufficient when investors expect even faster growth.
Nvidia benefited from the AI revolution and delivered strong results.
Its challenge is sustaining record growth rates from an elevated base.

“High pe stocks, high growth stocks have very high expectations and they can disappoint just by growing fast but not fast enough.”
Barry Ritholtz · 10:23

“It's a classic case of it's just going to be tough for them to keep delivering on these very elevated growth rates.”
Jeremy Schwartz · 10:59

#nvidia#expectations#ai stocks#growth investing

Story· 2

Story01:23

Jeremy Siegel Warned About the Tech Bubble Days Before It Burst

Jeremy Schwartz recounts how Jeremy Siegel moved beyond a simple buy-and-hold market stance when technology valuations became extreme. Siegel publicly challenged triple-digit price-to-earnings ratios shortly before the 2000 bubble burst and shifted his own portfolio toward value.

Siegel had previously advocated inexpensive broad-market index investing.
Extreme technology valuations changed his portfolio stance.
He published a warning shortly before the bubble collapsed.
The episode helped inspire his later focus on valuation-sensitive strategies.

“You can never justify the valuations no matter what the growth.”
Jeremy Schwartz · 01:53

“So his own portfolio started selling the S and P five hundred and buying value.”
Jeremy Schwartz · 02:00

#tech bubble#jeremy siegel#market history#valuations

Story04:35

How Buffett Evolved From Cigar Butts to Quality Businesses

Warren Buffett's investing evolved from buying extremely cheap price-to-book stocks toward acquiring durable franchises at fair prices. Schwartz presents Apple as a prominent example of this shift from pure statistical cheapness to quality-conscious value investing.

Ben Graham-style investing emphasized extremely cheap stocks.
Buffett called the weakest bargains cigar butts with a final puff remaining.
His later approach favored high-quality franchises at reasonable prices.
Apple combined a reasonable initial valuation with a valuable business franchise.

“What he called cigar butt investing later on is getting last puffs of these cigars that were through cheap stocks at their very last moments,…”
Jeremy Schwartz · 05:02

“buying these high quality businesses at fair prices is also part of the value investing framework.”
Jeremy Schwartz · 05:17

#warren buffett#quality investing#apple#ben graham

Takeaway· 2

Takeaway06:08

Value Investors Endured a Fifteen-Year Growth-Led Market

Schwartz emphasizes that the long-term case for value does not prevent prolonged underperformance. Growth dominated for roughly fifteen years, although 2022 briefly reversed the pattern before growth recovered strongly in 2023.

A sound investment style can remain out of favor for many years.
Growth dominated most of the period preceding 2022.
The Nasdaq's 2022 decline contrasted with positive high-dividend stocks.
Market leadership reversed again during 2023.

“But the last fifteen years have been a very painful stretch to be a value investor.”
Jeremy Schwartz · 06:10

“It has definitely been a fifteen year stretch hallmarked by growth until twenty twenty two”
Jeremy Schwartz · 06:13

#market cycles#growth stocks#value stocks#investor patience

Takeaway11:36

Decades of Data Showed a Two-Point Annual Value Advantage

Schwartz cites research extending back to the S&P 500's 1957 inception. In that study, the most expensive stocks underperformed the market while the cheapest stocks outperformed, creating large differences in accumulated wealth over several decades.

The analysis covered roughly sixty years of market history.
Expensive stocks lagged by about one to two percentage points annually.
Cheap stocks outperformed by about two percentage points annually.
Small annual differences became substantial through long-term compounding.

“the most expensive stocks lag the market by one hundred to two hundred basis points a year.”
Jeremy Schwartz · 11:44

“The cheapest stocks outperformed by two hundred bases points a year”
Jeremy Schwartz · 11:46

#historical returns#value premium#compounding#s&p 500