Editor’s note: I’ve known Dan Ferris, as both a friend and as a colleague at Stansberry Research, for many years. I’ve learned a lot from him about how to value stocks. So today, I’m sharing an interview with Dan where you’ll learn where he sees value in today’s market… and where he thinks we are in this historic bull market…
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Kim Iskyan: Dan, before we get started, thanks for taking the time to talk with me today.
Dan Ferris: Anytime Kim.
Kim: You’ve said that the “Golden Age of Value Investing” is upon us. What did you mean by that?
Dan: First, I want to make it clear that I think we’re in the very early days of that in the U.S. market, and I see that development in just a couple of sectors right now.
But take, for example, the Russell 3000 Growth Index and the Russell 3000 Value Index. There’s a clear historical rhythm where one index tends to outperform the other for several years, and then they switch.
As you might guess, in the late 1990s, growth outperformed handily until the dot-com bubble burst. Then people became disenchanted with all those high-growth technology and telecom-type companies. What was left was all the stuff that had gotten cheap: mining and industrial companies, housing, homebuilders, mortgages, banking, all that stuff.
The cheap stuff outperformed for a while until Wall Street took those super-safe assets and turned them into toxic waste. The U.S. 30-year mortgage was ripe to be turned into toxic waste because everybody believed it was this wonderfully safe asset. That created a bubble that blew up, and then nobody wanted to own the toxic waste anymore… So they turned back to growth stocks.
Since about 2009, we’ve seen the growth index outperform the value index. In 2016, that situation reversed briefly when the market fell a bit. But it switched back last year and growth came roaring back. Although we’re still in this period where growth is outperforming value, we’re starting to see green shoots.
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Kim: Where in today’s market are you starting to see value?
Dan: Mining stocks got absolutely crushed in a brutal bear market starting around 2011 and continuing through early 2016. They’ve since generated some really good value. Of course, retail got crushed in 2016.
We’ve identified a third sector that has completely bombed out over the last several years. It’s bottoming out and it’s time to buy. We recommended two stocks from this sector in the March issue of Extreme Value.
If and when we get another bear market, I think we’ll see a period of about seven to 10 years of what I would call the new Golden Age of Value Investing.
Kim: Where do you stand on exactly where we are in this bull market in the U.S.?
Dan: I think we’re in the last innings. That’s not really a controversial viewpoint because the bull market has gone on for so many years and the valuations are so stretched. Hardly anything is attractively priced today. But I don’t make predictions.
I expect equities to perform poorly from here because in the past, when they’re reached valuations like this, they’ve performed poorly. They’re priced for lousy returns. All I need is to know what’s attractively priced for a good long-term return. By and large, that isn’t U.S. equities or bonds today.
Kim: You’ve told your readers for years to “prepare, don’t predict”.
Dan: Absolutely. I’ve said that over and over again. It simply means avoiding what is unattractively priced. Don’t be afraid to hold cash for another few years. Sell short shares of deteriorating businesses, preferably in industries that are under a lot of pressure. And always buy deep value where you find it.
As long as you have a good margin of safety, you’re approaching value investing in the right way. Whenever we find an appropriate margin of safety and everything else lines up, we aren’t afraid to recommend it. But lately, that has been harder to find, so we’ve been recommending holding plenty of cash while we wait for those opportunities.
Kim: How do you measure the margin of safety in an investment?
Dan: Margin of safety is simply the difference between what you think a business is worth and the price you’re willing to pay. You’ll see value investors like the folks at Harris Associates who run the Oakmark Funds. They’ve consistently said they want to pay two-thirds of intrinsic value, so basically 33 percent margin of safety or a 33 percent discount to true value.
You need this margin of safety because people aren’t perfect. If you estimate that a business is worth US$100 a share and you pay US$100 for it, maybe you’re wrong and it’s really only worth US$80 a share, and the market corrects. At that point, you either have to admit you made a mistake and get out or wait to get a positive return.
On the other hand, if you determined something was worth US$100 a share but you refused to pay more than about US$65 a share for it, that allows you to be a little or even a lot wrong and still come out on top.
Kim: Again, thanks for taking the time to speak with us today, Dan.
Dan: It’s been my pleasure, as always. Anytime.
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Publisher, Stansberry Churchouse Research