Why Value Investing is So Hard (Russian Edition)

For every investing strategy there needs to be a fundamental reason why it works.  A basic, “explain to your 12 year old niece reason why it works”.  Value investing, at its most basic, is buying $1 for $.80 (or less than intrinsic value).  Most of the alpha out there (or smart beta or whatever it is being called these days) is either hard to find or hard to DO.  And by do, I mean it goes against everything your behavioral instincts tell you to do.  Buying a stock at all time highs is hard to do, and one reason momentum and trend work.  Buying a value investment is hard for many reasons, a few of which I outline below with a very relevant current example, Russian stocks.

1.  All of the headlines are negative.

2.  The investment has declined, usually by A LOT. 

3.  All of the trailing fundamentals are really bad.

4.  People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

5.  There is a non-zero risk of the investment going to zero.

6.  It is not popular (or patriotic) to own the investment.  

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

8.  The banking consensus is all sell rated.

9.  Flows are out.

Russia checks all of these boxes and then some.   

For the same reason we recommend to never put all your eggs in one basket with a single stock, the same goes for countries too.  If you plan on value investing with countries it makes sense to buy a basket rather than just one or two.  As was the case with Greece going to a CAPE of 2 in 2012, Russia could easily get cut in half again.  But secular bears set the stage for secular bulls, and vice versa.