Value Investors Ready to "Trounce the Stock Market". Umm, Don't Walk, but RUN AWAY!!

Bloomberg News ran an article yesterday proclaiming that famous value investors Bill Miller, Martin Whitman and David Dreman, "Mired in the worst slump of their careers, are poised once again to trounce the stock market.  If history is any guide, the value investors emphasis on shares trading at low prices relative to cashflow will provide returns superior to holdings of so-called growth managers."

Ok, first of all, these three gentlemen know a lot more about stock picking than I do.  I'm more of a fixed income, YouTube clip guy.  I understand that these are venerable names.  However, all three of them are mired in the worst slumps of their careers because they completely misread the financial maelstrom that began hitting us in late-2006, early-2007.  Furthermore, even after ample evidence in 2007 that this crisis was going to be the biggest thing since the 1930's, they discounted the seriousness of the situation and found "value" in firms like Freddie Mac, Wamu and MBIA.  Here is something I wrote in January 2008 after Mr. Dreman came out bullish on financial stocks;

News Item: David Dreman Sees `Major Opportunity in Financials

Jan. 30 (Bloomberg) -- David Dreman, the 71-year-old value investor, said he bought more shares of financial institutions after the industry's worst annual performance since 1990 created a ``major opportunity.''

Now I read this story a couple of times yesterday, and all I could think of is one of my favorite scenes from Godfather II. It takes places in Michael’s office at the Lake Tahoe residence. Frank Pentangeli is mouthing off to Michael, questioning his authority, etc. After his rant Frankie “5 angels” leaves…one of the greatest exits EVER. Al Neri looks wearily at Michael and says, “You want me to take care of it?” Michael just shakes his head and says to Al, “No, the old man had too much wine.”

This is how I feel about poor Dreman here. The proud owner of Wamu 61% ago (and they have a lot more to go in terms of write downs in my humble opinion). It’s almost a footrace between Dreman and Ben Stein to see who can win “Most Delusional Septuagenarian.” I still see Ben far in the lead but if David keeps up with this it may come down to the wire.

Financials haven’t even figured out what their own balance sheets and capital positions really look like! UBS comes in with a $14bb write-down this morning…and we literally stop talking and thinking about it by 9AM! The Fed and the ECB have to have a pep rally and free term-funding party every 3 weeks or so just to keep the banks lending to each other for any period longer than 24 hours…because nobody has any trust of their counterparty.

I can go on for a long time and add up the losses to come, and I think when we get done with residential mortgage credit, commercial mortgage credit, High Yield Loans, counterparty defaults….and last and probably least (maybe only a paltry 75-100BB) Emerging Markets (no one is talking about that yet.) we might be at a cool Trillion! Hell, yesterday the biggest laugh we all had was the discovery of youwalkaway.com!!! Dreman is looking at 1990?? How about 1930!

What kills me is it still doesn't seem like these "Value Investors" know what "Value" is.  Listen to Dreman yesterday;

"This is one of the worst periods I've seen for value.  The more it underperforms, the more it normally snaps back.  The probabilities are very strong we'll have a major upswing."

The operative word here is "normal".  Mr. Dreman still doesn't get it that we are not in normal times.  If he's finding value in another sector besides financials then God bless.  But if he can't see that the "value" he still seems to identify in the financial sector is a mirage then I wouldn't trust him with anybody's money.

Finally, here's something that just really pisses me off.  This is from James Montier, the man voted the "Top Global Strategist" in Thomson Extel's survey since 2005 (I'm quoting from Bloomberg's article);

"The five prior times since 1952 that growth beat value two years in a row, the latter group recovered and won by 17 percentage points annually on average the data from Societe Generale show."

I have just one question.  What does the data show for the period 1929-1940, because we are a hell of a lot closer to that period than 1952 to 2008.

Comments

[eric]

Thank you very much Brian.

[brian]

really nice job here.

i'm the guy that's been commenting on the MER comedy network on Goog finance (i.e Merrill "sells CDOs to itself") of which you have been promoting this site.

this is becoming one of the better blogs out there. keep it up.

cheers,
brian

[eric]

They won't have us Axel, we're not "credible" enough for TV!

[axel]

first of all, i still want to know why wb is trading. not at any specific price, but why AT ALL? i know, i gotta be patient, pop.
second of all: i would like to say that if anyone is still tuning into cnbc or whatever the $ channels are, what is your freaking problem? lisenting to those talking heads jabber w/other uninformed dopes instead of tuning in here is beyond positive comprehension. if you guys could ever afford the pay cut, and the mkts could afford the truth, this medicine would get taken a whole lot quicker and we really could recover and rebuild. but the dopes will drag this out another year or two and will continue taking every "long" guy's money along w/them.
stay short, pony boy. stay golden and stay short.

[eric]

That's a very fair point. Sorry Monty!

[Rcyran]

Montier is one of the biggest bears out there, and has been for years. My guess is that he thinks growth will do even worse!