Show HN: Invest systematically in deeply undervalued companies

#1

Post by wsieroci » Thu, Sep 17, 2020, 4:50 PM UTC

Show HN: Invest systematically in deeply undervalued companies
gemalpha.com

Re: Show HN: Invest systematically in deeply undervalued companies

#2

Post by maxharris » Thu, Sep 17, 2020, 5:14 PM UTC

We're in the era of disruptive innovation, where whole industries get gutted and replaced by the next big thing. For example, the iPhone disrupted a long tail of physical gadgets, from voice recorders to rulers, calendars and Rolodexes. Amazon disrupted retail and on-premise enterprise computing. Tesla is disrupting the automakers, energy companies, ride-sharing networks, etc., all while transitioning us to carbon-free energy. Square + Bitcoin is disrupting the banks, payday lenders, small business accounting, etc.

The returns I've gotten investing in disruptive innovation, just since March, have yielded many times the returns of the S&P 500.

(See also this argument against value investing: https://www.youtube.com/watch?v=2A-TVLyYY9c)

How is "value investing" not going to just lose a lot of opportunity in the roaring 2020s? It is obvious, and widely known that the Fed Put is going to continue for years. What is special about the particular companies that Gemalpha invests in, and why should I trust that?

Re: Show HN: Invest systematically in deeply undervalued companies

#3

Post by jfengel » Thu, Sep 17, 2020, 5:30 PM UTC

Unfortunately, the same rule that applies to shorting overpriced companies ("The market can remain irrational longer than you can remain solvent") also applies to going long on underpriced ones. They can remain underpriced indefinitely.

The formula is reasonably well founded, as far as it goes. Take the cash and debt into account, figure that as a ratio to past revenue, and you can figure out what a stock "should" be worth -- if its revenue persists.

But the stock price may not reflect that for a lot of reasons. A value investor should look into the market, management, and other broader conditions as well. This is a decent metric to start with -- one that you kinda don't need to pay them $200 a year for. Especially since a value investor would buy and hold.

Re: Show HN: Invest systematically in deeply undervalued companies

#4

Post by jfengel » Thu, Sep 17, 2020, 5:33 PM UTC

maxharris wrote: post #2

We're in the era of disruptive innovation, where whole industries get gutted and replaced by the next big thing. For example, the iPhone disrupted a long tail of physical gadgets, from voice recorders to rulers, calendars and Rolodexes. Amazon disrupted retail and on-premise enterprise computing. Tesla is disrupting the automakers, energy companies, ride-sharing networks, etc., all while transitioning us to carbon-fr…

I've had the same effect: a few breakout companies have repeatedly unbalanced my portfolio that is otherwise index funds over the past 30 years. It's unclear whether I'm smart or just lucky; it's probably 10%/90%.

They do claim a significant win over S&P in back-casting, though I find it odd that their test cuts off in 2018.

Re: Show HN: Invest systematically in deeply undervalued companies

#5

Post by the__alchemist » Thu, Sep 17, 2020, 10:20 PM UTC

How can you be confident these companies are undervalued? I feel like if you really had a good system, you could capitalize heavily directly by taking aggressive options positions in them.

Making a claim like "these companies are undervalued" requires strong evidence, in a field so rife with bogus claims.

Re: Show HN: Invest systematically in deeply undervalued companies

#6

Post by wsieroci » Fri, Sep 18, 2020, 4:20 AM UTC

the__alchemist wrote: post #5

How can you be confident these companies are undervalued? I feel like if you really had a good system, you could capitalize heavily directly by taking aggressive options positions in them. Making a claim like "these companies are undervalued" requires strong evidence, in a field so rife with bogus claims.

Hello and thanks for asking such questions!

Everyone may have different definition for words: "undervalued company". What we mean by "undervalued company" was explained on our landing page.

Basically, for us, undervalued company is a company whose "operating income/ev" is the highest among some set of companies. So, "undervalued" for us means "undervalued" in relation to their financial statements, because it shows how much money given company is making from its operational activities in relation to how much money people would like to pay for it - so we get a multiplier (call it "gem" multiplier).

You can agree with this definition or not, this is up to you. However, what we (and this is well explained on our landing page) and lot of other people showed using historical data (for different time periods and countries) is that in the long term (many years) companies having higher "gem" multiplier have higher chance to outperform (for stock returns) companies having lower "gem" multiplier. That's it.

We are just inferring conclusions from history and we let you use such conclusions.

Please refer to our backtests included on the landing page and other analysis we refer to.

Additionally, I encourage you to watch this video from Google Talks explaining why using such method may work: https://www.youtube.com/watch?v=1r1vJZ80Z7I

Best regards, Wiktor