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“Successful investing is anticipating the anticipations of others.”

— John Maynard Keynes

The value game has changed

Self-proclaimed value investors tend to be a little holier-than-thou in their approach to investing.

Undeterred by a two-decade run of near-constant underperformance, value types still look down on growth types, who they dismiss as mere speculators.

They shouldn’t.

In many ways, growth investors are the real value investors — they do the fundamental work of finding companies that might grow earnings faster than the market expects.

And value investors are the real speculators — they do the speculative work of finding stocks that other investors might soon be buying.

True, value investors may spend all their time pouring over 10k filings and the minutiae of balance sheets, just like Warren Buffett does.

But unlike Buffett, what most of them are trying to do is “figure out what someone else is going to buy six months, a year, two years before they come to that conclusion,” as the long-time value investor David Einhorn recently explained it.

Aka, anticipating the anticipations of others.

It hasn’t been working as of late.

Einhorn contends that “markets are fundamentally broken” because the traditional value investor’s playbook of buying a hidden gem at 10x earnings and then selling at 15x earnings when others discover it…no longer works.

He blames this on the rise of passive investing, which he says causes stocks to diverge away from their real value (ie, cheap stocks get cheaper and dear stocks get dearer).

I don’t think that’s entirely correct —  Starbucks’ 25% one-day move last week suggests there’s still enough non-passive money to price-in stock-specific news and keep markets efficient. 

It is true that passive investing has lowered the amount of “alpha” available as a percentage of the market: By definition, one investor’s outperformance is another’s underperformance, so the more passive investing there is, the less scope there is for active investors to outperform.

But that just means there’s less money to be made in value trading.

“The competitors have effectively left the field,” according to Einhorn, which means there are fewer opportunities to play the traditional value game of “anticipating the anticipations of others.” 

Value investing, however, should be easier than ever. 

What’s the difference?

Value trading is what Einhorn used to do —“count[ing] on other investors to buy our things after us” — and value investing is what he does now: “We’re gonna have to get paid by the company.”

Getting paid by the company is the purest form of value investing.

Instead of buying stocks on 10x earnings in anticipation of another value investor soon paying 15x for them, Einhorn is buying them at 4x earnings in anticipation of the company itself paying any price for them.

“We’re buying them where they have huge buybacks…[with] 15, 20% type cash flow numbers,” he says. “If that cash is returned to us, we’re gonna do pretty well.” 

I don’t know where he finds stocks on 4x earnings and 15% free cash flow, but it’s working for him: Greenlight Capital returned 36.6% in 2022 and 22.1% in 2023, net of fees and expenses.

Could it work in crypto, too?

Don’t hate the player — or the game

The traditional crypto playbook of buying bitcoin first and then progressing out along the risk curve to ether, altcoins and, finally, memecoins hasn’t worked this time around. Bitcoin and memecoins had decent, but short-lived, rallies and everything in between has been mush. 

As a result, despairing crypto investors are being forced to consider the once unthinkable: value investing. 

With crypto activity generally up and token prices generally down, there are perhaps for the first time some tokens that might qualify as value. 

Not a lot, mind you — very few crypto projects collect more in fees than they pay out in tokens. 

But despite their scarcity, the token prices of the ones that do haven’t performed particularly well — which might be an opportunity?

The ones I see mentioned most frequently are MakerDAO’s MKR token, which trades on about 14x price-to-earnings, Lido’s LDO token on about 23x, and Aave’s AAVE on 42x (all according to Token Terminal).

By TradFi standards, those are not exactly deep-value earnings multiples. 

But just the fact that they have earnings multiples makes them value under crypto standards.

With earnings so scarce, surely those few tokens that have them will vastly outperform the many without?  

Crypto’s new value investors have been mostly disappointed thus far: AAVE and LDO tokens both remain near their all-time lows.

Maker’s MKR token has done better, however, currently trading up about 4x from its lows.  

That might be because MKR qualifies as a value investment (100% of excess earnings are used to buy the token), whereas AAVE and LDO are value trades (earnings are mostly retained, so you’ll need other investors to buy the token to make a return). 

Either strategy — investing or trading — can work, stocks can be “value” without ever returning earnings to shareholders (see: Berkshire), and most “investors” are still trying to anticipate the anticipations of others.

But to avoid disappointment, it’s important to know which game you’re playing — and that the value game has changed.

So don’t be disappointed if no one wants to pay 30x for the crypto token you just bought at the value price of 20x.

— Byron Gilliam

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