Thursday, April 17, 2014

Value Investors Club

Value Investors Club (VIC) is a semi-private website where people share investment ideas. Becoming a member of the club requires submitting an application and then, if the application is accepted, writing up two or more ideas per year. People whose applications are rejected, or who don't apply, can view the site with a 45-day lag.

VIC began in 2000. I learned about it in 2002, when Whitney Tilson mentioned it in one of his Motley Fool columns, and since then I've been a regular reader of the site. At this point VIC has a database of thousands of investment write-ups, which is great for 1) testing which investments and investing strategies have and haven't done well over time and 2) seeing what people thought about a particular investment at the time of the write-up, which helps against hindsight bias.

VIC's demographics have changed a lot over the past 14 years. When the site started, it was mostly individual investors. Now it's mostly hedge-fund analysts and portfolio managers. As the membership has become more professional, the write-ups have grown longer and more detailed, although that's not necessarily an improvement: In my experience, the greater detail often gives a false sense of precision. Also, while the pros may be more sophisticated, their thinking seems narrow in a lot of ways. Some of them seem to live in a bubble in metropolitan NYC.

When the stock market becomes overvalued, many VIC members respond by lowering their standards. Sometimes they buy junkier stocks than they normally would: instead of buying stocks that trade at 6x earnings, they'll buy stocks that trade at 6x earnings pro forma for a turnaround that probably won't happen. Sometimes they talk themselves into paying higher multiples than they normally would. One write-up from last year begins: "While SODA is not the type of traditional low multiple value idea I would normally post on VIC, I am finding a dearth of traditional deep value type ideas with the market at all time highs."

Members rate the write-ups that are posted on VIC, and certain types of write-ups consistently get higher ratings than others. Contrary to Buffett's famous quote that "I'd rather jump over a one-foot hurdle than a six-foot hurdle," VICers tend to rate ideas better if they're more complex or novel. Write-ups that have colorful anecdotes about the CEO or the company's history also get better ratings, even though those things don't really matter.

Write-ups recommending a short sale tend to get higher ratings, especially recommendations to short overvalued growth stocks. I'm primarily a short-seller, and in my experience these are the absolute worst stocks to short.

Ultimately, VIC is kind of paradoxical: it's a great research tool, and there's a lot of intelligent commentary on specific write-ups, but the site's overall sentiment is often a contrary indicator.

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