Trends Watch: Methodical & Systematic Approach to Value Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with David Kaiser, General Partner, Methodical Investments LLC.

What is your outlook for investing via methodical and systematic approaches to value investing?

The outlook is great. The keys to investing in a methodical and systematic approach are consistency and thus staying unbiased and unemotional in decision-making. This means whatever we feel, or think, is irrelevant. With the plethora of information in the world today, both macro- and micro-focused, investors are too often influenced by noise. By sticking to data (which is readily available now) methodical investors can stick to time-proven techniques to create returns. Furthermore, the scalability is there. Systematic approaches are only limited by the number of stocks and the size of the companies they invest in.

Where do you see the greatest opportunities and why?

The greatest opportunity for a methodical and systematic approach is in value investing and specifically mean reversion. Value investing is valuation based and does not rely on complex technical aspects. Similarly, mean reversion is a simple concept. Unbiased and consistent investing means focusing on valuation and operating metrics and not being distracted by other information or how we feel about that information.

What are the greatest challenges you face and why?

The greatest challenges we face are convincing people to get on board with a new(er) approach and that humans are heavily influenced by bias and emotion. This can be good, but when consistency is needed, and investors want to be informed and understand an approach, it can be detrimental. Today, computers are a key tool in both data and consistency. We couldn’t have done this 30 years ago, let alone when value investing really came into form. When Benjamin Graham was writing The Intelligent Investor, I doubt he could have imagined that a) financial data would be readily available anywhere and anytime and b) we could process that data in minutes. We are now able to apply a value approach and create a portfolio quickly. We can also track that portfolio and its metrics easily and in real-time. 

Often people trust other people over a consistent approach. Again, this can be because of emotion and bias. We are asking people to invest in an approach that we developed; but, ultimately, data drove our strategy creation and drives portfolio rebalancing and stock selection, sell rules, etc. Although this can be intuitive, it is also foreign to some people. It does not help that many value investors believe that qualitative investing is the best approach, or that many quantitative investors prefer complex strategies versus using the tools we have to be consistent rather than creative or exotic.

What keeps you up at night?

For our approach to work, valuation must matter. Not every day, or even every year, but over a longer period, mean reversion has to work. History has shown that it does. There are times of exuberance and disconnect from valuation, but ultimately investors care what a stock costs relative to its worth, not just thinking they can sell it for more. Our biggest fear is that a disconnect occurs over a long period of time. Is that realistic? Who knows? We are confident in our approach, but it does rely on history continuing to repeat itself. Someone once told me, “Change is the only constant in life.” In individual lives, I agree; in human history, I think it is less applicable, but that doesn’t make it impossible.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.