Counter Intuition from Deep Value

Deep Value excerpts of interest on counter intuition:
Excerpt 3:


I'm uploaded these quotes as I find most people including myself often mistake and automatically correlate company business performance to their stock price performance.

Excerpt 1:
"As Graham theorized, and Mauboussin has demonstrated, it is the rare company that does not return to the pack. In most cases competition and other corrective forces work on the highly profitable business to push its returns back to the mean. The better bet is the counterintuitive one: deep undervaluation anticipating mean reversion. It’s Warren Buffett in his American Express investment, rather than his See’s Candy investment. An appreciation of mean reversion is critical to value investment."

Excerpt 2:
"These results establish two propositions. First, valuation is more important than growth in constructing portfolios. Cheap, low-growth portfolios  systematically outperform expensive, high-growth portfolios, and by wide margins. The second, more counterintuitive finding is that, even in the value portfolios, high growth leads to underperformance and low or no growth leads to outperformance. This is a fascinating finding. Intuitively, we are attracted to high growth and would assume that high-growth value stocks are high-quality stocks available at a bargain price. The data show, however, that the low- or no-growth value stocks are the better bet. It seems that the uglier the stock, the better the return, even when the valuations are comparable."

Excerpt 3:
"It wasn’t an improvement in the fundamental performance of these unexcellent companies that led to the market price outperformance. Like Peters’ excellent companies, the operating performance of the unexcellent companies declined on average, although not to the same degree as the excellent companies. In the unexcellent companies, 67 percent experienced a decline in asset growth rates, 51 percent had lower average returns on capital, 51 percent had lower average returns on equity, and 56 percent had lower average returns on sales. Strikingly, examined at the end of the five-year period, Peters’ excellent companies were still more attractive on a fundamental basis than Clayman’s unexcellent companies. What stands out, however, is that only three of the unexcellent companies had a decline in the ratio of price-to-book value, which means that the market revalued up 36 of 39 companies. This amounted to an average revaluation across the portfolio of 58 percent, a clear example of reversion to the mean."