Are Regulators Regulating Value Investing Out of Existence?

Date Added: June 9, 2019 | Comments Off on Are Regulators Regulating Value Investing Out of Existence? | Filed under: Blog

Are regulators regulating Value Investing out of existence? Maybe!

Having a look at the regulatory framework I see many potential inconsistencies between the way that value investors look at certain aspects of investing and the way that the regulators seem to look at the same.

Here are some notable potential conflicts:

Value investors define risk as the permanent impairment of capital. Value investors are less concerned with “volatility” (the ups and downs of portfolio pricing) than they are with an impairment of the business value of their holdings. Their focus is in buying a security below its business value with the understanding that this provides them a “margin of safety” and the expectation that over time the “market” or competing corporate interests will recognize this discount and take advantage of it correcting the pricing anomaly (reversion to the mean). From the various Notices I read from the regulators, it seems that their definition of risk is far less clear, at least to me.

The regulators seem to want to attach the phrase “high risk” to smaller capitalization securities in general whereas value investors understand that the best pricing anomalies occur in securities which are less scrutinized and know that by considering and including all practical market capitalization securities in their portfolios they create a better chance of producing index beating performance. Market capitalization is not in and of itself an indication of the viability (or even the size) of a Company.

Regulators comment on concentration in portfolios as “potentially” arousing suitability concerns while value investors live by the credo that knowing a lot about a few things is better than not knowing much about a whole bunch of things (securities) and tend to run concentrated portfolios.

It may be that the future for many value investors unfolds the way it has for a number of U.S. hedge funds with an increasing number making the transition to “family office” and returned outside capital in order to free themselves from a variety of burdens, not the least of which is the potential for regulatory misinterpretation of long held principles passed down from the masters of value investing over a generation of superior investment results.


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