TIP782: The Search for Mispriced Stocks w/ Clay Finck
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, Clay Finck reviews "Hidden Investment Treasures" by Daniel Gladiš, exploring how the rise of passive investing has created market inefficiencies for disciplined value investors to exploit. (02:37) The discussion examines how passive capital flows have weakened price discovery mechanisms, creating opportunities in overlooked market segments. (07:38)
- Core theme: The shift from active to passive investing has created unprecedented opportunities for value-focused investors who understand business fundamentals and can identify price-value disparities in neglected market areas.
Speakers
Clay Finck
Clay Finck is the host of The Investors Podcast's "We Study Billionaires" show and co-host of the Millennial Investing series. He focuses on value investing principles and has extensive experience analyzing investment strategies and interviewing successful investors, including notable conversations with professionals like Derek Pilecki who has compounded returns at 22% annually since 1981.
Daniel Gladiš
Daniel Gladiš is the founder and director of the Vltava Fund, a long-term fundamentally driven investment firm based in Europe. He has been an active stock investor since the early 1990s and started his fund in 2004, delivering 511% returns over sixteen years versus 333% for their global benchmark through year-end 2024.
Key Takeaways
Passive Investing Has Weakened Price Discovery
Over 50% of US market capital is now invested passively through index funds and ETFs, with only approximately 20% truly actively managed for value disparities. (02:37) This creates a situation where fewer investors actually analyze individual businesses, leading to wider gaps between price and intrinsic value. The irony is that passive investors rely on active investors for price discovery, but there are fewer active participants doing this critical work.
Focus on Share Cannibals Over Dividend Payers
Companies that intelligently repurchase shares below intrinsic value create more shareholder value than dividend-paying companies. (23:43) Share buybacks essentially represent an investment by the company into itself with returns typically higher than available alternatives. NVR exemplifies this perfectly, reducing shares outstanding by over 80% in thirty years while generating massive returns for remaining shareholders.
Capital Allocation Matters More Than Forecasting
The greatest risk for value destruction comes through poor acquisitions, particularly large ones paid for with stock rather than cash. (25:25) Companies with disciplined capital allocation, strong balance sheets, and management quality significantly reduce investment risk over time. Focus on businesses with high returns on invested capital that can reinvest at similar rates or return excess capital through intelligent buybacks.
Look for Hidden Treasures in Ignored Markets
The best investment opportunities often exist in market segments that passive flows avoid and retail investors ignore. (45:11) Examples include smaller financial companies, international markets like Japan, and medium-sized businesses that don't have large index weightings. These areas receive less attention, creating pricing inefficiencies for patient value investors.
Risk Management Through Understanding and Quality
True risk reduction comes from three pillars: staying within your circle of competence, avoiding permanent loss of capital through quality businesses with minimal debt, and paying fair prices with wide margins of safety. (62:14) The most sophisticated valuation models often lead to poorer investment outcomes - it's better to wait for situations where cheapness is blatantly obvious.
Statistics & Facts
- Research from 2019 suggests that more than 50% of total money managed in the US market is invested passively, with Gladiš estimating only around 20% can be regarded as actively managed capital seeking value disparities. (07:17)
- The Vltava Fund delivered returns of 511% over sixteen years leading up to year-end 2024, versus 333% for their global benchmark, demonstrating the potential for active value investing in today's environment. (02:32)
- NVR reduced their shares outstanding from over 15 million in 1995 to 2.8 million today - a decline of over 80% or about 5.4% per year, while generating $1.3 billion in free cash flow with only $26 million in CapEx. (35:20)
