Skip to main content

Value Investing



WHAT IS VALUE INVESTING?

Value investing is an investment paradigm that Benjamin Graham & David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 book 'Security Analysis'. In a very simple sense, value investing is buying something that is less than its worth. The stocks may quote below the intrinsic value either due to overall pessimism in the market or due to prevailing poor sentiment about the business or the company.


Buffett improvised his teacher — Benjamin Graham — and delivered astonishing performance for his shareholders. His key to success is buying a business that comes with high entry barriers. He looks out to own the pricing power for the products and services of a business that offers high incremental return ratios, is managed by a good management with rational capital allocation capability and still quotes at a reasonable price. He is a value shopper.

HOW TO MAKE VALUE PICKS?

There are broadly three ways a value investor goes about investing. First is by following the old school of thought which focuses extensively on numbers. Some of the popular filters include low price-to-earnings ratio, companies quoting below cash balances, low market cap-to-sales ratio. This is where cigar butt investing comes in. Investors buy into a company purely because it is cheap, hoping that the market in due course of time will correct the 'valuation mistake' and reward the investor for spotting it early. The second, and more polished version, is buying growth at a reasonable price. This method not only relies on the existing state of business and undervaluation but also factors in the possible future growth. "Investors will not only look at under-valued securities but also consider qualitative factors such as balance sheet strength, management quality and corporate governance, before investing," says Atul Kumar, fund manager, Quantum Mutual Fund. Seasoned investors also look at special situations such as merger arbitrage and open offers announced buy companies to earn profits with a pre-determined risk-reward ratio.

WALKING THE TIGHT ROPE

While the value approach to investing appears the easiest to preach, it is difficult to put into practice. Investors who opt for value investing must have patience to reap the rewards. At times, the businesses may be available cheap, because there are problems in the short term. Hence, you should have a longer time frame of at least 2-3 years, when you opt for this style of investing. There may be times, when the company's situation could deteriorate further from where you bought it. In such times, investors must have the ability to stand alone.

 


A fair degree of scepticism, a non-conformist stand and ability to search for value are essential ingredients for a successful value investor. The investor must have a lot of humility and should develop the ability to think about many scenarios with probabilities attached to it, he adds. Such a mindset is just the ticket to enter the value investors' club.

RISK FACTORS

Underperformance vis-à-vis the market for a long period of time is a big risk. Many people cannot stick to the strategy for very long period time and switch over to momentum chasing, which can be harmful. It is important for investors to have patience when buying value stocks, and should not be discouraged by stocks not doing well in the short term. The strategy must be judged over a very long period of time. Landing in a value trap is a risk where an investor ends up buying into a bad business trading at a cheap price. "Before committing your money you have to take some extra efforts to understand the business to avoid getting into a value trap. Those who run a portfolio of multiple value ideas simultaneously can ensure that the impact of value trap on the portfolio remains minimal.


Walking the tight rope while analysing the opportunities on the one hand and maintaining a value investors' mindset is not possible for most retail investors. Be it the inability to get into the value investing mode or lack of time to devote to the discipline forces to seek professional help.

CAN MUTUAL FUNDS HELP?

There are very few pure value funds in India. But still there are some options in the market that look at buying growth at reasonable prices. If you can take a long term view on Indian equities, say three to five years, such funds can be good wealth creators for you. A lot of fund managers follow a blended approach rather than following pure value investing. Of course, it is difficult for fund managers to emulate Warren Buffett's style, since fund managers have to walk the tight rope of value investing and at the same time have to be ready for redemption pressure arising out of short term underperformance. It is the daily NAV pressure that makes many stay away from value investing. In addition, investors are always comparing returns from mutual funds with benchmark indices, and fund managers constantly have to invest in sync with the index. So, if investors wish to use the value investing style, they should have a different temperament. To start with take a long-term view of at least three years and have lot of patience.


There are financial planners who feel that it is not necessary to go with any particular style. In an economy growing at 8-9%, it would make more sense to chase growth than value. Based on a client's profile, he recommends a mix of large-cap, mid-cap or small-cap funds. Some others feel value investing is for conservative investors with a low-risk profile.



 

Popular posts from this blog

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now