Skip to main content

Benjamin Graham’s value investing approach in Indian contest

   THE MARKETS have always had a fancy for companies on a high-growth path, giving them a premium valuation over others. Most of the investors, too, tend to follow this rule — put your money where the growth is. After all, the logic of growth — as the profits grow, so will the stock value — is so easy to understand.


   Although this popular strategy appears logical and successful, it is the contrasting investment approach of 'value investing' that continues to score over 'growth investing' consistently in the long run. Various empirical studies in different time periods and on various sets of companies have shown that value-investing — investing in companies with low P/E, low P/BV, high dividend yield — can give an investor sustained better returns over a period of time.


   The primary reason investment researchers give for this phenomenon is related to the tendency of corporate earnings growth to move towards its mean or, in other words, the sustainable rate of growth. Although growth stocks initially experience higher growth rates than value stocks, the growth rates of both quickly revert towards the mean. Both these high-growth as well as low-growth phases are temporary. But overoptimism for high-growth stocks and over pessimism for others is a universal investor tendency. According to a collaborative research work of three experts, Lakonishok, Schleifer and Vishny, published in 1994, investors put excessive weight on the recent past in attempting to predict the future. This is a common judgement error in psychological experiments and explains investor preference for glamour stocks. In the process, one of the key principles of investing is violated — good companies are not always good investments. This common investor tendency practically ensures that value investing will continue to make superior returns in a longer timeframe.


   To explain the concept in simple words, value investing is buying a stock before its growth cycle begins, while growth investing is when you enter a stock after the growth momentum becomes visible. As an investor goes on to invest in such 'glamour stocks', where the market has already discovered the growth prospects, she inevitably ends up paying a premium towards the higher future earnings. Obviously, unless you are very early to catch the trend, the growth investing approach can land you with high value stocks in which most of the upside potential is already built in the prices.


   In this context, it would be interesting to look at auto component companies such as Munjal Showa and Ahmednagar Forgings. Both these companies posted higher profits in the December '09 quarter and are well-positioned to benefit from a sustained recovery in the automobile industry. Currently, both the companies are trading only slightly above their FY09 book values. Considering the profits made during the year so far, both scrips would be trading below their respective FY10 book values.


   The key, therefore, lies in investing in companies that are trading significantly below their intrinsic value. For example, caustic soda manufacturer Aditya Birla Chemicals or the security solutions firm Micro Technologies are trading at a 30% discount to their respective FY09 book values. Both the companies were hit badly by the economic slowdown last year and are now on a recovery path. The chemical company is also expanding capacities eyeing capacity addition in the aluminium industry next year.


   When working with a large number of companies, it makes sense to use price-to-book value (P/BV) as a proxy for intrinsic value to avoid the tedious and subjective calculations of earnings projection and cash flow discounting. In fact, the study published by Bauman, Conover, and Miller in 1998, which studied 2,800 stocks in 21 countries over a 10-year time period, concluded that price-tobook ratio is a better indicator of value than priceto-earnings, price-to-cash flows or dividend yields.


   The value investing approach shuns the conventional wisdom that higher returns are associated with higher risk by focussing primarily on eliminating the risk. 'Limit the downside and let the upside take care of itself' is, in fact, one of the most fundamental principles of the value investing approach.


   This approach has a number of key benefits. First, as mentioned above, it limits the downside risk — or the risk of a significant erosion in investment value if the market falls. At a low market price, these companies have high dividend yields, which adds to the margin of safety. For example, companies such as SRF, Nippo Batteries, Munjal Showa, Cosmo Films and Shipping Corporation of India are available at dividend yields of around 4-5%.


   Many of these companies including GNFC, Shipping Corporation, India Cements and OCL India are investing significantly in their respective businesses. The expanded asset base is likely to bring in additional revenues and profits in the years to come. Most importantly, such companies can witness a quick run-up as soon as their present problems go away or sentiments improve.


   With the benchmark Sensex within striking distance of 17,700 on Friday — a peak briefly touched in January after nearly two years — and not appearing inexpensive at a P/E of 21.4, we believe investors should take a break and look out whether any value buys are around. ET Intelligence Group brings you a list of such companies that can be the starting point for the search of value.


   The primary criterion used for selecting the stocks was the price-to-book value, which was capped at 1.25. Further, the list was pruned to ensure companies with a track record of profits, positive cash flows from operations and dividends were included. Then the highly indebted companies and those earning too low a return on employed capital were excluded. Finally, companies in a perpetual downturn or with known dubious management record were eliminated.


   All said and done, investors must do their homework before staking out money in the stock market. As Warren Buffett, the great Oracle of Omaha, who has played an instrumental role in popularising the value investing approach, puts it, "Never invest in a business you cannot understand."

Popular posts from this blog

BHIM App

What is BHIM? BHIM stands for Bharat Interface for Money , which is an easy way of transferring money from one bank account to an other via a smartphone using the Unified Payments Interface (UPI) platform . It is an instant payments application meant for sending money as well as requesting for payments. How is it different from UPI? BHIM is no different than UPI. But in the case of BHIM, customers don't have to download mobile applications of multiple banks, instead a single BHIM app downloaded from Android Play Store is sufficient. Other than that, payments can be made through a virtual payments ID or through account number and IFS code, same as UPI. What you need to use BHIM? BHIM can be used across an droid smartphones with version 4.0 and above, also it will be made available on iPhones and Windows smartphones very soon. Further, for feature phone users they need to use the USSD feature by dial ing *99#. Why was the need for BHIM felt when UPI is already in place? With various...

NPS for Tax Saving

The NPS is a great way to save tax if you don't mind locking in your money till you retire. Till last year, the taxability of the NPS was a big issue. But last year's Budget changed the rules and made 40% of the corpus tax free. The PFRDA wants that the balance 60% to be exempt from tax as well. The emphasis is on increasing pension coverage. So, allowing EEE status (to NPS ) is our major demand (in the Budget NPS is especially useful for investors who may have exhausted the `1.5 lakh investment limit under Section 80C but want to save more.   Another way the NPS can cut tax is by rejigging the salary.If a company deposits up to 10% of the basic salary of an employee in the NPS under Section 80CCD(2d), the amount will be tax free. Turn to page 28 to see how much tax this can save. However, the take-home pay of the employee will come down. Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 10 Tax...

Retirement planning from a long-term perspective

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds     `HOW green was my valley'. This title comes from a movie I had watched many years ago. A little boy's journey into adulthood and the story of a Welsh valley's turn of-the-century descent from pristine paradise to despoiled coal mining.   I thought of the title because it is comparatively reflective of a person's life ­ the glorious years when he is earning and the sun down years when he is not having his regular job and, hence, his living standards comes down. The reason is a combination of things. Inflation of food items, transport, increase in health related costs in the later years of life and increase in expenses in almost all basic amenities of life. In India, the social security system is almost non-existent. In some states, wherever it is available, the scales of benefits are extremely modest...

SBI Long Term Advantage Fund Series

Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 10 Tax Saver Mutual Funds for 2017 - 2018 Best 10 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. ICICI Prudential Long Term Equity Fund 5. Birla Sun Life Tax Relief 96 6. Franklin India TaxShield  7. Reliance Tax Saver (ELSS) Fund 8. BNP Paribas Long Term Equity Fund 9. Axis Tax Saver Fund 10. Birla Sun Life Tax Plan Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave your comment with mail ID and we will answer them OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com OR Call us on 94 8300 8300  

Investment Strategy - What is Sector Rotation Theory?

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   The economy goes through cycles : it expands for a few years and then contracts. Study of historical data suggests that different sectors tend to perform well on the stock markets during different stages of the economic cycle. While history never repeats itself exactly, some broad patterns tend to recur. Investors can take advantage of the sector rotation theory to move their money from those sectors that have seen their best times to those that are likely to do well in future.   The person who developed the sector rotation theory is Sam Stovall, chief investment strategist at Standard & Poor's. He developed this theory by studying data on economic cycles going as far back as 1854 provided by the National Bureau of Economic Research ( NBER ) of the US.   When trying to correlate stock-market perfor...
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