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

Jeevan Labh

 The Life Insurance Corporation of India has announced Jeevan Labh , its limited-premium, with-profits endowment plan .   It comes with a premium paying terms of 10, 15 and 16 years for corresponding policy tenures of 16, 21, and 25 years respectively. ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saving Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) Fund 9. Religare Tax Plan 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further information contact Prajna Capital on 94 83...

Liquidity Adjustment Facility

Liquidity adjustment facility (LAF) is a money market tool used by the central bank of a country (in India it is the Reserve Bank of India ), to infuse funds into the country's banking system when liquidity dries up. Again, in case there is excess liquidity, the central bank uses some tools to help banks manage their surplus liquidity. Usually the RBI uses the repurchase facility (called Repo ) to give short-term loans to banks to meet their temporary liquidity shortage. On the other, hand RBI uses reverse repo facility to help banks park their excess liquidity with it. Banks usually use various securities, which are approved by the RBI, as collateral when they take money from the RBI to meet their short term liquidity requirement     Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara...

Tata Dynamic Bond Fund exit load

Tata Mutual Fund has revised the exit load of Tata Dynamic Bond Fund to 0.50 per cent if redeemed on or before 180 days. Currently, there is no exit load. The effective date is March 25, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a missed...

Home Loans that Save Time and Money

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   Home Loans that Save Time and Money  You can deposit surplus money in these special home loan schemes and reduce your loan tenure significantly in the process   IF YOU are thinking of taking a home loan and are confident of generating a surplus every month after paying the regular EMI, you can opt for loan schemes with an overdraft facility that not only cut interest payments significantly, but also reduce the loan tenure. State Bank of India, Standard Chartered Bank, HSBC and Central Bank of India offer such home loan products. Under the scheme, as a home loan borrower, you can deposit any surplus that you have into the home loan account, though you retain the option of withdrawing the sum, if required. By depositing an amount higher than your EMI , you save on interest outgo. The principal amoun...

Tata Mutual Fund changes its in Benchmark Indices for few funds

Tata Mutual Fund has approved the changes in benchmark indices of seven funds, with effect from August 01, 2011. The schemes would now be benchmarked against the following indices:   Scheme Names    Existing Benchmark    Proposed Banchmark Tata Dividend Yield Fund   BSE Sensex   S&P CNX 500 Index Tata Equity Opportunites Fund   BSE Sensex   BSE 200 Index Tata Growth Fund   BSE Sensex   CNX Midcap Index Tata Indo Global Infrastructure Fund   BSE Sensex / MSCI World   S&P CNX 500 Index / MSCI World Tata Infrastrucute Fund   BSE Sensex   S&P CNX 500 Index Tata Infrastrucute Tax Saving Fund   BSE Sensex   S&P CNX 500 Index Tata Life Sciences & Technology Fund   BSE Sensex   S&P CNX 500 Index         -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Inve...
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