Value Investing – An Underdog Strategy

"Price is what you pay; value is what you get. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." says Warren Buffett explaining his penchant for value based investing. Warren Buffett is an ardent follower of value investing and most of his investment strategies are rooted to this form of investment. The concept of value investing was introduced by Benjamin Graham and David Dodd in 1928, which was later discussed in their book on “Security Analysis”.

What is value based Investing? 

Value investment is identifying stocks that look under priced based on some form of fundamental analysis.  It may include identifying stocks that are trading currently at discounts to their book value, stocks that give good dividend yields, have low Price-to-Earnings multiples or have low Price-to-Book ratios. It definitely doesn’t mean buying cheap stocks. Buffett simply described value investing as buying securities that are trading below their intrinsic value. Value investment is dependent on quantitative data. It is more or less more acceptable as it draws trends from historical data.

How do we get our stock pick for value based investment?

Some of key pointers to look for a potential value stock are as follows:

·         Stable and predictable cash flows with limited risk

·         Low valuation at discounted future cash flows

·         High entry  barriers in industry

·         Strong historical performance

·         Low price ratios compared to industry standards

Why do people avoid value investing?

Basically value investing is a result of investors becoming over negative about any particular stock. It is a situation when the market players’ oversize the problem /risks attached to any security and refuse to believe it to be a good investment. People don’t want to buy these stocks that don’t have attractive tags or command low recognition in markets. Psychologically they find it more risky than investing in much stronger valuation and popular companies.

People like to invest in companies that have done well in the past in both stock market and have strong financial performance. But one must remember that these anticipated good performances come with high valuations leading to high fancy prices. These fancy prices then lead to terrible losses.

Thus, we can say identifying value stocks is difficult as most of investors are against it. It is like taking a contrarian approach to current tide. Money needs time to grow and although, value investing might not sound an exciting investment opportunity, it is the right approach to build wealth.

“Investing is for making your money grow. It is not for excitement. Value investing may sound boring but that is the only way you grow your wealth in stock markets.” Parag Parikh, PPFAS Mutual Fund.