Patience Holds The Key In Value Investing

R. C. RAWAL B.Com, LL.B , F.C.A, Chartered Accountant
Director, Imperial International Pvt Ltd

When it comes to investing, there are a variety of investment styles such as growth, momentum, value, contra approach, to name a few. Of these, globally renowned investors such as Warren Buffet, Charlie Munger and the likes are known for their value investing approach. Warren Buffett, in his 2008 Berkshire Hathaway Chairman’s Letter, mentions, “Long ago, Benjamin Graham taught me that price is what you pay; value is what you get. Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down.”

This forms the heart of the value investing concept. Under the ‘value’ investment style, an investor picks up a stock that is not only just trading below the intrinsic value but also offers long-term potential on the basis of expected cash flow and sound dividend pay-out capabilities. Experts believe that the liquidity-fuelled rally is not tenable for the long-term and distended valuation could regress to the mean level. Furthermore, valuation gap between growth stocks and value stocks is at its highest in the last two decades, thereby proving the relevance of value-based funds.

To elaborate further, it is a known fact that stock markets tend to overreact at times during certain developments. At such times, even fundamentally strong companies tend to witness sharp corrections. As a result, such companies become undervalued based on their long-term growth potential. Benjamin Graham, who is known as the ‘Father of Value Investing’, believes a value investor is the one that buys a stock of a company when its price is undervalued. Buying at such times also ensures that investors have a comfortable margin of safety. Because of these factors, various studies over time have shown conclusively that value stocks perform better than growth stocks in the long term.

Advantages

The biggest advantage is that value investing ensures that one is investing in a name that is presently under-priced but will bounce back faster when the tide turns. One needn’t go very far in market history to see this play out. The most recent example was in March 2020. Owing to the corona virus pandemic, stock markets across the globe corrected sharply and Indian markets too lost ground. However, recovery soon followed and in this phase it is the value stocks which led the rally.

The other advantage is that it is a well-proven strategy with a documented history of at least a century. So, one needn’t worry regarding whether the value approach really works or not. This brings us to the next advantage. Value investing when done right opens the door to benefitting from exponential gains. When the market discovers an undervalued stock and recognises its true potential, the upward price movement seen in such a stock tends to be very sharp.

The Timing

As the market recovered from March lows, it was not quality but value which led the recovery. In the times ahead, there is a good probability that value will make a strong comeback, as quality fatigue sets in. Also, there are several pockets in the markets which, even though are expensive in general, provide a good opportunity for investments with their attractive valuations, healthy dividend yields and earnings comfort.

Value Funds

However, spotting such opportunities for a retail investor may prove to be a tough and time-consuming task. Furthermore, one may not have the resources to find out the true value of a stock. This is where mutual funds come to the rescue. Investors who are looking for such opportunities can opt for the value category schemes where one gets an opportunity to own stocks which are thoroughly vetted by market experts, but are available at a bargain.

The writer is a Director, Imperial International Pvt Ltd
Email: impinternational@gmail.com  
Website: www.imperialmoney.com