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Saravanan B

What is Value Investing? How to do it in India?

Warren Buffet, Benjamin Graham, Parag Parikh....

What do they have in common?

They are all value investors and practice the school of value investing.

What's value investing all about?

Value investing means buying stocks that are below their actual intrinsic value or what its really worth. 

Let me explain this with a simple real world example,

Steel Authority of India (SAIL), a government-run company that's manufacturing steel, was trading at a price of 20 INR in the month of March 2020. The company had a book value of 98.4 INR with reasonable return metrics. Due to lockdown, the stock was beaten down and investors were skeptical about the prospects of commodity companies. 

This negative sentiment brought the stock price to a level that was not seen in decades. 

It was a good opportunity for investors to accumulate the scrip at such extreme undervaluation.

Fast forward to 2021, the stock went up to 79 INR which was 4x from the march 2020 levels. At a price of 20 INR, the stock offered a huge margin of safety to investors to protect their downside risk and also a potential upside. 

Does this mean that we should buy companies that are trading below their book value?

The answer is 'no'. 

While looking for potential attractive scrips, an investor should look from multiple vantage points such as,

  • Long Term Earnings Potential 
  • Earnings Growth
  • Free Cash Flows
  • Management with high integrity
  • Low debt

These factors will help an investor for building conviction and also in sizing their positions. History has shown that, "every now and then there are certain localized or global triggers that causes corrections in the stock markets". Some notable examples include ILFS Crisis, COVID19, etc. 

During such times, investors are presented with attractive opportunities to invest in high quality companies run by excellent management team. 

As Warren Buffet puts it, "Be Greedy when others are fearful, be fearful when others are greedy". 

While looking for value stocks, investors also should remain cautious about Value Traps. Value traps are companies are trading cheap for a certain good reason. Some of the reasons include but limited to,

  • Poor Corporate Governance
  • Poor Long Term Prospects
  • Declining Industry Structure
  • Poor Return Ratios
  • High Debt
  • Fraudulent promoters
  • No Growth

Noteworthy examples include Sintex Industries, Unitech, etc. had a history of fraudulent activity due to which promoters looted minority shareholders leading to capital erosion.

The list is never ending and there is no shortage of fraudulent promoters in India.

Now that brings to a question,

Will Value Investing work in India? if yes, how to practice it?

Value investing works in India. It's just a matter of time as history has shown us.

The cardinal rule is to stick with high quality management with proven track record. This helps an investor to prevent permanent lose of capital. Return of capital is more important than return on capital.

Price is what you pay, value is what you get. 

A bit of research and conviction goes a long way in generating market beating returns.

With that thought in mind, an investor show buy what he knows and own what he knows. This mindset will help him to make use of lucrative opportunities that markets throw at him from time to time and exercise caution during overvalued markets

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