Value Investing – Always in fashion

The basic tenet of value investing is tethered to the notion that investors frequently overpay stocks that are popular. Which is why Value investors underperform when markets are rallying, but when they start falling, value investing comes back into fashion. That being said, serious disciples of Value investing need to be more scientific and learn from the great value investors of the past. Benjamin Graham, widely regarded as the Father of Value Investing, was an investor and a professor at Columbia University. He was also Warren Buffet’s mentor and a staunch proponent of fundamental analysis for stock-picking. Graham developed the Margin of Safety approach which posited that the value of a stock is independent of its price. As such, a stock should be purchased when it is trading at a significant discount to its fundamental value and sold when it becomes overvalued. From that perspective, what one needs to focus on is not the absolute price of the stock but the price of a stock relative to its fundamental value.

Back to fundamentals

The fundamental tenet of value investing guides investors to buy undervalued stocks and sell overvalued stocks. The value of this approach has been underscored in the aftermath of several stock market crises. Over 1000 listed entities on the Bombay Stock Exchange (BSE) saw their stock prices at least double during the COVID-19 pandemic, between 2020-21; which is second only to the post-Global Financial Crises (GFC) period which saw the stock prices of over 1300 entities at least double. While fiscal stimulus and government interventions do play a large role in improving market sentiment across the globe, it nonetheless validates the importance placed upon identifying value over price.

Value vs growth

No narrative on investing styles is complete without addressing the growth vs value argument. Adherents of these approaches seem to operate as two parallel lines, never meeting at a common point. Growth investors primarily seek to invest in companies that offer strong earnings growth while value investors seek to invest in companies that are available at a discount to their fundamental value. The differentiating factors here is the valuation and the investment period. Relative to growth investing, value investors take lower risk, but they need to be invested for the longer term. Historically, value investing has created great wealth for investors across the globe. However, this process can take very long, during which one might run out of patience. It might make sense to allocate a portion of ones capital to a professional investment manager executing a Value investing mandate. This brings us to another interesting feature of value investing. It is usually a lonely road because it requires a contrarian approach, something we humans are not programmed to do. At an overarching level, value investing seeks to exploit the irrational behaviour of stock market participants. In the short-term, due to the whims and fancies of the market, value investing can lead to losses. However, in the long-term, sanity prevails and the true fundamental value of a stock emerges. Benjamin Graham once explained that in the short run, the market is like a voting machine but in the long run it’s like a weighing machine.