Arun Sankar, Director, Divine Wealth Management
Benjamin Graham, an American economist, investor, and professor, founded a new method of investing in stocks known as ‘Value Investing’ in the 1920s. He is known as the “Father of Value Investing”, and his methods ring true to investors till date. This ingenious approach to investment in securities allowed him to develop substantial wealth while minimizing his risks by merely analyzing companies with deft precision.
Value investing is all about going against the grain, especially in terms of popular opinion, while deploying money in the stock market. It is about finding value in stocks which others have dismissed, and in businesses which are undervalued but are a good long-term bet.
Value investors actively try to identify stocks which are traded for less than their intrinsic or book value and make profits based on the market’s un-productivity. It is one of the few tactics that Warren Buffet swears by. There have been multiple analyses that showcase value stocks to outperform growth stocks in the long run.
There are two important principles used when adopting the value investing method for stock selection – Intrinsic Value and Margin of Safety. The stocks which form a part of the value portfolio are those which are available at a discount to their intrinsic values.
The second important principle is to have a high Margin of Safety. It indicates the difference between intrinsic value of stock and market value. The higher the difference, greater is the margin of safety.
There are various ways in which value stocks can be identified. They can be identified by financial metrics such as the Price to Book Value (P/B) or Price to Earnings (P/E) ratio, to name a few.
Interestingly, studies have shown that famous value investors have underperformed the markets during roughly one-third of their investing career. This under-performance to achieve long-term outperformance is a critical part of value investing. The reason for the temporary under performance is that the value picks bought, are perceived in a negative light initially owing to various perceptions and hence undervalued. Most of the times, markets discover the true value of the stock, while at times, it takes longer than expected. This can lead to significant periods of underperformance in value picks. It has been observed in the past that investing in such potential ideas when they are undervalued, leads to better alpha generation.
So, as we know, for much of the past two years, equity investors chased momentum, which has led to skewed market growth. However, this changed when the markets witnessed a sharp correction due to the Corona virus pandemic. And as investors pondered over the next best strategy to grow wealth, value investment emerged to the fore once again.
Value-oriented mutual funds have made a strong comeback amid the ongoing uncertainty in the market and ICICI Prudential Value Discovery Fund made a comeback and topped the charts with 20.33% on a YTD basis. The Fund has outperformed the peer group average by 8.42% on a 9 month return basis. Since the outbreak of the pandemic, this portfolio composition has aided the fund in its stellar performance.
