Is Value Investing Overrated?

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hidden value investing

Value investment or value investing has been a buzz word for a few years already. However, is value investing overrated? Are there too many people trying to find a value?

If everyone tries to achieve same things & puts same efforts toward it, the result achieved is always mediocre.

Going by above logic, if every fundamental analyst tries to find a value, will there be any value left for a discovery? This is the question has always raised questions. Being a value investor does not just mean you look to buy a 100 rs stock at 20% discount, and grab a chunk at 80 rs. This way of finding value will never work in India anymore.

If you think buying a stock at a discount to its value is the only way to value investing, then you will never discover any value

What majority of value investors miss?

In the race of finding value, often it is forgotten that the underlying value must benefit investors.

  1. For e.g. you have discovered a deep value in one of the companies that owns online retail stores, but being expense intensive, price usually trades at a discount.
  2. Or another example, you discovered that one of the textile giants owns a huge land bank & a cement plant. You would start putting together a valuation based on the land bank & cement plant, and you come to conclusion that after factoring in this newly discovered information, the company trades at a huge discount.

What is natural decision in both of the above examples? – Over 90% of the analyst would recommend a value discovery & give a buy recommendation on the stock. However, is it really going to benefit investors?

Market is always rational & gives fair value most of the times

Yes, market is always rational & gives fair value most of the times. I am not saying there is no possibility of value discovery. There is, but in highly traded, highly valued market state, you cannot expect undiscovered value lying around.

If a company is trading at deep discount, then market, perhaps, understands way more than investors do, and there is good enough reason for the discount.

It is essential that when you discover a value, you must ask your self – WHY? What is the reason there is an underlying value? Is it any of the following –

  • Business scalability
  • Deep desire of the company products making future cash flow & margins expand
  • Desperate need for the product making it one of the highly demanded companies

If you find value for any other reason, there is a right reason this discount exists, and there isn’t any value in real. Do not mistaken underlying discount for a value.

Value Unlocking – The missing part

While 90% of value investors think they are right in finding value, many of these value investors overlook the most important part – When will value unlock, passing benefits to investors?

If there is underlying value, similar to one we discussed in example 2 above, what is essential is to understand & attach a time-frame to value unlocking. If there is underlying value (a real one), then there must be clear visibility over its unlocking.

If underlying value in a value investing idea takes too long for value unlocking, then it isn’t worth investing!

It is as simple as it can get. So, whenever you embark over finding investment ideas based on a value investment method, ask yourself these questions –

  1. Why is there underlying discount over the fair value?
  2. What is the reason of this discount – Is it really because the idea is undiscovered?
  3. If there is a real value, how & when the unlocking will happen?
  4. What effect on bottom-line will this value unlocking will have?
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