The Concept of Value Investing
It is the season of festive sales, and the prospect of clinching a value deal makes us look for the discounts available during the sale season. But whether you buy a product on MRP or discount, you are going to get the same product with the same features. As such, the value of the product rendered to you remains the same. This forms the core of what value investing, which is to look for bargain deals. In simple words, value investing is an investment strategy to invest in stocks trading at discounted valuations as compared to the underlying fundamentals.
For example, you analyse a company and derive a fair valuation of Rs. 100 for the stock, based on its financial position, brand value, recent operating performance and growth potential. However, the stock is trading in the equity markets at Rs. 60. Considering the stock market dynamics, one of the two is wrong in evaluating the stock – the markets, which value the stock at Rs. 60, or you, valuing the stock at Rs. 100. Value investing is all about exploring and spotting such investment opportunities where the markets ignore the fair value and hence, allow the stock to trade at lower valuations.
Value Investing – Unearthing the Fair Value
Value investing requires rich analysis by the investor to spot the deeply-discounted stocks available as well as the patience for the stock to realise its fair value steadily. Value investors often believe in investing in fundamentally sound companies, wherein they may invest and then may stay relaxed while the markets unleash the true potential of that stock. While equity markets may be volatile, the short-term movements in the stock price may not impact you much, if you believe in the underlying fundamentals of the Company.
The Underlying Hypothesis - Price is not the true reflection of Business Fundamentals
The price of the stock in the stock markets is generally perceived as the reflection of the underlying business valuation. However, value investing recognises the fact that the markets tend to overreact on the news and events, and the true potential of the stock is bound to be unearthed sooner or later. One lousy news may pull the stock price down significantly, even while it might not be affecting the business fundamentals as perceived. Such over-reactive events are an excellent opportunity for the value investors to invest in quality companies at better prices.
Know your Stock
Value investing is all about digging value stocks with long term investment horizon. However, spotting such investment opportunities may be a tough task, given the crowded space of equity markets. As such, one must keep analysing different companies fundamentally to gauge the future growth potential and the potential reasons why the stock price is trading low. Once you get an answer to this question, choosing the next stock for your portfolio will be more easier. If there was a race between the tortoise and the hare reflecting different investing strategies , value investors tend to take the role of the tortoise, wherein slow and steady wins the race. A famous Chinese proverb reads, “the best time to plant a tree was 20 years back; the next best time is right now.”
Let your value investing strategy plant the tree for your prosperous financial future right away. Be a bargain-hunter and equip yourself with the potential of better returns over the long term.