~Written By Priyankar Sarkar
Value investing is a concept which was first coined by the towering intellect Ben Graham. He wore many hats viz, as an economist, investor, author and professor. His concept was fairly simple which states if an investor can buy an asset worth one rupee or less than that, the investor should be happy. If an asset is available at 50 paise to a rupee, the margin of safety is said to be higher compared to an asset selling for 70 paise to a rupee. The greater the margin of safety, the greater the chance of making lucrative returns in the equity markets.
The oracle of Omaha, Mr. Warren E. Buffett is the current mayor of Graham’s school of thought. Mr. Buffett has helped evolve the concept of value over a period of time.The sage of Omaha and his alter ego, Charlie Munger, suggest that we should buy great companies at reasonable prices and hold it till eternity! Other investors such as Philip Fischer, Sir John Templeton, Peter Lynch had different variations of value investing Lynch asks us to diversify whereas Buffett tells us to concentrate. There are different ways to go to heaven, choose the one which best suits you!
Almost all B-schools teach that more the risk, more the return. Value investing is quite the contradictory. It says lesser the risk, more the return since the first aim of a value investor is to cut down risk. Value investing also defies the efficient market hypothesis. Great investors have proved time and again that the financial markets are efficient most of the time but mispricing does exist. Some argue that since data and information are available to us instantly (thanks to the Internet) and hence the markets are always efficient. But who is processing that information? It is the human brain, which is irrational! Human beings “processing information” determine prices. Therefore, stock prices are not always rational. It is our job to figure out the discrepancy between price and intrinsic value. More the discrepancy, more the margin of safety!
However, I feel the concept of value investing has evolved over the years. What value are we referring to? Is it simply buying cheap assets? Is it prospective value, enduring value or is it valued based on history? These are some of the difficult questions which I often ponder on as a student of ‘Graham and Buffettsville’. The predictability of cash flows in a business also acts as a margin of safety thus providing value. When Dalal Street was in the back waters in the early 1990s, there was a stock which was then recently listed – Container Corporation of India Ltd. It is a PSU (Public Sector Undertaking). Most of the investors did not understand the business model of the company and therefore did not show any interest. There was hardly any liquidity in the market for this particular scrip. However, one of my acquaintances saw this as an opportunity and invested in the company. The rest is history. The stock has multiplied more than 50x over the last decade. This has taught me two lessons: liquidity per se has nothing to do with value and the fact that most of the investing world does not understand a company which I do in itself provides a margin of safety. This has been elucidated by Buffett over the last five decades. He has termed this as “circle of competence” – invest in businesses which you understand.
Experience is the best teacher! I vividly remember having picked a stock named Agro Tech Food Ltd in July 2008. Having discussed this stock with some of my friends (who are also die hard value investors), they were not convinced of this idea and they tried to dissuade me from buying the stock. Since I had conviction, I went ahead and bought the stock. The stock has given me a whooping return of almost 400% since then. It demonstrates that as value investors we may frown at each other’s stock picks but the underlying principal remains the same. As Rakesh Jhunjhunwala put it very aptly when he said that the two most difficult adjectives in English language are beauty in a girl and value in a stock – it differs from person to person!
To create wealth in the stock market, one needs to be a contrarian. Independent thinking is vital. To quote Buffett “A public opinion is no substitute for thought”. Along with keeping an open and independent mind, I would say let common sense prevail!
About Priyankar Sarkar:
Priyankar Sarkar is a passionate stock picker. He recently completed his MBA from SIBM-Bengaluru. His hobbies include reading, playing squash, chess, cricket, networking and gaining wordly wisdom. A keen follower of Hindustani Classical music. He has been an amateur investor for the last seven years in the Indian Capital Markets.