Capital Markets are always attracting investors and public for many reasons. From return to diversification to ownership of businesses. Accumulation of wealth, access of capital, analysis is very big subject but whenever I read about it, there are some topics which are getting highlights again and again. They are mainly Technology, Stock picking strategy and Of course, Warren Buffett. As investor, Student of Finance, CFA Candidate I know that your success in investing is depending upon the stocks which you are choosing, your asset allocation and the time you are hold the stocks. Yes. Timing the market may affect your return but it is not in your hand. I know many examples where undervalued stock was not moving despite the so called fundamentals are looking attractive.
Investors handled this problem with the strategy with which they Pick the stock. Value investing is one out of it. I think I don’t need to tell this to you. There is a joke among investors that If you ask any investor weather he is value investor or not. There will be only one answer. YES. It is easy to accept that you are Drug addict then accepting that you are not Value investor.
Recently I saw So many peoples claiming that they are VALUE INVESTOR. But after through analysis, I realizes that they must be lying.
Plus we are living in era of Algo Trading. Some people may claim that they are value investor. Basis? Algo trading?
But when you decided to check what WAS real Value Investing, you came to know about Two books. One is Intelligent Investors. Another is Security analysis. Oh yes. You can’t forget Warren Buffett and Charlie Munger. Specially Charlie, who in fact advocate for giving price for quality. One famous investor Mohnish Pabrai once explained difference between Charlie Munger and Ben Graham Style Investing. Ben Graham means Go To market search what is available at cheap. Buy that all. Whereas Charlie Munger style is Decide what you want to buy. Then go to market Everyday. Check at what Price it is available. Don’t buy unless it is available at right price. Always Keep sufficient cash in your wallet so when it is available at right price, you can buy it. You can call both of them real value investing.
So when I saw this tweet, it leverage my thoughts which was there since long time.
— CFA Institute® (@CFAinstitute) April 19, 2017
What is Value Investing.
In simple word, Value investing is nothing but Buy low, sell High.
When I am saying Low And High, I am comparing it with Intrinsic Value of the Stock. How to decided that? Different investors will came up with different intrinsic value even with same data and same situation, same fundamentals, same numbers. Value investor believed that market is wrongly valued the stock. So indirectly the investor is believing that market is not fully efficient. Investor is using Price to book ratio, Price to book ratio, debt to equity ratio, dividend yield etc.
Pretty easy? No. It is SUBJECTIVE. What is debt? Is defined benefit plan include in it? Long term debt? What are other liabilities? Is the Book value correct? Because in one survey around 45% management people accepted that either they know other company which having COOKED EARNINGS or part of their earnings are also cooked.
What are earnings? In one case, DLF, Indian Real Estate company hide one subsidiary and show their revenue as their own. Trump Casino and Hotel company in 1999 also made the same show.
In another way, you can manipulate earnings and Assets. But there are some investor who accept that Brand value also play key role. Simple example. Berkshire Hathaway, Coca cola, Toyota, Duracell, Google, Apple, Microsoft. The name itself can make or break. So if you are buying stocks, then you are paying for this also. Some value investor take this into account.
Price to Book ratio is very important but not always. It apply only Where assets are heavy on balance sheet. Like Software company, trading company. You can’t use this ratio.
Dividends. Important. Yes beyond doubt. But personally I look for ROCE, FCFE factors. One more things is if there is any lease on balance sheet and if yes, is it Capital Lease, Operating lease. Defined Benefit Plan and Defined contribution plan. Makes big differences.
Last factor. Most. Warren Buffett Coined this term and I am completely agreed. Best example Are Google and Amazon, (yes you read it right. AWS is very Large thing.)
So what is all new here in the old concept?
Some people claim that you can replicate Value investing with the help of algo trading.
Algo trading, Artificial Intelligence, BOTs… : Technology For Value Investing.
Some of the terms are not even new for investing world. I mean you can set up screen based investing with BOT or Algo trading. Though not many investors will follow but I believe that like many people now going bullish on IT like Apple, IBM. Someday artificial Intelligence will also enter into market. Or maybe it is already here. I am already watching some applications for advising investors where to invest. Interesting is even if you give your age as 90, it will still give you large chunk as Equity. Don’t tell me Warren and Charlie are invested in equity. They are different.
One very funny possibility for this is personal preference. Like BOTs Can’t understand that Islamic Finance is different. Tests and preference of Roman Catholic is different. A BOT may give BoAML, SBI or other Banking stocks. It may advice Stock of Lockheed Martin to Impact Investing portfolio. Think about it, A BOT advising Stock of some Contraceptive Manufacturing Company to Defined Benefit Plan of Some Church. BOT advising some Totally unethical company like Yes bank to me or Advising tobacco stock for me or Some other people who don’t like it.
In 2016, many investors in many different market, complaints that fund manager is not taking right steps. He is loosing their hard earned money. When AMC or Fund house told them that the whole fund was handle by BOT for REDUCING COST, that’s why BOT was selling stock when whole markets was going down. Many of them shocked.
But what If artificial intelligence entered into market…
Alexa, Siri, cortana… They are not new for us. What if they will start giving you advise about Stock? What If your device and other device will contact with each other and take care about fundamental of stock and technical analysis? Right now in India there is ARC engine from Angel Broking is near this. My question is will value investing still survive against it? Or going against all this will make a new identity for Contra Investing?
Goldman Sachs on "The Death of Value Investing?" pic.twitter.com/Xg0BRFzvGm
— Robin Wigglesworth (@RobinWigg) June 8, 2017
Reader Rating: 0 Votes