Over the course of past few years, I had the pleasure of interacting with many investors across India and the globe. Leaving aside value pretenders and speculators, each seems to have a peculiar definition of value investing. Some go only for cigarbutts, while some go for multi year growth stocks. I think that this is but natural – investing is a reflection of one’s attitude and experiences in life. These interactions have greatly enriched my knowledge base; and have helped me evolve my distinct investing style.
Value investing is not about low P/B or P/E stocks; it’s not just about ‘buy and hold’, but it’s a comprehensive investing philosophy. It recognizes the behavioral aspect of investing – that there are cycles of greed and fear. It recognizes the uncertainty inherent in business environment and our inability to predict the future. It recognizes that markets are a voting machine in the short term, and a weighing machine in the long term. It’s a method to increase the probability of return by lowering the risk in the investment.
Value investing is based on 4 fundamental principles –
1. Circle of Competence: Investing in what you know, and where you have an edge.
2. Mr. Market: Investing based on own conviction, and not according to moods of the market.
3. Margin of Safety: Buying securities at a steep discount to a conservative valuation of the underlying business.
4. Low cost structure: Developing a low cost strategy – avoiding costs related to trading, taxes, intermediary etc.
While these make intuitive sense, it takes a lot of discipline to practice this in the real world – with high market volatility, one click transactions, experts with advice at the drop of a hat, and continuous information overload…
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