Article on Share Market

                                                             Value Investing

                                                                                                           Prasanna Sabat

                                      

Value investing is an investment strategy for investing in stocks or equity. This philosophy can teach you few more points which can be used in your daily life. The scope of the discipline is very large. This is a huge area to write an introduction concisely. The objective of this article is to churn few drops from the ocean and a casual read for a novice investor. 

This is a concept or strategy followed by some of the legendary investors who have made their fortune from the stock market. I am trying to explain the same from the knowledge by reading those investment philosophies from their books or other sources. This is something like training your mind and temperament in that direction. There is no shortcut or formula. If you are looking for some tips on some equity or fund or sector, pick for your portfolio; chuck it and move on. 

Suppose you want to buy a cow what will you do? Look out for all the places or people selling a cow, right! When you are buying the cow you must have a price in mind depending on your criteria. Even if you know that a particular variety of cow (C1) giving x liters of milk per day costs you a thousand rupees you will definitely try to do some bargain. You will look out for someone who is buying in distress (like he has urgent need of money and selling in lower price). You will check the health of the cow, how much you have to feed and how was her past milk output etc etc. 

After finally buying the cow you must have thought how you are going to deal with her. Like just milk her for the season and dispose or take good care of her and also milking her for next generation. But whatever it may be you can give me ten good points on why you bought her. You will never buy a cow just because everybody is buying. You will never make a queue to buy the cow without checking the price tag or without checking its worthiness. You will never pay double the price of the cow thinking you will again sell or milk her to its triple price. Just compare this with your experience with buying a stock in your last few transactions. Can you write ten points on why you owned that share? Do you know the right price of that share or have you bought it less than that or more than that…! Now you must have got some idea on what is value investing. It’s simple but not easy. This is the concept followed by people hundred years before and still this holds good even today.

Don’t gamble, buy ownership. Don’t make money, create wealth. Remove fear and greed from the mind. Buy when everybody is selling and vice versa. People buy a share at 100 Rs but when everybody is selling and its price crashed to 60 Rs they fear to buy again, but when everybody is buying and it goes to 120 Rs they make a queue to buy again. Buy with conviction for the company on its business value not on the rumors or others prospective on it. Patience is the key. When you have bought share of the company you should understand its business, the ideal scenario can be like you should be able to understand (substantiate with your knowledge) on its every business decision published in public domain. Otherwise you might have caught a big fish but would have sold it much before its adulthood. A small example you must have received through many forward mails that, what is the current value of your investment if you have invested ten thousand rupees in Infosys IPO when it was launched in early nineties. It would be more than one crore that is the power of compound interest. But we mostly have lack of patience to realize that true potential.

Next thing is risk. Value investing is low risk high gain phenomenon. Yes low risk high gain that is why it’s against the conventional wisdom but it’s true. Just think over it; if you can understand. A true value (intrinsic value in value investing terminology) of a share is Rs 100. If one person X is buying this at Rs 40 and another Y at Rs 60; who has more risk? Of course Y has more risk; who will gain more? Of course X.

Again risk is a relative term according to most of the investors but here risk is an absolute term. This is little tricky to understand. Your risk is losing all your money (for X its Rs 40 and for Y Rs 60) and gain is reaching your intrinsic value (for X its Rs 60 and Y Rs 40).

Now how to find the intrinsic value?

That’s why such areas like ‘Company Valuation’, ’Security Analysis’, ’Financial Management’ exists and thousands of people are doing research on those. But that is learnable by anyone. You don’t need ten such (Infosys IPO) opportunities in your life time.

How to control greed and fear before taking such decisions: explore ‘Behavioral Finance’, one of the most fascinating subjects in finance I have ever come across which has profound use in our day to day life.

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