When people get fancy degrees in investing, they get trapped in jargon. Luckily for me I got into investing before I had any degree.
Let us look at some of the jargon.
Value Investing vs Growth Investing: All investing is value investing. You put Rs. 100 today hoping to earn more than Rs. 100 over a period of time. You know from where the value is coming. Value actually comes from one source: spread of information. You know something about the share’s current / future performance. You want this information to spread to more people so that the price of the share goes up. If this is the basic truth what is value investing and Growth investing?
Proponents of value investing look for some tell tale numbers like dividend yield, price to book ratio, cash earnings per share, etc. The funny part is these numbers are easy to calculate and almost useless if you do not know how to interpret the numbers. Some “Bull Market Geniuses” can even look smart if they invested on such a basis.
Let us look at shares like Coal India, Ntpc, and other PSU shares which are traded very well in the Indian markets. If you had bought NTPC at say Rs. 145, nobody could have faulted you for that. It had a good dividend yield, had a good P:BV ratio, had a good CEPS..so you would have felt good. However the share fell from 145 to Rs. 115. Such a fall completely destroys your Value theory simply because the so called Rs. 5 dividend has been wiped out COMPLETELY in the MTM losses. Thus one needs to see the following:
- is there really value in the so called Value stock
- does the market believe that there is value in the stock
- how will the value be unlocked
- will you have the patience to hold on the stock during the process of value discovery? (no I am not rooting for Naren S !!)
- will you keep re-investing the dividends to reduce the cost of acquisition?
- how will you react to an increase in price, change in interest rates ?
- will you have a stop loss?
- will you have a time frame for your strategy to show results?
Sorry if you do not have an answer to all these questions, you are not a value investor. The traps with which some of the ‘Value Investors’ trap themselves makes you believe that they do not understand investing. Sure they spew jargon, they know how to calculate all these ratios, but have no clue about how to use them.
So they will buy an Ntpc at 145 because it meets all the requirements of value (the numbers looked attractive at 145), but they will miss out the value capture of a HuL at 750. It is too damn expensive. Look at the PE, look at the industry,…etc.etc….However if HuL or a PnG or a Gillette were to go private there could be value capture in the buy back price. Similarly when Bharti Airtel was at Rs. 80 and my broker (a complete value seeker not hampered by any investment degree) said “but subra all the value in Bharti comes from the Growth” one had to pay attention. Clearly 2 Gods of the investment field – John Templeton and Mark Mobius do seem to agree with me. Franklin Templeton India has a fund called “Templeton India Growth Fund” – and it has a Value orientation. Value orientation means when the buy a share it normally lacks market appeal, has a low price earning ratio (vis a vis the day of buying it has to have a substantially low pe compared to the index).
If the value does not come from growth where else can it come from? Look at 2 companies – Hdfc and Larsen&Toubro (disclosure I may have a position or Options on all the shares and funds that I mention). A lot of the value could be captured when the subsidiaries are sold off / listed / through dividends that they receive. I do not think L&T finance deserves the price that it commands but a lot of the value capture went to the parent. Similarly they have an IT subsidiary. They have land in Powai…so is there value? Please answer it yourself. In case of Hdfc – the bank has made lots of money for you. Remember you got 200 shares at Rs. 10? Similarly when EiD parry gave free shares of Coromandel International ..the value capture came from the value of the subsidiary.
A lot of value in value investing has to come from the dividends that you receive (and which you use to buy more shares of the same). So when a big equity name did a wealth study of market performance, they ‘forgot’ to include dividends!! One of the biggest blunders in investment performance evaluation. They got away, and it feels odd. Over a 2o year period you need to use the Total return index. See why Colgate walks into that list, but not in the list of pure price movement!!
So do not get too caught up in the jargon. Or in the numbers, you need to use your brains. To me capital preservation while enjoying the yield is very important. So many of my ‘value’ shares are at a very high pe..but continue to be in my portfolio. Yes my portfolio is mocking at me!! It says do not use the word Value investing. Yes Jargon trap is bad.
So this portfolio can look stupid when the market falls, and the pe of some of these companies do not correct so much. Very difficult to look at the value funds and decide whether they are being true to label. Very difficult to know whether the fund manager knows when the fund will capture. There are 3 funds that I look at when I see the value orientation – Templeton India Growth fund of course, Icici Prudential Value Discovery fund and I also find Hdfc Prudence have a tendency of a Value fund, though it does not say it is a value fund.
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