What are the characteristics of a Value Investor? Or what are the characteristics of a V. I. that I have seen?

has a huge appetite to sit on cash for long time

has a good understanding of risk

hates leverage

will under perform in a bull market FOR SURE

in a bear market he will protect the downside very well

Problems of value investing is like running at a slow speed for very long distances. It is boring, but builds stamina very well. It is easy to describe and even understand, but difficult to execute. For example in shares like Coromandel International I saw the PE change from say 8 to a PE of 22. It is very difficult to see ‘value’ in a share with a PE of 22. It is actually far more sensible to sell at the current valuation and wait for the PE to fall. However, if the EPS increases to compensate for the fall in the PE, the price will remain same.

Lesson #1:

A value investor cannot be judged on the portfolio performance. He can make mistakes (like not selling when the PE is high) but still have a good portfolio return, BY NOT BEING true to label. Using market price to judge a value investor is not easy. When the value is discovered, should the value investor sell?

I bought Apollo Hospital at Rs. 9.70 (yes below par). It was a good value buy, because it was paying some dividend and I was getting a double digits. I then saw the share price go to Rs. 135, and sold off. This is what a value investor is supposed to do. I realized that Apollo was no longer a dividend yield share, and in my head NOT WORTH HOLDING an utility share at such ‘high’ valuation. Funny my 15 bagger then became a 10 bagger again. HOWEVER, my success should be measured in the SELLING – I stuck to the principles of Value Investing – and did not bother about price.

I could have bought Apollo again at 135 and said ‘now the further value capture will happen with PE expansion’. It did not strike me to do so…and I missed the Apollo bus.

Value must always be in relation to price – and value can come by PE expansion and/ or EPS expansion. The EPS change is easier to gauge, the PE change is difficult to measure or predict.

Of the very many good investors that I have met, very few can be called Value Investor. Implementing value investing by sitting on cash for very long times is not easy to implement if you are sitting on other person’s cash. I remember talking to a client of Parag Parikh – and the investor was cribbing about cash in his PMS portfolio (long ago before the amc was launched). I told the client “the asset mgt charges that he is charging you is for knowing when to sit on cash, and how long). At least my own money I can decide that I wish to sit on cash, with OPM (other people’s money) that is difficult.

Controlling emotions is a very important characteristic of a V. I. This is almost impossible if you read blogs (including this one!), watch TV, read about other’s returns, etc – all these are impediments to good value investing for sure.

Of course it is very difficult to be a value investor in a rising market – when do you choose the exit time? do you use PE as an indicator (like I did in Apollo) or wait for the full value discovery (EPS peaking and PE at its best)? so if you are a value investor should you be selling HDFC bank now? Or do you tell yourself that the further value discovery in Hdfc bank will come from improvement in profitability and spreading the fixed cost over a larger number of account holders?

Do I sell Coromandel International at a PE of 22 (current) – I have benefited from EPS expansion, 3 successful merger arbitrages, and PE expansion. To be truthful, I have ridden the full circle, and I KNOW that I am holding on to Coro due to past memories over the past 31 years. Is that ENOUGH reason to sell? What if the new investors think that 22 is the right PE for a company with such a good management (so what if it is in a commodity space?)? Should I sell now and wait for the PE to drop to say 15 if not 8? that can still mean a 30% fall from the current prices.

Answers are difficult. Even knowing what to ask is difficult.

Woes of a Value Investor.

PS: I may have puts, calls, or a personal position in all the shares mentioned above. I am not trying to talk up the share – and hey even if I did, its your problem, not mine 🙂

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