I am planning to do a series of articles on Value Investing – too much of s@@t is being written in the garb of V.I. hence the need to write….

The problem with direct equity investing is that the returns are skewered. So if a few good shares give you amazing returns, remember that they make up for the bad ones. It is like a salesman making calls on many people. One big sale and all the effort is forgotten. The salesman cannot say “I will only make successful calls”. You have no clue before the call whether it will be a sale or a disappointment.

Suppose you are a good V.I and have a direct shares portfolio of 10 shares of which 3 have given 65%, 49%, and 29%…being the top 3. Then the others have given returns ranging from 5% to -22%. At the year end review you wonder why you bought those shares which did not do well during your review period.

Now if you are a copying V.I, and you copied this portfolio in parts…what happens to you? especially if you decided against these 3…and bought the other 7. So if you have respect for Naren as a VI and decided that Icici Pru Value Discovery is the fund to COPY from…you could have done very badly for yourself. (I know N is no longer managing that fund, and I have not seen its portfolio for a long time, it is just an example because the words Value appears in its name).

Assume for a second that the bottom 3 shares in the portfolio have given -32%, -29%, and -23%….and you had all of them, it means my average of say 11% return would have looked like -12% return for you! This is exactly the reason why most investors wanting to do value investing, are better off with a fund house. The fund manager is not likely to get the shares AND the weightage wrong. If he has picked 4 winners and was over weight on them, he could be rocking. If he picked 7 winners (out of ten) with equal weights, he could be rocking.

In all portfolios (value or otherwise) stock picking is just a part of the story. Weightage is also very important. I recently bought a share which is down about 10% in the past one year. If you see carefully, almost all psu shares have been beaten down a lot. One amc is likely to come out with a banking fund – ignoring the psu banks, but including nbfc. I am convinced about the story in the long run (skin in the game story), but in the short run it could look very very foolish. The time to ignore (or worse, short) a share is not when it is at its nadir..

Hey, but who told you V. I. is easy? It is not, but it surely worth the effort.

You have to remember that your next year’s winners will be the losers of the past year. It means you have to look at your losers and say “Ok guys,,,..I know this sounds foolish…but do you wanna drive this years portfolio”. Tough.

Why does this happen?

Simply because some so called value investment shares are at a low pe for a particular reason (Ta Mo DVR for example)

Some V.I. shares are low because there is a rogue promoter who is never bothered about the shareholder (NTPC),

Many shares are value investors delight, but if you do not know how the value unlock will ever happen, it should not be in your portfolio (Ntpc)

Sometimes all the Value comes from the Growth! (Gillette)

A new competitor cleans out a value company (Jio vs Airtel)

Some sectors can remain poorly priced for too long (Infra)

However, if you are not sure whether people will pay for the infra that they love using! Example is of course airports..but these days I see a lot of people crowding airport shops AND BUYING…

So …what to do?

PS: these examples are just given for academic purposes. I may have a position, or may even have a put or call options on some of these shares. Do your own research.