Value Investing Landscape

Do you know how to differentiate between value investing and growth investing, or for that matter value investing with any other form of investing? I will leave this for readers of TIPBlog to ponder over it. However, I would like to say one thing; I do not know how to differentiate. I invest with an objective to grow my capital. It does not matter where it comes from. Hold on, don’t pass a judgment yet.


Let us take an example. Late last year, Buffett bought a whole rail company, Burlington Northern Santa Fe. On per share basis, the price paid by Buffett was (1) 31.5% premium to prevailing market price at the time of announcement; and (2) Approximately, 15 PE ratio at the time of announcement.


At first glance, these two matrices will tell you, “that was not cheap!”. That’s because in today’s world of instant gratification, we have come to believe PE ratio and/or current premiums are only ratios that determines value. We have dropped the meaning of value to few parameters. Small time investors like you and me would jump to take 31% premium and declare victory. But 20 years down the road, Buffett is likely to be basking in glory.


The point I am trying to make is ability to judge value is much more than crunching few numbers in excel sheet. What we consider premium today even at 15PE or 20PE, it may be actually undervalued when look ahead 20 years from now.  Like single digit PE ratio does not necessarily mean value (could be value trap), similarly, a high PE ratio could still mean value. Key element is ability to project growth, or anticipate growth, or understand moat, or competitive advantage. And this comes from understanding of the domain.


The much beaten down proverb, “know what you are investing in”. Easy to say but very difficult to practice.


It is in this context, it is not necessary for value to existing only in stocks and shares of a company. Value can be found in any forms of investment, any type of company, or any type of investment vehicle.


In the beginning I said, “I invest with an objective to grow my capital. It does not matter where it comes from”. So it does not matter whether it is a growth, value, small, mid, large, bonds, real estate, commodity, futures, options, derivatives, etc… Fundamentally, I am open to at least  let pass all of them through my objective screen.


The only reason, I stick to stocks and shares, is because I think I can make some very objective decisions. I have some control over what I buy, at what price, when I sell, at what sell price, at what point, etc. Meaning, I have some understanding of the full chain of activities right from thinking of buying it … to… deciding to sell. Stock markets or online accessibility are just means to reach them. Even in case of stocks, so far, I have remained stuck to my long term buy and hold objectives. I have invested in shares of companies that had certain characteristics to meet those objectives.


I have mentioned I am looking to expand my horizon and include some other companies where there are value opportunities. The question is where and what? Shooting in dark is less likely to hit the target, and forget that you could even hit the bulls eye. So I need to know the target area in the available landscape.


(1) Companies that have moat, significant market competitiveness, market share, capital intensive, growth potential etc. These companies are worth holding for long time. Typically, my growth expectations are conservative. But they are likely to be sustainable and consistent. Examples are ONGC, Hero Honda, L&T, NTPC, Pidilite, Asian Paints, Infosys, Graphite, Aegis, etc. The opportunities to buy such companies come during market down turns, unless there is something explicitly wrong (event driven or otherwise). One can even buy at premium based on individual’s risk profile. The key here is to watch them and have free capital available.

  • So far I have been investing in companies in this category. Dividend and capital appreciation were the objectives. And I will continue to look for such companies. I would most likely sell only in case of insanely high valuations.


(2) Companies that have market share, current moat, low capital needs, operational efficiency, etc, but potential future growth is not visible. Growth could be cyclic, high, low, or needs large capital, etc., Examples are Hawkins, ABCIL, Camphor, etc., One can continue to hold them, or sell them at extremely high valuations, add to them, reduce, etc. These companies can be bought cheaper to intrinsic value, or current premium. If you believe there is higher growth,  then you may pay current premium. If you don’t believe there is growth, then pay only discount.

  • This is the area that I am going to expand. This is what I mean by value opportunities. Here, my objective is capital appreciation based on growth in value. Dividends are not necessary and hence, I need to tweak my process little bit to meet these objectives.

(3) Companies that are somehow running. Examples are Ador, Cheviot, GE Shipping, etc. At least for me, I do not consider them as value preposition. These may be opportunistic if one can buy them in depressed markets. They may also include cigar butts. It is advisable to sell them after market recovers to certain extent. Again this is my understanding of such companies in the context of value.

  • I am not chasing these types of companies or these type of opportunities. Because, it is hard for me to really figure out what I should I pay to buy them and when I should time to sell them.


(4) Companies that are in event driven situations like mergers, acquisitions, buyouts, temporary chaos, scandal, etc., Temporary chaos is like BP in US or any other drillers in Gulf of Mexico, or Airlines in India. Example for scandals are Satyam immediately after the announcement.

  • I am not chasing them. I am not good at grasping these events. I am not good at anticipating potential returns. I am not good at timing them.


(5) All other financial vehicles like options, futures, derivatives, etc. Here also, I do believe there is value to be found. Only if one knows how/what/when! The optional warrants that Buffett got from GE and Goldman are also kind of financial derivatives. They are simple to understand. Buffett knows its value and understands potential returns.

  • I don’t understand them, so I am not chasing them.


This has been my understanding of value investing landscape. Value is much more than PE ratio or crunching few numbers or cheaper price today. You can find value in almost any financial instruments, any type of company, any situation, or any events. Only if you understand the entire chain from buying to selling. In my opportunistic plays, I am going to look for companies as described in item (2) above.


What does value mean to you? What does value opportunity mean to you? Did you still think value means buying cheap during market depression only?










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23 Responses to “Value Investing Landscape”

  1. Very Nice thought process, TIPguy.

    In my view there are two stages of any investing
    1) Gather the capital
    As I am reading The Snowball, on many occurrences Buffet was seen looking for more capital. at the time of winding up the partnership in 1969, he took out cool $25m from the partnership. That was sure enough money to get started with bang and produce desired results which we are trying to achieve at the end of our career. Enough capital is must for any value investor. starting with small amount and fiddling with it half of the lifetime is not Value investing in my View.
    2) Find out the avenues to invest for long term.
    Once the enough capital is gathered, it will start rolling on like a snow ball which will grow bigger & bigger. Anywhere you put that money in bank FD@6% or in dividend paying stocks. it will fetch you money.

    I think i am in the first stage, gathering the capital. Once i have enough amount of snow to create a snowball, I will be in second stage.

    regards
    MPI

    • TIP Guy says:

      Hey MIP,

      I like the simplicity in you view. But, probably differ in execution part of it.

      I cannot put my hand around “gather capital“. From where? ancestral heritage? family? loans? or grow on your own?

      This is pretty a strong statement, “starting with small amount and fiddling with it half of the lifetime is not Value investing in my View“. While I agree it is necessary to create snow, the question in “how do you create your snow”?

      Best Wishes,

      • In my view one can “Gathering Capital” by
        1) Regular profit booking irrespective of company prospects.
        2) Bringing in close relatives friends in case one is confident of his capital allocation skills.
        3) Leveraging

        I think your Opportunity Portfolio objective meets point No 1. That would really help you to accumulate the necessary snow.

        regards
        MIP

  2. Siddharth says:

    Hi TipGuy,
    Wonderful post and i like your clear cut approach to what u understand & what you don’t. Just like Beauty, value lies in the eye of the investor. I believe all investing(excluding trading) is value investing & as buffett says Value & growth are joined at the Hip. There are many ways to make money in the markets and different places to find value and some methods work in bear markets some in range-bound some in bull. The key i think is to stick to your style and not abandon styles at the first sight of under performance as every strategy is bound to not work in certain markets. Value for me is essentially buying cheap(low p/e relative to market/historical valuation/growth prospects or low p/b compared to ROIC). There are a lot of wonderful companies i am aware of but they may not necessarily be wonderful investments given their premium valuations.Over my limited investing experience i have come to the conclusion that value lies in small-micro-mid cap space for me.

    • TIP Guy says:

      Hello Siddharth,

      Thanks for sharing. Buying cheap! Does that mean wait for downturn? If not always, then most of the time stocks are cheap during downturns only?

      Good to know, you also have identified what works for you and willing to stick with it. Looking forward to read more about small-micro-mid cap companies on your blog.

      Best Wishes,

  3. chetan S. Raut says:

    Hi Tipguy…..

    value dont stand alone…it must have relation with price…and event….if price of share is too high then value goes down…while price is too low then value go up..its like einstein theory of relativity……one example is…
    i never had thought in my life buying shares of satyam..as i dont like this company….company not fit into my buying list… but when scandle happen in jan 2009…price come down too much..and it reached at level where not downside risk remaining..i just utilized that opportunity..and brought satyam at very low price..not because satyam is very strong fundamentally…but price determined by market at that time was very unfair for satyam….and satyam share must value more than wht market interpretating……

    Thanx,
    Chetan Sadanand Raut

  4. Yogesh Tiwari says:

    Hi TipGuy,

    I just finished reading Value investing and behavioural finance by Parag Parikh, thanks to your e-gift.

    I m still in process of refining my thought process in judging a business and opportunities laid within.

    I still get confused while analyzing a business…I doubt myself, whether I m following a growth story or value investing.

    Would you please suggest me a few books on value investing in Indian Market’s context?

    Regards
    Yogesh Tiwari

  5. Yogesh Tiwari says:

    One question, if a company is not paying dividends to shareholders(except prefential shareholders), though it has good growth potential. Do you still shun it away?

    E.g. Ganesh Polytex Ltd. Please refer to July 12-25 issue of Business India. It blowing trumpets of its growth potential.

    I’d love to hear from you on this.

    Regards
    Yogesh Tiwari

    • TIP Guy says:

      Hello Yogesh,

      For my long term buy and hold portfolio, yes, I straightaway reject non-dividend companies. Does not matter how good the company is, or how great it is doing.

      Best Wishes,

  6. sachin8778 says:

    Hi TIPGuy,

    If we assume Warren Buffet is a value investor, which I and rest of the world believe he is, I agree that it is very difficult to define value investing (i.e. to tag certain things as value investing actions). It is easier to define value investing with Graham’s approach. In last several years Buffet has improvised on Graham’s teachings, and his success has now changed the definition of Value Investing. As you said he is capable to see value in anything and everything thus value investing is not limited to PE ration or PB ratio or only stocks, etc.

    However for most of us do-it-yourself, small investors we must ‘define’ value investing limited to the area of our own comfort i.e. stocks in my case.

    What I understand as definition of value investing in simple terms (not necessarily simple to practice) is – buy very good companies at very low prices. In other words, pay fifty paisa for one rupee value.

    When it comes to practice I find myself playing only in the category 2 that you have described above. Recently I have developed a very strong desire to build category 1 portfolio (buy and hold) but so far have not been comfortable in paying premium for that. So waiting for the right time, I guess…. not hoping not to repeat the mistake of letting it go like in recent past :)

    Cheer,
    Sachin

  7. Raja says:

    Hi TIP Guy,

    Here is a request from me for 2 posts on 2 different topics:

    1. A post on Govt bonds. I know you have wrote somewhere that it’s a no brainer :) But trust me, it’s not. At least for a beginner like me. Particularly aspects like it’s availability, various kinds (if any) and is there anything to chose from or all are similar, tax implication vis a vis other similar avenues like say Bank Deposits & debt funds, liquidity etc… (Will it sound like a personal finance post ?!!)

    2. A post explaining your rationale behind dislike for mutual funds. I know you have told before that “why should we pay someone to manage our funds”. But given the fact that you are in for of index investing and there are quite a few MF’s who have given index(NIFTY) beating performance in the last 5 years (like HDFC Top 200, HDFC Equity Growth, Magnum Contra, Reliance Regular savings etc… data from value research) then why not the MF’s. May be i’m missing something here, but am still struggling with the idea of index investing Vs MF investing assuming that even MF investing too can be done by following the relative PE which you discussed in one your posts.

    On a side note i quite miss your relative PE meter and graph. They were nice to have on your site and i don’t think there is any resources showing such data on the web. So, can we have it back please based on popular demand :)

    Regards
    Raja

    • TIP Guy says:

      Hello Raja,

      On Govt bonds….. being personal finance topic. It is a hybrid area of personal finance and investing. The objective of such govt bonds are mostly to preserve the capital against inflation. They are not real return-oriented. Therefore, any type of govt bond you take, you will not make any real-money out of it. e.g. Non-taxable bonds, it reduces tax, but then returns are likely to be balanced by relatively low interest rate. etc. etc… Anyways let me think about it on how much I want to cover. I do not intend to focus too much on it, because, it is my belief it does not provide any ROI. Stay tuned!!

      On mutual funds…. your question is fair enough. I should not be bashing MFs without data-driven arguments. OR I should at least discuss why’s?. Many readers have asked me the same question. [Revised] I will continue in my next comment. Let me think how I can respond to this question. It will take me some time. Please bear with me.

      On Rel. PE meter and Graph…. Did not notice, I wonder what happened? Thanks for bringing to my attention. I checked and it looks like the new version of Google Docs does not support gadgets (yet!!). I can’t figure out how to get back to older version. Will keep working on it…..

      Best Wishes,

  8. TIP guy
    Why don’t you start your own value fund, like Saj Karsen of BarelKarsen.com? (We can learn from you if you start it)

    I am thinking about it since long time, but i have no idea how to manage the money like a professional fund. Few points i would like to mention
    1) I would be using only my money & close relatives like Wife & Parents.
    2) It should handle additions & payouts.
    3) It should publish weekly/monthly/quarterly NAV.
    4) It should have proper Balance sheet & Income statement.
    5) How to handle Borrowings where interest payments are going through my salary and booked profit going back to market.

    Will you please put your thoughts on this subject?

    Kind regards
    MIP

    • TIP Guy says:

      MIP:

      Did you check little snippet on my Facebook Profile or Fan Page? Are you trying to connect the dots. Sometime towards end of this year I will slowly start writing about it.

      For now, here are few nuggets for your curiosity…. yeah, full time investor is my end goal. I will use only my money. I am already exercising 1, 2, and 4+cash flow statement. (but not likely 3 and 5, being a private investor, it has no meaning).

      The journey is to reach a destination, and that destination is to become a full time investor (including incorporating the funds as pvt. investment company).

      Best Wishes,

  9. chetan s. raut says:

    Hi tipguy,
    i have one query which not directly related to investment process….
    if we have stop loss for some share with your trading account…is this possible that price of your share go down bellow your stop loss value still stop loss not get triggered?any idea..can this happen in gap down opening?

    Thanx,
    Chetan Sadanand Raut

    • TIP Guy says:

      I have not used stop loss in a long long time. Ideally, stop loss should trigger. The point should be opening value or closer to it, depending upon where you are in queue and when your trade is executed.

  10. saif says:

    Sir,
    The Stock Analysis under @Stocks menu is not updated .Last it shows Hawkins analysed in Oct 2009.Since then you have analysed many more companies.Could you please update so that we can directly click on those analysis .It would be helpful.

    Thanks

    • TIP Guy says:

      Saif,

      Grrr…. can’t keep up with the load of organizing the content. I need to figure out an automated way. Meanwhile, you can still access all analysis by clicking the Category – “Analysis”.

      Best Wishes,

  11. Rana says:

    @TipGuy, do you plan to talk about your recent buy or sell in camphor and why made you think it was an opportunity? Eager to know who you determine it as an opportunity

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