October 24, 2007

The frustation with Value investing

I received the following comment from amit and can completely empathize with his frustation. Instead of replying via a comment, I thought of posting it as my reply is rather long winded. My reply is after amit’s comment.

Hello Rohit,

In 2005 i passed from my engineering course and joined a software MNC.As there was too much hype about stock markets i too got lured into it and had my Demat account.

Confused why i am writing this story,please read on.The next part was to do some investing and for that i wanted to earn big and fast.My first trade was buying Reliance pre split at 830/- a share.Many said it was overvalued and i wont gain from split.I had other thoughts,i have always had a fascination for reliance and i thought i was perfectly right.In fact i was and today that 830/- has zoomed to 5000/-.

The next thing i heard was value investing.And i hate the day i heard about this whole value investing funda.I started to read blogs of value investors and plz dont take otherwise they are so sick people that right from 8000 level of sensex they are saying that the market is overvalued and market will crash and only value investors will have the final say.Today market stands tall at 17500 and value investors are as usual worried.

And after devoting so much time to value investing i feel i have missed the bus from 8000 to 17500 in a big way.Guys who had simply invested in sensex (famous) stocks have made much much more than what i have made.

May be all this value investing will come handy when the market actually crashes and go in a bear phase.Seems that is not going to happen anytime sooner.

I m sorry for myself and for most value investors i guess.Most have lost.....agree or disagree i hold my view.........

Amit agarwal.

My response


I can understand your frustation. I will not try to ‘sell’ you the concept of value investing or justify it. I think that is something one has to decide for himself.

Let me first try to clarify (per my understanding) what value investing is not. It is not a system of predicting the market. I am not sure if anyone could have forseen this rise in the stock market from 3000 to 18000 (the market was at 3000 in May 2003). One can guess that the market will do well in broad terms, but it is very difficult to predict whether the market will be at 20000 or 25000 next year.

In addition, one can only estimate (probabilistically) how over valued or undervalued is the market . See my post on the same topic
here. So if someone is sure that the market will tank soon or take off, take it with a pinch of salt (value investor or otherwise)

One important point to remember is that value investing does not work all the times. Over a 8-10 year period you can do well ( I am saying can and not will), but there will be phases when you will underperform the market, especially during bull markets. This is not a new phenomenon. Value investor got killed during the 1999-2000 dotcom bubble in the US. Warren buffett who is recognized as ‘the’ investor was assumed to have lost it and the press was writing him off. So if you want to follow value investing , be prepared to look like a fool sometimes. Also if you recommend an out of favor, value stock, your friends may smile (if they are polite and don’t want to laugh at your face).

Finally value investing is buying something for less than what it is worth. What can be more rational than buying something for less than it is worth…we buy all other stuff that way …except maybe stocks. The approach is simple but it is not easy. On the contrary it is emotionally very taxing. I have gone through the same phase myself. I started off in 1999-2000. I did not have experience then and saw my portfolio bleed as the market tanked. The stocks which I though were cheap, became cheaper …can you believe that concor sold at 5 times PE in 2003, blue star at 5 times and so on.

I was not able to understand the reason why the undervalued stocks I was holding were not appreciating then and why no analyst was even analysing or recommending them. It took 2-3 years for the stocks to be recognized and the value to be realised.

I have not regretted being a value investor over the last 10 years. I chased IT stocks in 2000 and lost money on that. I have found value investing to be a rational approach and from personal experience, a profitable one too.

I agree the last 3-4 years have been tough for value investors, where you may have lagged the market. Will it end soon and then everyone will convert to value investing and value investors will have the last laugh? I don’t know and frankly not concerned about it. I just prefer to follow a logical and rational approach, which is what value investing is about.

I would also recommend you to read this article by micheal mauboussin on
process v/s outcome . See the matrix closely and I hope you realize that even when you follow a good process, the outcome will not always be favourable (but over time favourable)

One last suggestion – try to invest some portion of your portfolio in an index fund or a good mutual fund while you experiment with various investing styles and pick one eventually. Maybe that will reduce the regret.

please feel free to leave your response to amit's points in the comments


Mumbai Journo said...

I am in agreement with amit's responses. I have the bulk of my portfolio in the top performing mutual fund schemes. It is only now that I am moving to buy stocks directly as a value investor.

While my MF schemes ride the waves generated by the sensex, my own picks are timed to wait and grow in the coming years.

But yes, the research and the waiting is a pain, especially in volatile times when your holdings depreciate really fast.

venkat said...

Dear Rohit,

I have been investing in both MFs and in stocks directly for the past couple of years.

The MFs have been giving me great returns.

Incase of stocks, the idea was to reduce the losses and get decent returns..the risk aspect gets minimised in value investing approach.

however, if one is looking for high returns in short spans.. comparing with what others are making... look at self.. find your way through the jungle.. why blame the approach.


VISHNU said...

Hi Rohit,

I was always wondering what is value investing exactly.

Some people group the stocks which is priced below market avergaes (Low PE , Loe P/B), I dont agree with this , though I can say thats this is a good starting point

There is any article by tweedy brown about why Walmart is better investment than Kmart

(Kmart was giving High Dividend Yield , low PE and trade below bookvalue. Walmart was (is still) quotes at high PE , low dividend yield and trade 3 - 4 times of Book value.)

Typical value invester may choose Kmart over Walmart.

If you compare the return given by walmart & Kmart , you can NOW say that walmart was better investment than Kmart before 10 years.

To come to a conclusion , I can say that value investing all about investing in good companies at fair value.

What is fair value ? Fair value is YOUR assumption of what the company is worth as of now.

When the companies comes at fair value ? Not often. For an example Warren Buffet was waiting for Coke more than 20 years. (yes, 20 years)

so value investing is all about

1)Your ability to identify Good Companies
2) Your ability to measure the intrinsic value of the company
3)Your ability to withstand short term gyrations
4) Your ability to deploy considerable amount of money on long term basis

If you feel that someone else (aka Sandip Sabharwal) can do a better job than you , its better to handover your money to him

Ranjit kumar said...

Hi guys,

Let me join the party.

Amit - First of all your assumption that "Value investors are saying that Market is overvalued" is very generic and wrong.

There are people who call themselves as value investors who are bullish at 19000 and also other people who are bearish at 8000. Everybody's (value) investing style is different, some people dont take a probability of 8:10 and while others take 6:10 despite both being the so-called value investors.

I am sure that you have read both the views but had subscribed to only one camp (bearish). It is your attitude that made you believe it. So instead of blaming, check your attitude towards risk and as charlie munger said "Always invert"

I invest in companies which i (emphasis) believe are undervalued (note that growth is a part of value) - If this investing style is called value investing then i might be one, but i myself is not 100% sure about it. The companies which i think today as undervalued might be speculative in nature - then should i call myself a speculator. I dont know - all i believe is that market is the ultimate and it always give you what you deserve over the long term.

Ranjit kumar

vineet said...

Hi All,

I am newbie in the world of investing either directly and through MFs. This discussion has been a great source of understanding some pointers of investing and the styles. Just a big thank you to Rohit and everyone who contributes. A great read anytime.

Rohit Chauhan said...

Hi vishnu

you have explained value investing much better than i could have

ranjit - agree with you 100%

vineet - glad that you find the blog and comments useful.

personally (and i think a lot of other value investors too) are not too dogmatic about value investing. it is not a religion or some cult. it is a rational process of buying something for less than what is it worth. we do that all the time. who goes and buys a shirt and pays 1000 when the sticket price is 800 . investing (value or any other tag) should be the same. ofcourse the catch is estimating the true value.

finally if an approach has worked for a lot of people for a long time and there is a bunch of data validating it, then i would keep an open mind and atleast try to understand it

VISHNU said...


I further explained my opinion on the point 3 & 4 in Ranjit's blog which I think is really important and most misunderstood by lot of value investers

This is the transcript of my response

VISHNU said...

First thanks for noticing my comments in Rohit's blog.

I think you have not mentioned (or missed ) my other points which I think very important and least understood in value investing.

Lets discuss point 3
3)Your ability to withstand short term gyrations

Let assume that a person called XYZ knows which is a good company and knows the intrinsic values.
(this is the easiest & Simlple in Value investing I think). Now lets say he is emotionally unstable and he is getting heart attack
when his portflio sunk less than 50% in value , now he decides to exit. Lets say after 2 year his notional portfolio triples , now again he is having
heart attack after seeing this. ( Value of the portfolio is Notional , Heart attack is real :) )

Do you know who is that person ? it nobody else, me (The great Vishnu)
As of now , I am working on my emotional side of investing. (Heart Attack perse is not real just Disappointment)

Lets discuss point 4
4)Your ability to deploy considerable amount of money on long term basis

I think this is missed by almost all of the so called value investers.

Here is the performance of top investers (all I admire ) in the world from http://www.incademy.com/courses/Ten-great-investors

Warren Buffet compound 22.3% over 36 years.
Peter lynch compound 29% over 13 years
John Neff's 32-year tenure was 13.7% compund

You can think why only warren buffet is the only richest invester in the world ? Why not Peter Lynch or John Neff ?

I think I know the answer ,it is written in every Buffet's letters to Shareholders /Partners.

I think the answer is "All my networth and my wife's networth is invested in Bershire or Buffet Partnership Limited"

He is richest men in the world NOT BECAUSE HE IS ABLE TO IDENTIFY GOOD COMPANIES OR MEASURE THE INTRINSIC VALUE which Peter Lynch and John Neff successfully did.
He is richest men in the world BECAUSE HE IS KEEP INVESTING 100% OF HIS NETWORTH IS IN HIS PORTFOLIO.That explain his frugal lifestyle.
(One simple house , Simple Head quarters , no cellphone , no credit card)

If you are investing less than 50% of your networth into your portfolio , You are wasting your considerable amount of your time , your money and your energy
and you may not be able to become RICH

I want introuduce another point

5)VALUE INVESTERS will be missing most of the multibaggers in Wall (Dalal) steet

yeah ..correct Warrren Buffet missed Microsoft , Dell , Amazon etc etc..
Peter Lynch has written a full page covering of 30-40 multibagger companies he missed in his book "One up on wall street"

My advice is for any value invester is

Dont worry if you are missing the bus , mutlibaggers or Reliance (as per Amit) because eventually everybody will miss 100s of multibaggers if the world's best invester Warren buffet too missed.

what make you RICH in the end is

Invest only when you confident after quantitiative & qualitative analysis
Invest considerable amount of your networth
Dont loss your money on your investment (I am talking about real not notional)

(What ever I mentioned above are just my opinions , you may be having different opinion and infact you may be correct and I may be wrong but I hold my opinions :) )


Rohit Chauhan said...

Hi vishnu

you have definitely done a lot of thinking and reading on investing.

I read ranjit's post.I would say the key point as buffett says is 'circle of completence.'

if you know a company well and can see how it will perform, then it is easier to get a range of intrinsic value (not necessarily a single no.) and buy at a discount.

On the topic of investing a decent portion of networth ...that is very tricky. perssonally i may be confident, but do i have the courage to bet 50% or more on my stock picks ? till date ..no

i cannot risk my family and my future on the assumption that i am right, till i can prove it to myself. that is why i have invested only a portion and have been increasing it as i do well and gain confidence.