Is Current Market Situation a PARADISE for Value Investor?

Friday, 31 August 2018

Is Current Market Situation a PARADISE for Value Investor?

Greetings from Hitesh! Our last post on Efficient Market theory has been appreciated by serious investors. Today we are taking another topic – Value Investing and how you can apply in current market.

What is Value Investing?

Buffett gave the simple definition – “buying a dollar for 50 cents.”

Most guys talk about value investing as “buying low and selling high.” 99.99% of the guys interpret the same as buying at low price and selling at high price. They are 100% wrong. The correct meaning of the same is “Buying at lower prices than the Intrinsic Value of the Shares and Selling when the prices are higher than the intrinsic value of the share.”

So, the bottom line is VALUE.

There are two major approaches to investments – Technical analyses and Fundamental analyses.

In 1960, professor Eugene Fama developed a – RANDOM WALK THEORY. As per the same stock prices movements are absolutely of no help for predicting future prices. It’s a random process, like tossing a coin. Eg. Even if a Coin has come up head 10 times in a row, the 11^th time it has still 50:50 probability for head or tail. Same way if the stock prices has moved up for 10 days in row, it does not mean that it will rise on 11^th day also!!

There is something called Momentum trading which is being practiced widely. There are two major disadvantages of the same.

Say, you have identified a trend and you are buying a stock at 10 and selling it at 13. Again buying at 15 and selling at 17. Again buying at 20 and selling at 23. You would do 3 transactions. Pay three times brokerage, STT and other charges plus short term gain tax. So, you will make paltry money. Instead, had you hold that stock from 10 to 23, you would have doubled your money!!

Another disadvantage of momentum trading is based on economist HERB STEIN’s view – “If something cannot go for ever, it will stop.” Say in above example, prices come down from 20 to 15. All your small profit goes for a toss.

So, follow technical analyses with caution.

Now let us see VALUE INVESTING in DETAILS: -

Track Record of Value Investors: -

Buffett had shared a beautiful example of COIN FLIPPING in support of VALUE investing in 1984. At that time US population was 268 million people. This is worth understanding for making tons of money.

"I would like you to imagine a national coin-flipping contest." Let's imagine all 268 million people in the United States are asked to wager one dollar on their ability to call the flip of a coin. "If they call correctly, they win a dollar from those who called wrong." After each flip the losers drop out, and on the subsequent flip the stakes multiply. Each person has a 50-50 chance of calling each flip and approximately half of the people will lose and drop out each round. After ten flips there would be approximately 260,000 people that had successfully called ten consecutive coin flips. After 20 flips, based purely on chance, there would be approximately 250 people that had called 20 consecutive coin flips - a seemingly miraculous feat.

These 250 people would have more than one million dollars for going right 20 times”

Buffett explains that the common link in the above 250 people is not luck or skill or technical analyses. Simply they followed the GRAHAM AND DODD Value investing principles and that is the reason that they made so much money.

Steps in Value investing: -

This is common-sense approach. We use it in our day today life but fail to apply when it comes to investing in share market.

Frist find out the accurate intrinsic value. You need to consider financial metrics, hard assets, brand value, retail outlets, patents and technological superiority, growth potential and above all the ability to generate earnings and cash flow. This is easier said than done and that’s why there are just 250 people in USA who made the tons of money in Buffett example.

Once the intrinsic value is known – the game is in your hand.

The challenge here is not to be too early. Eg. If you find out that the value of some share is Rs.100 and mkt price is say just Rs.50 and you buy at Rs.50. Now, the market takes the price to Rs.40/ Rs.30/Rs.20. In theory, you should be happy that you can add shares at lower price as the value has not changed. But in practice, very few lion heart investors can do the same and that’s why they will make tons of money.

Is there any easy way to get the Value Investing Idea?

As per moneycontrol.com, there are 1700 companies which have come down below there 200 DMA. So, you have ready made RAW MATERIAL for your study. Still you want to make it easy, find out where the promoters have increased stake in their companies through market purchase (NOT THROUGH BUYBACKS OFFERS). This is one of the sure shot indications of VALUE in those stocks. The challenge here is to find out their stakes since Janaury 2017. It may happen in many cases that they might have sold their stake at upper levels and now they are adding!! But if you follow these 2 ideas, I am sure you will have lot of RAW MATERIAL to find your multibeggar.

What NEXT?

Current market is full of opportunities for a sensible mind who wants to make tons of money without much risk. If you need our help in the same, you can approach us.

I wish you all the best.

Have a Fantastic Friday.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.