Investing Strategies of some well-known Value Investors
Created on 31 Jan 2020
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Updated on 07 Oct 2020
It hasn't been long since the stock market has become the newer and the more approachable money-making market. 'Value Investing' has become the new buzzword among the existing and new millennial investors due to the promising returns it has given.
But, the 'What,' 'How' and 'When' of this stock markets' value investing strategies is still a question, which seems to be blur amongst the most.
The clouded understanding of 'Value Investing' has created a dire need for passionate investors to have a better understanding of the value investing strategies to make the maximum returns out of it.
Let's try and simplify the investment strategies of some renowned value investors in the stock market, who have not only set a benchmark for others to achieve beatable market returns but have also introduced us to the idea of 'Value Investing.'
What is ‘Value Investing’?
The underlying concept of value investing is to buy fundamentally strong scrips at a lower price or a discounted price and sell it at its true value. The stock prices discount market information and hence do not show the intrinsic value at all times. Thus a stock might be undervalued at some time in the market and can be bought at a lower price and sold when the stock gains its true value later. This gap in price is the opportunity to make money.
Some Renowned Value Investors of all Time and Their Value Investing Strategies
Although all these investors work on the common principle of 'Value Investment,' yet they are exclusive in their stock-picking strategies. How? Below mentioned are a few techniques used by them.
Benjamin Graham is most commonly known as the 'Father of Value Investing' and is the writer of the most read book among investors, 'The Intelligent Investor.'
The ‘Defensive Investor’ Strategy
Well-suited for whom?
This scheme belongs to passive investors with minimal day-to-day participation in the market, like full time working professionals, students, etc. Anyone who wants to invest and forget, i.e., a long-term investment purpose, will fit perfectly into this technique.
How does it work?
This particular technique is of the concept similar to putting money in a bank deposit and withdrawing in the later years of life with the compounded return. The portfolio should be between 10-30 stocks and reviewed every year to filter out the outliers. To filter a company for investment Ben Graham has specified 7 tenets, which the specific company must have which are-
- Company Size – Large Cap is preferred as small-cap companies are prone to wide fluctuations.
- Strong Financials- Healthy Financials can be analyzed by ratios, working capital analysis, debt levels, etc.
- Earnings Stability maintained in over past 10 years
- Dividend pay-outs maintained in the history
- Price to Earnings Ratio
- Price to Book Ratio
Margin Of Safety
'Higher the risk, higher the returns,' we often hear this when it comes to investments. But a smart investor will always have a safety net called 'Margin Of Safety.' According to this strategy, an investor will buy stocks at a price that are below their intrinsic value to avoid the downside risk.
Also Read: Benjamin Graham’s Model of Asset Valuation
It is said that a great teacher is identified by his students' success. Warren Buffett, the owner of 'Berkshire Hathaway' and one of the richest in the world with a net worth of $89.1 Billion, is one of the most successful investors of his time and is an ardent follower of Ben Graham's school of value investing.
Know the business before you buy it!
Warren Buffett is a man who believes that if you know what you are buying, you know its value. Let's simplify this. If I'm buying a company's shares, then I am indirectly buying the business it is in. If I know the business well, I will know the dynamics and how and when they will affect the company's operations.
This gives an added advantage to any investor who will be benefited by knowing whether the company will flourish or not, which will ultimately impact the stock price. Investing in what you understand limits the risks associated with the investment. Thus, 'Invest in what you understand!'
If you wish to know more about Warren Buffett, Read: Living Like Warren Buffett
Another renowned investor, 'Philip Fisher', but what makes him peculiar from others? Let's understand his value investing strategy-
Invest in ‘Growth Stocks’
Philip Fisher, in his book 'Common Stocks and Uncommon Profits' has tried to emphasize that one should invest in stocks that they understand well and should hold them for a long period so as to gain from their promising growth.
He believed that the stocks, which are in their early cycles of growth and the underlying companies of such stocks, have come up with some sensational and breakthrough ideas are the successful investments.
Fisher wrote, "The young growth stock offers by far the greatest possibility of gain. Sometimes this can mount up to several thousand per cents in a decade."
This investor is known as the 'Big Bull' of Dalal Street in India. As per Forbes, he is the 48th richest person in India with a net worth of $3 Billion.
Right Time Right Decision
Time is one crucial element in the stock market that can have a major impact on profits. Rakesh Jhunjhunwala has mastered this technique of picking up the right stock at the right time. The timing of any investment depends on the underlying factors that affect investment decisions. Thus aligning the stock selection with the right time to buy and sell is just the perfect combination, which has made his investments profitable.
Patience is a virtue, which not everyone can master. But this ace investor has not only mastered it but has made money out of it. How? He believes in holding fundamentally strong stocks for the long term. Jhunjhunwala's stocks fell by up to 30% in December 2011. But he kept patience and held onto those stocks and recovered his losses in February 2012.
Also read: Success Story of Rakesh Jhunjhunwala
He is another successful Indian stock market investor who also happens to be an earnest Warren Buffett follower. He started his investment careers in his thirty's and owned 'Pabrai Investment Funds, ' which manages more than $800 million. He has written a book 'The Dhandho Investor' in 2004.
Low Risk and High Uncertainty
Pabrai, in his investment philosophy has drawn a thin line between risk and uncertainty. He explains that the capital invested in any company or business is done on a minimal or a calculated risk. Still, the potential loss from such investments is due to the uncertainties associated with the outcome.
This is where maximum investors get lost and the smart ones make money out of others' misjudgment of risk and uncertainty.
A perceived notion among investors is that businesses should be predictable, but in this age of innovations and new business models, uncertainty and unpredictability of business has just become its part. Hence when any business faces a rough time, the market fears and cuts the ropes immediately.
But as per Pabrai's philosophy, the investor must understand that low-risk businesses with high uncertainty are just different.
Also Read: Investment Funda’s of Mohinish Pabrai
It's always easy to recite other people's success stories, but what's more important is what we learn from them. The above-mentioned successful value investors are just a few among many who have stunned their audiences with their remarkable achievements and success stories.
Each one of them has left behind their philosophies, legacies and, most importantly their investment strategies to be followed and mastered by others to achieve what they could. All we have to do is just learn, apply and practice.
The secret ingredient of the recipe is with us. It’s time to use it.
Happy and Successful Investing!
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