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Value investing is the new mantra

January 11, 2008 15:39 IST

Value investing, it seems, is the best way, according to pundits, to make money in markets.

"With all kinds of stocks, including penny and mid-cap stocks, flying around, investing can't be a part-time job," says Bruce Greenwald, professor of finance and asset management at the Columbia Business School.

"Almost always, when everything looks good, there are some things that don't look good enough," says Greenwald.

Cautioning investors against investing in "lottery ticket stocks," Greenwald presents a new approach called value investing.

"Valuations should be based on the cost of creating assets, earnings power and the franchise. A growing income stream is more valuable than a flat one but it also means that you have to invest to keep up with the growth," Greenwald, speaking at a media interaction in Mumbai, said.

Value investing, an approach widely followed by the likes of Warren Buffet, Benjamin Graham, David Dodd and John Shapiro, has proved to be a widely successful money management strategy over even the most widely taught and practiced modern investment theories.

"If it's ugly and there are potential losses, people want nothing to do with it. Stocks that are ugly, with which people want nothing to do with, have historically outperformed the markets," he added.

In looking for growth, a value investor should not look at the discounted cash flow model but the nature of the market that the company operates in and the discipline with which it allocates incremental capital.

"Doing that, there are huge value investing opportunities in India because there is a lot of stupid money out there that thinks that any growth is good. It is the smaller local companies or niche market companies that dominate markets," said Greenwald.

"A lower-cost structure, as a result of access to cheap labour and a favourable exchange rate, may only help against external competitors. But the new entrants are going to be Indian companies who would be protected by the same cheap labour and the exchange rate," said Greenwald.

He maintains that value investing would not work in anything that is popular at the time. Value investors mostly hold on to any stock for 30 years unless the price of the stock goes ridiculously high.

While there has been a lot of interest in stocks of Indian companies that have seen private equity, not all private equity investors are value investors, said Greenwald.

"The ones that are, tend to be the industry specialists, they know a lot about retail so they do retail. They are really connected with the industry because PE investors want to know who the good managers are. The bad ones are the ones who come to India, knowing nothing about the country. They are the ones who are the highest bidders in a competitive auction or who just got lucky in the past," he says.

"You could incorporate a statistical approach. But again the good thing about a statistical approach is that because you are very disciplined, you are being driven by the statistics. Character is probably more important than brains," he signed off.

Priya Nadkarni in Mumbai
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