‘VALUE CENTRIC’ INVESTING IS THE ANSWER
Value-centric investing strategy is very much consistent and understandable, simple and time tested where one can see what is invisible to others.
--BY JEEVAN BASNET
Stock business should coincide with three principles, in order of importance. They are preservation of capital, consistent profitability and the pursuit of superior returns. These principles are basic in the sense that they underlie and guide all market decisions. They carry different weight and evolve from one to other. Preservation of capital leads to consistent profits which makes pursuit of superior returns possible. The hidden gem embedded here is the magic of compounding. All these subjective parameters point the needle towards value-centric investing of which past and present legendary investors like Benjamin Graham, Warren Buffett and Peter Lynch have championed with high influence.
Value-centric investing works over the long-term exactly because it doesn’t work all the time. If it worked all the time, it would have been arbitraged away long ago by the people programming computers to invest large amounts of money based on its principles. However, because of the intermediate length periods when value-centric investing doesn’t work and most investors lack a long-term time horizon, this hasn’t happened and value investing remains one of the few constants in a changing investment landscape. Many people can articulate a good investment approach theory. It is far more difficult to remain rational and execute it under conditions of uncertainty and real outer pressures. Those who can fully stick, bring out the competitive advantage through a combination of things and follow the process despite external turbulence, possess an important edge over those who cannot. Let’s remember, experience alone is not sufficient, neither is just bookish knowledge, combining good investment philosophy and process of experience and applying it with data coming in from over several market dynamics allows one to improve in a way, yet stocks available at large discounts from their intrinsic value may push us into a value trap, which should be avoided.
Quality is the antithesis to value trap. Statistically inexpensive values with a quality tag have on average outperformed expensive glamour stocks across the board over the long term. Stronger the superior, attached with higher earning power, it is more likely to keep and hence reap all the benefits on its way. However, its undervalueness has to be meticulously worked out before venturing into it. That said, buying quality stocks at marked down prices should be the aim, but marked down prices has no meaning unless without quality. Hence the value and quality should go hand in hand.
Volume holding is yet another criterion worth mentioning here. There is no point if we don’t bet big, when the odds are in our favour. One must backup with high volume of stocks. Holdings or the portfolio is not going anywhere when two percent allocation becomes 10 baggers. All we need is seven to eight big moves, with large volume. Preliminary generation of 24 percent compounded annual growth rate (CAGR) on return on capital employed (ROCE), followed by yet bigger CAGR leads to multi-bagger enhancement. Consequently, what you pay counts, logically to acquire more value from the market, cost should not exceed value.
How can ‘value’ be determined? Warren Buffett once said, “The intrinsic value approach relies on estimating value based on a combination of the net present value of the future cash flow stream of a business and any excess assets not used to generate those cash flows.” Yes, plenty of insights are embedded in this statement, however, it is hard to process for a layman.
Therefore, simplified methods could be the Graham Number, PEG (Price/Earning to Growth) and TAV (Total Asset Value), whichever is lower. Value is never static; it is changeable as well as workable depending on the latest financial report published. Accordingly, rebalancing the cost is advisable and adherence to the original value centric concept should be intact. It is very rare that those quality stocks fall below value. Hence, the price risk is mostly averted. Strong footing thus leads to smooth future sailing and will have ample of opportunities to redress our holdings as per market momentum. Always be aware with a flexible mind and keep re-evaluating investments as the circumstances and the price change- this is crucial. Once such a feat is established, there should be no turning back and the ride becomes comfortable reaping several advantages on the way for a long long period, perhaps infinity.
Value Averaging (VA) is the space to make the easiest money in the hardest way. Initially, the least number of companies with high compounding at good valuations can be selected. Observing its outcome, addition on every dip is preferred to make the holding grow, to the extent of 211 (volume). This is the first part; the second part is to calculate how much money is made on favourable conditions for the next few years. Tenbagger is the nominal prerequisite for a comfortable ride onwards.
Bear in mind that all these require effective planning and thorough focus since, if we do not have a working design, we are programming to fail. Henceforth, elevating ourselves through knowledge, hard work and experience is critical.
In essence, value-centric investigation is all about a combination of satisfactory earning power growth, near value which has probability of PE expansion in companies with your cost always lower, possibly, having an edge where share numbers redouble 6.5 times of the original which is to hold till ZVS (Zero Value Syndrome) in accordance to market cyclical order and being a reluctant seller.
Consistency is the hallmark of great investors and is what separates them from everyone else. If you use even a mediocre strategy, you will beat almost all investors who jump in and out of the market. Value-centric investing strategy is very much consistent and understandable, simple and time tested where one can see what is invisible to others.