Does Value Investing Make Sense?

Short answer: It depends on your investment style. If you invest long-term (30 years), then yes. If you invest short term (up to 1-2 or even 5 years), then no.

Long answer:

What is value investing?

Value investing refers to putting your money in stock market investments that are priced reasonably right.

Here you look at a company’s financials and buy it if it is underpriced. The concept is popular because Warren Buffet and Charlie Munger follow it and have termed their investing style as such.

Is it practical?

Benjamin Graham and David Dodd introduced the concept of value investing while they were teaching at Columbia Business School nearly a century ago (1928).

At that time, the US had the Great Depression where a few people had invested in the stock market, lost money and the papers had described it as a catastrophe. This turned a small stock market tumble that could have been over in probably 5 years or even less into a Great Depression that lasted for quite a few more years.

At this time, stocks were cheap and one can buy them at prices far below their value.

But then times changed and markets went up. Over time, Graham and Dodd went about revising their numbers and estimates until even they concluded that companies at low prices are hard to come by.

This can be seen by what Buffet and Munger have done. They have modified their concept of value investing into “finding an outstanding company at a sensible price” rather than generic companies at a bargain price.

It is practical to find great companies that are trading at a discount due to XYZ reasons and buy that stock instead of spending time and money on looking for all types of companies that are trading at a discount. Most of the time, the only stocks you get at that price are what are called penny stocks, and it can be hard for a retail investor to find a good company here.

So, what to do?

Invest for the long-term if you are a value investor and not short-term. If you buy a good company, it will reward you multi-fold over the next 3 decades.

Case in point, if you had bought only 100 Infosys shares in 1993 when it had its IPO (at Rs 95 per share), you now would have around Rs. 2 crore. This means your Rs 9,500 would now be around Rs 2 crore.

Guess what price you have got if you had sold your shares in 2000, seven years after the IPO? The value of your 100 shares would have been around Rs. 1,28,000 only (due to bonus shares and stock splits your 100 shares would have turned into 1,600 shares).

Guess how many shares your original 100 shares would have turned into by 2021 due to bonus share issues and stock splits? The answer: 1,02,400.

So value investing: terrific for long-term if you find good companies, bad for short to medium term.