So what exactly is this value investing that led Warren Buffett to be so rich?
In Value Investing, you are essentially buying stocks — which essentially is a part ownership in a business — that is worth $1 for 50 cents (this is just an analogy). There are many reasons why you can buy a stock that is worth $1 for 50 cents.
One of the reason is that many stock investors do not understand what they are buying or selling — they simply buy and sell stocks based on hot tips or based on chart patterns.
That forces them (at times) to sell a good stock at a cheap price.
In which, the practitioners of value investing will take advantage of that by buying the stock they sold.
“Value investing in fundamentally different from stocks trading.While the latter focuses more on price movements and other technical indicators, the former focuses on analysing the business behind the stocks and buying the stocks at a cheap price relative to the business value. This is done by first determining the rough intrinsic value of the business.” – Chris Lee Susanto
Value investing works because simply put, the stock market is not efficient.
That means that the stock market at points in time does not accurately reflect the true value of the business behind the stock.
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The luckiest part of my investing career is that I’ve been old enough (37) to have emotionally invested through two bear markets (1999-2001 and 2008-2009) but still young enough to take advantage of the lessons learned.
From 1999-2001, while I was in college, I worked part-time for a brokerage firm. I was the “Marketing Administrator” which means I was the secretary who answered the phones. When the Dot Com bubble burst I heard from a large percentage of our 1,200 clients. They called our office in every emotional state you can imagine. And here I was an inexperienced 19 year old trying to calm them down. When I started the job I thought I wanted to be a broker. After the Dot Com experience, I knew I didn’t want to be a broker. Investing is hard enough dealing with your own emotions let alone the emotions of others. Investors can handle volatility as long as it’s only to the upside. In addition, I lost 80% of the capital my parents saved for me to use towards my college education.
In 2008, I had just made the leap to becoming a full-time investor. Simultaneously the markets went into freefall. Great timing right?
During the crisis I realised a few things.
First, The worst place to be invested during a crisis is in liquid, institutionally held microcaps (i.e. the large microcap segment). I found that when the economy or markets show signs of weakening, institutions take risk off. One of the first areas they look to liquidate is exposure to microcaps.
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The S&P BSE Sensex ended 222 points or 0.58 per cent lower at 38,165 while NSE’s Nifty50 index dropped 64 points or 0.56 per cent to settle at 11,457.
At 2:30 PM, the S&P BSE Sensex 236 points lower around 38,150 levels, weighed by losses in Reliance, HDFC Bank, TCS, Kotak Bank and Maruti while slipped 70 points, or 0.61 per cent, to 11,450 levels.
In the broader market, the S&P BSE Midcap index was trading 73 points lower at 15,093, while the S&P BSE SmallCap index was ruling at 14,767, down 57 points or 0.39 per cent.
Among sectoral indices, every Nifty index except Nifty Realty were trading in the red with losses ranging from 0.21 per cent to 1.28%.
Meanwhile, Fitch Ratings on Friday cut India’s economic growth forecast for the next financial year starting April 1, to 6.8 per cent from its previous estimate of 7 per cent, on weaker than expected momentum in the economy.
Shares of InterGlobe Aviation, parent of IndiGo, and SpiceJet rallied up to 14 per cent in early morning trade on Friday, surging up to 33 per cent in past two days on market share gain in the month of February.
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Today marks 30 years since a confident young man walked into the back office of Schroder Investment Management in London, to start his first day on the job, the first in his career. Ask me a question back then and I would have answered assuredly and quickly. Today I’d be more likely to say ‘I don’t know’ with just as much confidence.
Now older, wiser, but with just as much hair, I have over the years seen many people come and go. Clients, colleagues, bosses, company mergers, bankruptcies (thankfully not my own), through bull and bear markets, booms, crashes, and have seen my own fortunes fluctuate too before setting out on my own a few years ago.
Thirty years is a long time. The good news is it was all worth it.
The first thing to point out is I don’t have all the answers. That’s not what this post is about. I’m always learning. But I have benefited enormously from people sharing their time and expertise, so if I can help others in the same way, I’m happy to share what I’ve learnt also.
These are 30 observations, guiding principles, or simply things that work for me. Some of you who have followed me for a while will recognise many of them. These aren’t universal truths, they’re my truths, my beliefs, shaped by my experience.
And that’s probably a good place to start.
“The more you believe something to be true, the more you will have accumulated evidence to support it.”
That’s a quote from trading coach Van Tharp, and I’ve applied it to so many areas as a simple way of explaining people’s expression of their beliefs, my own, and the realisation of how powerful confirmation bias is. Van believes we don’t trade the markets, we trade our beliefs in the market. A trading system therefore is simply a set of beliefs, and I think he’s right.
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Like many traders, I read Market Wizards as a kid. If you don’t know it, it’s a collection of interviews with the most legendary traders of the 1980s.
Back when I first read it, I really had no idea what the hell I was doing. I read it, thought I got it and moved on.
But I didn’t get it.
The reason was simple. I didn’t have the life experience and wisdom to understand it. That would take many, many more years.
A few months ago I picked up my old, dog eared and highlighted copy and started thumbing through it. I expected to snag a few quotes and move on but pretty soon I found myself hooked, reading it cover to cover all over again.
Two things struck me immediately.
- First, I’d highlighted all the wrong things.
- Second, I saw instantly how much these men were alike.
No matter where they came from or how they got started, they all remembered one devastating loss early in their career. They all started with little to no idea what they were doing. All of them transcended false beliefs and developed an amazing ability to adapt and change their minds in a flash.
Their styles, politics and temperament all varied widely but the rest of their lives followed a remarkably similar path.
That’s when I realized I was seeing something bigger, a meta-pattern, a pattern of patterns.
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After surging 500 points in the intra-day trade, the S&P BSE Sensex witnessed a sharp fall at the fag-end of the session, mainly due to profit-booking to end at 38,024, up 269 points or 0.71 per cent. Financial stocks such as HDFC Bank and ICICI Bank contributed the most to the index’s gains while Reliance Industries (RIL), ITC and Hindustan Unilever (HUL) emerged as the biggest drags.
The NSE’s benchmark index Nifty50 closed above 11,400 level at 11,427, up 84 points or 0.74 per cent. The index hit a high of 11,487 levels during the day.
Both Sensex and Nifty reclaimed their crucial levels of 38,000 and 11,400 levels, respectively in the intra-day trade after a gap of six months.
On a weekly basis, Sensex gained 3.68 per cent and Nifty added 3.54 per cent.
Market breadth remained in favour of declines as out 2,860 companies traded on BSE, 1,476 declined and 1,209 advanced while 175 remained unchanged. A total of 59 securities hit their 52-week highs while 111 scrips hit their one-year lows.
In the broader market, the S&P BSE MidCap index ended 83 points, or 0.55 per cent higher at 15,172, while the S&P BSE SmallCap index settled at 14,837, up 51 points or 0.34 per cent.
Banking barometer Nifty Bank, too hit a fresh record high of 29,520.70 during the day. It ended at 29,381.45, up over 1.50 per cent with 10 out of 12 constituents ending in the green.
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I am fascinated with history, or more specifically, market history and how investors reacted during different periods of different markets cycles.
Partly because I’m interested in history and partly because I want to be prepared for every market environment, I like to seek out investor letters and commentary from some of the best investors of all time during periods of market stress, such as the dot-com bubble or financial crisis.
Howard Marks (Trades, Portfolio) is undoubtedly one of the best commentators in this regard. His regular memos to investors have maintained the same investing framework ever since he started writing them in 1990. All that has changed during this period is the market environment. That’s very clear throughout the letters as Marks applies his cool, value-focused mind to every climate no matter what the prevailing consensus among Wall Street analysts.
The dot-com bust
I recently stumbled across one of Marks’ memos from 2000. Titled “We’re Not In 1999 Anymore, Toto,” the letter is a perfect example of Marks’ investing style. Just after the dot-com bubble had burst, the highly acclaimed billionaire uses the memo to provide a post-mortem on the market environment, and a look at what went wrong, as well as what went right.
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The S&P 500 hasn’t had a negative return for nine years now. There’s been some volatility in 2018 but overall things have been going pretty well for a while now.
When things are going well in the markets it can become easier for investors to focus on the minutiae.
Instead of focusing on the big picture — documenting your investment plan, asset allocation, diversification, financial planning, etc. — we start arguing about a few basis points in fees, the best formula for factor investment strategies, active vs. passive debates, and the like.
And don’t get me wrong — combining a handful of small edges in your portfolio can really add value when done in a thoughtful way.
But at a certain point, the law of diminishing returns kicks in and trying to optimise every minor detail can shift the focus from the things that truly matter in portfolio management.
Perfect is often the enemy of good when managing money.
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stockarchitect
March 11, 2019
Benchmark indices ended marginally lower on Friday led by a fall in ICICI Bank, State Bank of India (SBI), HDFC, RIL and Axis Bank.
The S&P BSE Sensex ended at 36,671, down 54 points while the broader Nifty50 index settled at 11,035, down 23 points.
Among sectoral indices, Nifty Metal index ended 1.5 per cent lower with Jindal Steel & Power and MOIL among the top losers. The Nifty IT index, too, settled 1.1 per cent lower, dragged by Wipro and Infibeam Avenues
In the broader market, the S&P BSE MidCap index ended 12 points, or 0.08 per cent lower at 14,804, while the S&P BSE SmallCap index settled at 14,529, down 11 points, or 0.08 per cent.
Shares of Wipro fell 5 per cent to Rs 256 in intra-day trade on the BSE in after huge block deals were executed on the counter. Till 11:22 am, a combined 57.86 million equity shares, representing 1.3 per cent equity, of Wipro had changed hands on the National Stock Exchange (NSE) and BSE. The stock ended at Rs 256.50, down 4.6 per cent.
Shares of Allahabad Bank hit a 52-week high of Rs 58.20, up 6.5 per cent on the BSE in the intra-day trade, extending its past three weeks’ rally after the government announced capital infusion of Rs 6,896 crore in the bank.The stock settled 4.39 per cent higher at Rs 57.05.
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Unusual challenges going forward in being a value investor, beyond active vs. passive or quant-based.
How the view of value investing has evolved over time.
One fact you should never forget: Investing is if you are judged relative to the market a zero-sum game. Asset by class by asset class, the average return to all investors in that asset class has to be the average return to all assets in that asset class. All the assets are owned by somebody, and the derivatives net out. If the asset class if up by 12%, the average investor is going to be up by 12%. What that means: If you’re going to be above average, somebody else has to be below average. That’s important because it seems good that more people are doing passive, leaving less competition. But it’s not true because you need someone to be stupid.
First reality: To the extent that the people who are doing index funds are people who populated the lower half of the investment distribution, it’s going to make your life harder not easier.
Second reality: Late cycle underperformance of value. Not something that should upset you. Today, we are in the middle of a fundamental change in the nature of profitability and in the nature of value generation that is related to a fundamental underlying change in society ad I think in various ways it has made value investing substantially harder.
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