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Business News/ Brand Stories / What determines your investment strategy?
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What determines your investment strategy?

In India, investment strategy is driven by two major considerations - value and growth. Read on to know more.

Patience is the key attribute of a value investor.Premium
Patience is the key attribute of a value investor.

How do you define your approach to investing? There may be many answers to that question. Often investors describe their style of investing as a means to answer this question. In India, the two approaches that are often heard of are value and growth.

 

Are you looking for value?

 

A value investor is seeking outbargains; finding those companies whose stock may be out of favor for one reason or another and whose stock is inexpensive relative to the company’s earnings or assets. Value investors are looking for companies with reasonable balance sheet strength and have little corporate debt but hold the potential for robust earnings increase in the medium to long term. Identifying a company that meets the above criteria is only the first step.

The next step is to determine whether or not a company’s low share price is justified. For instance, can the undervaluation be traced to the fact that the company’s industry or products are currently out of favor? Has the company experienced short- term earnings disappointments? Or is it because of some problem with the company for which there is no immediate or near- term solution? The answer to those questions will determine whether true value exists or not.

The value approach is a time tested one and dates back several decades to the works of Benjamin Graham, who is widely regarded as the “father of value investing". His wisdom still holds true even today and is worth being followed. His book, Security Analysis, co-authored with David Dodd, advocated a fundamental analysis of a company’s balance sheet before deciding to invest. Graham also emphasized the importance of building a “margin of safety" into one’s analysis. The investor’s aim, he said, should be to “purchase a dollar for 50 cents."

It is often said that patience is the key attribute of a value investor. This is because value investing by its very nature means the ability to invest, sit back and wait patiently for one’s thesis to play out, despite short term challenges. Over time, other investors too will draw similar conclusions about the company’s potential and thereafter the stock price is bound for an uptick. While the value investor waits, he or she still may receive some reward in the form of dividends as value stocks typically tend to have an above –average dividend yield.

 

Are you seeking growth?

 

Growth investing is a matter of expectations. Growth investors are on the lookout for companies whose sales and earnings are expected to grow steadily. Given that profitable companies rarely go unnoticed; growth stocks are not inexpensive. However, given the appreciation potential, growth investors are willing to pay the premium involved.

The companies in this category are those whose sales growth is greater than their competitors, have incurred major debt for expansion and will deliver very little in the way of dividends. They have high earnings per share, price/earnings and price/book ratios. Because their appreciation usually is based upon earnings announcements, share price of growth stocks tend to fluctuate rapidly. But, despite volatility, a good growth stock will report steady growth in earnings. The challenge here for an investor is to buy at an appropriate time and sell it too early in the upward journey.

 

Style Drift

 

A stock identified as either “growth" or “value" need not retain that characteristic forever. Over time, stocks may drift from one category to the other as their fortunes change. As that happens, a portfolio inadvertently may drift from one style to the other. The significant variability of the investment returns between these two styles suggests that “style diversification" may be appropriate or, at least, that style should be one of the metrics by which an investment portfolio should be measured periodically.

To conclude, history shows that the market does not favor one style of investing over another for very long. Both growth and value have their respective days in the sun. So, an investor need not choose one style over the other. A portfolio can have a healthy blend of growth and value names in a proportion with which one is comfortable with. Over the long term, the aim is to build a portfolio with robust companies helping in one’s wealth creation journey.

 

Raman Deep Singh, CEO, Verdant Horizons Pvt. Ltd
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Raman Deep Singh, CEO, Verdant Horizons Pvt. Ltd

 

This article has been authored by Raman Deep Singh, CEO, Verdant Horizons Pvt. Ltd

 

Disclaimer: This article is a promotional feature and it doesn't have journalistic/editorial involvement of Hindustan Times.

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Published: 23 Nov 2023, 01:56 PM IST
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