Value investing strategy can work for those with a long-term horizon1 min read . Updated: 22 Sep 2020, 10:22 PM IST
Value investing has under-performed growth investing since the global financial crisis of 2008
Value investing is an investment style that seeks to buy companies at a discount to their intrinsic value. Typically, such companies are cheap on metrics such as price-to-earnings, price-to-book and dividend yield. It rests on the principle that these companies will one day be discovered and re-rated. The cheap valuation provides a large margin of safety to the investor in case the company fails to see a growth spurt or revival in its prospects.
Value investing has underperformed growth investing (buying fast-growing companies even if they are richly valued) since the global financial crisis of 2008, but this could simply be a cyclical phenomenon. Mutual fund investors can buy into value funds if they believe in this investing style. A high level of patience and a long time horizon is a key ingredient of this strategy.
Not all value funds practise value investing as it is conventionally understood. Some have a relatively high allocation to large, growth companies as a result of the fund’s size. Investors should check the portfolio, and the fund manager’s interviews before picking a fund.
Investors should particularly be wary of “value traps". These are companies that have become cheap for good reason and are on the path to becoming cheaper still. The low valuations that seem prima facie attractive may not fully account for further declines in the company’s earnings and cash flows.