“value investing means buying low ROCE stocks at low pe”, one of the biggest lies spread by people whose styles are in fancy (quality/growth at any price). especially the ones who buy at high price and come on tv/twitter.
value investing is nothing more than buying cheaper than present value of future cash flows. (you don’t need to compute, just understand the concept).
a low roce company will have poor cash flow growth in future as it will reinvest bulk of its cash flows into the ground. There is no way this stock would be cheap even at 10 pe. Perhaps pe of 5x is fine for such companies. From 5 pe if it goes to 6-7 it can give decent returns + dividend. But since growth of stock price is ALWAYS linked to profit growth , one wonders why someone would just buy a stock for one time 20-30% pop over 2 y. Too less a reward for investing into equity. I aim for atleast 2x in 4-5 y in a bluechip stock and 3x in 4-5y in a decent co.
where will you find value stocks? if its track record is great but no one is looking at the company today. Its future is going to be bright but current performance is down due to temporary recoverable problem. 1 y ago, lot of pharma companies started to come out of stress. Case in point ipca labs. It had gone through its pain of usfda ban, prior to that it earned health ROCE and growth (I was just kept staring at its performance then). but growth got derailed. But as the growth started coming back, roce were likely to go back to their historical levels. The business continues to have same edge (low cost mfg) and the mgmt is the same. Same happened with divis, dr reddys (not so much sun pharma lupin yet) all these stocks were available at 15 pe with expectation of 15% cagr in profit. Global and domestic pharma growing at 8 (in inr) & 12%.
same case with IT in 2017. IT companies didn’t grow in 24 m and even large cap were at 14x pe. As compared to mkt, these stocks were bargains with low downside. Mindtree could report 14-15% cagr growth as even large cap were growing at 10-12%. It was available at 12-13 pe. (after removing one-off expense)
value investing doesn’t mean low pe, asset play or buying holding cos. It means buying at price lower than discounted cash flows. High roce and high growth will have high present value. But since their stock price will also be high (in terms of pe) they don’t offer much comfort in safety.
didn’t ben graham just look at pe? value investing is wrongly inferred as low pe because it was an old definition when only companies that existed were railroads, industrials and steel. Low pe worked beautifully as all companies had similar & lower roce. Now with better business models, the value of cash flows far exceeds asset value. (read bruce greenwald value investing book).
finding a value is not so easy -one has to wait for right bargains once in a while. Value stocks were hard to come by from 2015-2018. They started emerging off-late but not so many yet. in such environment, you just need PATIENCE
now imagine if fund managers start practicing value investing. They won’t be able to buy enough stocks so can’t charge fees. so they justify buying expensive shit and defame value investing by equating it with junk stock investing. If you see ppfas and quantum mf . both have been holding cash for last 2-3 years. only now they have invested fully. Same is true for many advisors/pms who believe in value investing. Some pms returned money to investors because they didn’t find opportunities and some pms held 30% in cash
value investing is never about finding multibagger. it doesnt mean buying next hdfc bank or identifying hdfc bank in early years. value investing more like tortoise than hare race. slow and steady wins the race.
value investing doesn’t mean beating mkt every yr. buffett has underperformed many yrs in his heydays as well (post 1970). so has charlie munger. so no wonder less mortals have no chance of beating mkt every yr
value investing doesn’t mean not losing money. stocks can lose money. but over time, if stocks are bought well (quality and price) they will together make good return. if you have bought well, you don’t need next best pick, you need PATIENCE.
value investing doesn’t mean no volatility. it is not fixed deposit. it is equity afterall. it will have more or less same volatility as index mostly. but why get all the goodies without negatives? are you god?
whenever you come across anyone laughing at low pe stocks (without looking at roce/growth) or defaming value investing –he either doesn’t understand value investing or promoting his ‘fund/pms’. stay away from such a pompous salesman. he will learn his lesson soon…
p.s. and beware of those petty intraday traders who look at cup and crow and owl chart pattern to convince you value investing doesn’t work. forget value investing, index fund itself beats 99% of traders. value investing may beat even more than that.
p.s. genuine momentum investors know pros & cons of their strategy too. they would not disrespect value investing unless they have ulterior motives