Tuesday, October 7, 2008

Value Investment revisited in Troubled Times..

The value investing was losing relevance off late due to global Equity markets reaching new heights. When market was breaking all barriers and going high every day who would have given a thought to the precautionary principles of value investing like margin of safety, splitting of investment In debt and equity etc. Benjamin Graham, Guru of celebrated investor Warren Buffet and writer of ‘The Intelligent Investor ‘ is the originator of value investing Philosophy. 

The most important principle of value investing is margin of safety .Margin of Safety is a conservative investment strategy. By margin of safety, Mr Graham meant that any stock bought should be worth considerably more than it costs. The worth of the stock can be determined by checking the book value of the share although there is no generic rule to define it, as per Mr Graham if the market value of the share is less than or in close vicinity of the book value it provides good margin of safety. If we look at the present valuations of the Indian equity market, there are so many stocks with good margin of safety. It was tough to spot such stocks when Sensex was at 22000 but at present valuations many good companies like ICICI Bank, DLF etc are all trading below book values.

Mr. Graham was a conservative investor throughout his life and strongly felt that the money invested should be splitted into both debt and equity as it provides a natural hedge against each other. If we check the present scenario the stock markets are plunging but interest rates are increasing proving good yields. 

As per Graham a shrewd investor is one who bought in a bear market when everyone else was selling and sold out in a bull market when everyone else was buying. But I don’t know how many people will actually have courage of buying in bear conditions.

I think history repeats itself over and over again and the core principles which were valid before are valid even now. The whole environment, technology etc may change and these principles may lose significance or ignored by investors for some time but they keep reappearing to upset us all and remind us the significance of basics.


amit kumar said...

Well ankit Lets hope sensex touches around 5k when we finally(hopefully) ;-) get our own first salary in may next year...and then another bull run starts....!!!!!!!!!! n then we can pick up the stocks based on The Intelligent Investor principle .....

Ankit said...

Hey Amit . Both the scenarios are actually contradicting :-) , If sensex touches 5k than getting jobs will be tough if not impossible!