Why is Value Investing boring ? Why do investors shun value stocks. Why do fund managers swear by value investing but are not able to walk the talk? It really requires a lot of courage and discipline to follow value investing.
One of the main reasons investors shy away from value investing is that the stocks they consider have poor stories. The companies that show up on the screen can be scary and not doing well, so people find them difficult to buy. The depressed prices instead of attracting investors make them repel..
What attracts investors about companies?
Companies that have done well in the past in both stock market and financial performance and those that have exciting stories. Remember the tech boom, the story: advent of a new economy or the infrastructure boom: building India, or the power sector boom: Powering India. 2006/2007 were known for their highly valued most admired real estate, infrastructure and power stocks. Thus the most admired stocks have great stories and high prices attached to them, whereas the despised stocks have terrible stories and sport low valuations. These compelling stories make them market fancies and they start commanding fancy prices. Over time when the fancy ends investors are left with fancy losses.
Companies that have done well in the past in both stock market and financial performance and those that have exciting stories. Remember the tech boom, the story: advent of a new economy or the infrastructure boom: building India, or the power sector boom: Powering India. 2006/2007 were known for their highly valued most admired real estate, infrastructure and power stocks. Thus the most admired stocks have great stories and high prices attached to them, whereas the despised stocks have terrible stories and sport low valuations. These compelling stories make them market fancies and they start commanding fancy prices. Over time when the fancy ends investors are left with fancy losses.
Psychologically investors tend to be attracted to the admired stocks. Yet the despised stocks are far better investment. They significantly out perform the market as well as the admired stocks. Investors find a stock less risky when everyone is buying and the prices are going up. They find it more risky when no one is buying and the prices are going down. This is how investor psychology works. It requires a lot of courage and discipline for one to go against the popular trend.
At the other end of the spectrum from value stocks we have another group of stocks that have different stories attached to them. I am talking about Initial Public Offerings (IPO’s), companies that have come to the market for the first time to offer their stocks to the public. Such stocks have great stories attached to them and are able to sell such stocks at high premiums. One recent example that captured investor’s imagination was the IPO of Reliance Power in the fancy power sector. The stock had a great story: Powering India. Everyone was exceedingly excited about the growth prospects of this company that they paid a hefty premium and the issue was heavily oversubscribed to be called the mother of all IPO’s. Investors overpaid for the stock and there was no margin of safety. On listing the prices crashed. The euphoria of the story was over as the earnings dropped over time.
Want to know which are the hot stories in the market? Read the newspapers and see the advertisements of companies coming out with IPO’s, and new mutual fund scheme launches. That is what is hot in the markets.
Investing is for making your money grow. It is not for excitement. Value investing may sound boring but that is the only way you grow your wealth in stock markets. PPFAS Long Term Value Fund follows the Value Investing principles.
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