All investing is value investing. What is investing if not an attempt to buy something for less than its worth? – Warren Buffet
Benjamin Graham. (Famously know as Warren Buffet’s mentor) introduced the concept of value investing later. He authored the well known books “Security Analysis” and “The Intelligent Investor”
According to him every asset has its intrinsic value (true value / Fair value / Liquidation value ) . But the current price of the asset is a matter of demand and supply. Generally In a booming economy ,most of the asset prices jump more than its Fair Value versus in a depressed economy the price of an asset moves much lower than its fair value.
So before investing in any asset it is very imp to know if its value is more than its price.
Let me give u a simple example.
Suppose on the night of demonetization you land in India from US and you take a auto ride to reach your home. The meter charge is Rs. 50. You being unaware of the latest development about banning of Rs. 500 and Rs. 1000 note, you offer a Rs. 500 note to the auto driver. He refuses to accept a banned note. ATM’s are shut and no one at midnight available to help.
So as a solution you regretfully offer the auto driver $1 though u know its value is much more than the auto fare, but you have no choice. Now for an auto driver not knowing the value of $1 he would argue only for an Indian currency valid note.
But if he is a smart, intelligent driver he would say the price that I have quoted is only Rs 50 but the value that I am getting is much higher, he would grab this opportunity and accept even a dollar as he is aware the next day if he goes to a money changer he would get approx 68 Rs which is 30% higher than what actually the bill was.
What the second auto driver would do is value investing. You always try and find assets where the value is more than the price. The real skill lies in indentifying and calculating the value of any asset. We as a team have derived different models through which we identify the difference between price and value of different assets.
We feel only high level macro analysis and big picture of future does not give comfort to invest, as future is always uncertain. Incase the assumption of future growth goes wrong the asset can correct very seriously creating big losses and only then one would realize that he/she had wrong assumptions.
A famous Warren buffet saying “Only when the tide goes out do you discover who’s been swimming naked”
Implying that in a bullish market everyone seems to be taking a right investing decision, but only in a crisis or market collapse it exposes the wrong investing approach.
We keep quoting Warren Buffet and Charlie Mungar is because they are the most iconic value investors in the world.