5 Things About Value Investing You Must Know in Mutual Fund

The stock market is 'unpredictable', with stocks fluctuating with every passing second based on many factors. While countless factors influence the stock market , they can broadly be classified into types - market sentiments and the company's fundamental records.The strategy of value investing focuses on investigating stock prices and making investments based on the company’s records and analysis rather than just the market sentiment.Let's understand this investment style better.

Value investing is an investment strategy that involves purchasing stocks when undervalued and selling them when they reach their intrinsic value or are overvalued. There are three main terms related to the concept.

• Undervaluation: This refers to a phenomenon when the stock price is less than its intrinsic value.
• Overvaluation: This refers to the stock being traded at a higher price than its intrinsic value.
• Intrinsic Value: This is the real value of a stock which is determined by carrying out a fundamental analysis of the company.

Market conditions, financial events, or the general public sentiment might influence a company's stocks to trade at a price significantly lower or higher than their actual worth. With valueinvesting style, investors look for such opportunities in the market where the stock is currently undervalued due to the factors such as mentioned above.

To apply value investing, investors first scout for stocks that have the potential to perform betterby studying the company's financials and other factors that can impact the cost price. Once their research reflects that the stock is underpriced, they buy the stocks and sell them once they hit the desired price. For example, the stock of XYZ company is being sold at Rs. 200. You investigate and find that the stock is undervalued; its intrinsic value isRs. 250 based on the fundamental analysis. You purchase this stock at Rs 200, and once the stock price jumps and falls in the range of Rs. 250, you can sell the stocks and make a profit.

The intrinsic value or the book value of a company is its actual value, free of any market biases or perceptions. This value is derived by judging crucial aspects of a company like its financial statements, market, business model, competitors, sector, future direction, cash flow and likewise factors. Here are a few financial parameters upon which a company is investigated:

• EBIT (Earnings Before Interest and Tax) and EBITDA (Earnings Before Interest Tax Depreciation and Amortisation)
• Price-to-earnings ratio or P/E ratio
• P/B ratio or Price-to-book value ratio
• Debt to Equity Ratio
• Discounted cash flow analysis
• Price Earning to Growth Ratio

While deriving the intrinsic value, it is vital to ascertain why the stocks were undervalued in the first place. Sometimes a stock might be undervalued owing to market hysteria or an unfavourable sentiment.For example, if news breaks down that the automobile industry is incurring losses, then investors might start offloading their stocks of automobile companies. However, once the hysteria subsides, the stocks are likely to jump back to their intrinsic value.

As apparent by now, value investing involves holding on to a stock till it shoots up to its intrinsic value.Since it is difficult to predict the time duration a stock will take to reach to its intrinsic value, this type of investment strategy is best-suited to investors looking at making profits and capital appreciation in the long-term.

Another answer to the question of what is value investing can be that value investing is banking on market inefficiencies. The strategy of value investing takes an opposing stance on the 'efficient-market hypothesis'. Since the hypothesis is based on the idea that the stock price is a reflection of every parameter surrounding a company, value investing works on the principle that stocks can, in fact, be undervalued and overvalued.This value discrepancy can arise from various factors like market conditions, public sentiment or administrative changes. However, for an investor, this offers a great opportunity to take advantage of such inefficiencies and generate capital appreciation.

What is common between legendary investor Warren Buffet and popular hedge fund manager Michael Burry, who was the first investor to detect the subprime mortgage crisis? Both these investors advocate the necessity of thorough research and patience when opting for value investment strategies. Gather and study crucial financial documents of a company to analyse its intrinsic value. Then simply invest and wait for the stocks to level up and perform at their intrinsic value. Trust your research and be patient.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.