Explained | What is value investing, how it works and strategy

Value investing is a popular investment strategy that focuses on identifying stocks that are undervalued relative to their intrinsic worth. The underlying principle is to search for companies whose stock prices do not accurately reflect their true value, with the expectation that the market will eventually recognise and adjust the prices accordingly.

According to Daylynn Pinto, Senior Fund Manager of Equities at Bandhan AMC, buying a business at the right price and time in a particular cycle is the hallmark of value investing.

Pinto believes that substantial alpha generation can take place when one invests into these out of flavour companies at distressed values and wait for the micro environment to improve.

However, Pinto warned investors about getting into value trap. He said investing in low PE or below book value companies can lead to investment in sub-par businesses. Value investing is about getting into businesses where market saturation has not arrived and obsolescence and governance is not a worry, he added.

“Most people believe that value investing only reflects around buying something very cheap. So, commonly we talk about only buying companies below book value or companies which have a very low PE, but a lot of times that leads us to invest in sub-par businesses which we commonly call value traps. Hence, the other aspect to remember about value investing is to avoid as many value traps as you possibly can.”

“As long as you are getting into businesses where market saturation has not arrived, where obsolescence is not a worry, where governance is not a worry, then over a period of time performance should track how the company grows over a longish period of time,” Pinto said.