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Value investing: lucrative, but long-term proposition

india Updated: Jul 03, 2008 23:31 IST
Arnav Pandya
Arnav Pandya
Hindustan Times
Highlight Story

One of the best strategies that are adopted by various market experts during tough times is that of value investing. Whether this works or not will be known only in the future, but one has to be careful about the way in which this is implemented.

Often, there is talk about adopting the value-investing route, but when it comes to implementation there is a lot of difference between what is required to be done and what is actually done by the investor.

About value investing

The strategy of value investing in its simplest form looks at buying shares that are currently priced lower than their actual value. There can be various reasons why such a position occurs in the market. This can be because a particular sector is out of favour in the market whereby the companies are quoted at a very low valuation or it can be some specific issues related to a company whereby its shares are at less than the actual value.

Gaining from investment

It is important to understand that investment in a company perceived to be a value investment candidate does not mean that there will be gains from the investment.

This is because the difference with regard to the actual or the perceived value might not be covered and the investor could end up either waiting for a long time without the gains or with a situation where the gains do not actually occur.

Low price

The whole strategy is that the investor will buy the shares when the prices are low so that they are able to get an entry into the investment. This is easier said than done because in most cases when the prices go down, the overall sentiment in the market is not too good.

This means that there is a situation where there is gloom all around so there is not much enthusiasm for stocks among investors. In such a situation it takes real strength of conviction for the investor to actually go out and make the purchase because they will be swimming against the tide.

Future opportunities

There are also times when the thinking in the market is extremely short term in nature so investors are not willing to look into the future for opportunities and that is the area where there is a lot of chance for the value investors to make real money. Another point is that the term value can keep changing over a period of time so one has to be careful in making decisions because the base for this might have changed over a period of time.