The art of bargain-hunting

Looking for good deals is inherent in human psychology, be it while buying a smartphone on a leading e-commerce site or while buying a pair of jeans in a brand outlet. Typically, same should be the case when it comes to investing in equities as well with an investor on a look out for the ‘Sale’ options. However, ‘Buy Low, Sell High’ is an investing mantra which is easier said than done. The Fear of Missing Out (FOMO) the rally makes retail investors follow the herd and buy into the market when the benchmark indices have already rallied on euphoric buying, which later on results in unpleasant investment experience.

This is where value investing plays an important role. At the heart of it, value-investing means investing at discounted prices. In order to spot value, an investor therefore has to keep a sharp eye on the market. It requires identifying beaten down names and analysing the reasons for the setback. More importantly, it is necessary to gauge the potential opportunities available for its revival. But accomplishing this requires time and patience. 
Just imagine, you analyse a company and conclude that this company’s share should ideally be valued at around Rs 100 considering the existing financial health, growth prospects and the earnings potential. However, the stock is currently trading at Rs 55. As an investing principle, higher the discount better is the bargain, given the safety margin cushion between the current stock price and the intrinsic value of the stock.

Now, there can be two possibilities:

There is something more than what meets your eye. The company might have certain corporate governance or financial reporting issues and as a result the stock price is subdued. 

The broader set of investors might not have spotted the company. Once it catches the attention of institutional investors and other market participants, the stock is bound to get re-rated.

Similarly, when the market sees a correction, investors tend to follow the herd again and indulge in panic selling. The selling may be triggered on the basis of a bad news or when the economy or a particular sector as a whole faces some hurdle. At such times, the correction in stock prices is drastic as sellers outnumber potential buyers. Instead of ruing such situations investors should ideally use such times for bargain buying. But do remember to do due analysis before going on a buying spree.

When market sees a sell-off in a particular sector, it is important to understand the rationale behind such a move. In late 2015 and early 2016, foreign institutional investors pulled out of Indian markets, especially large caps, brought down the prices of several frontline stocks to attractive levels. The concerns back then were largely surrounding profit growth in large-caps, but not enough to warrant such selling, thereby presenting an opportunity for long term investors to indulge in value investing.

Value investing is a long term play

Warren Buffet is often quoted saying, “Never invest in a stock you will not be comfortable holding for the next 10 years.” Through this, he highlights the importance of good companies in a portfolio while deftly pointing to the role of patience for making mega returns. Historically, it has been observed that a fundamentally strong company has always managed to deliver steady returns over long terms, if one is ready to overlook short-term volatility. 
Price does not drive the investment decision

Lower price of a stock does not necessarily mean a particular stock is worth buying and vice versa. For example, the most expensive auto-ancillary stock in the listed space in India may still be considered as a cheap stock by market experts. In effect, what is expensive or cheap is not dependent on the stock price, but at the potential growth and performance that the stock may deliver.

Invest in Knowledge and Research

While investing your hard-earned money, do not undermine the importance of research. Buying value stocks, calls for intense research and knowing its intrinsic value. It is worth understanding that value investing need not be specific to stocks alone, but can be seen in sectors as well. For example, post the Lehman crisis, the entire market (Indian equities) offered a ‘value buying’ moment. 

Globally, Benjamin Graham, Warren Buffett, Peter Lynch, Walter Schloss, Joel Greenblatt, John Neff and are some of the leading names who defined the value investing space. Through each of their investing experiences, it has been time and again proved that deep value stocks can survive amid all the market noise, quants and the likes.

The writer is a Class 11  student at Dhirubhai Ambani International School. This is the second article in the Smart Investing Series