The Value Strategy of Investing
- Why Large caps?
- Why Value Strategy?
- Investing Style?
Key benefits of Investing in Equities as an asset class:
- Proud ownership of companies
- Wealth Creation in long term
- Dividend income
- Higher liquidity
- Tax benefits
To sum up
- Equity markets have historically produced higher returns than gold, real-estate, bank deposits or other fixed income assets over the longer term (source: Bloomberg)
- Historical data states that the risk of capital loss does exist especially in the shorter term but with longer periods of investments, this risk is negated
This chart adjusts compounding interest and inflation rate. Tk. 100 has become Tk. 5399 in the stock market instead of Tk. 185 only from bank deposit between FY1990 to FY2017.
Food for thought !!!
- In longer time period, company’s share price reflects its earnings. But volatility of share price is generally higher than volatility of earnings.
- The volatility in share prices results in emotional response of greed in rising markets and fear in falling markets. Mostly these responses are way more exaggerated on upside as well as downside
Key Traits of Large cap companies:
- High Quality Management
- Good financial position and performance
- Higher ability to pay dividends
- Relatively stable companies as compared to midcaps
- Stocks are seldom mispriced by the markets
- Information often publicly available
- Often held by large institutional investors
Basic Traits of Investing Style
- Invest in companies with operating leverage than financial leverage
- Do not believe in “speculation”, rather believe in “value investing”
- Do not over diversify your portfolio
- The businesses you invest, must have growth potential with economic moat
- Do practice long-term Buy and Hold investing style
Why Value Investing for Longer Term is significant ? Buy Right, Sit Tight.
- Real wealth is created by riding out bulk of the growth curve of quality companies and not by trading in and out in response to buy, sell and hold recommendations.
- This philosophy enables investor and manager alike to keep focus on the businesses they are holding rather than get distracted by movements in share prices.
- An approach of buying high quality stocks and holding them for a long term wealth creation motive, results in drastic reduction of costs for the end investor.
- Long term creation of wealth is produced only by holding on to the winners and deserting the losers.
Value Strategy Characteristics
- Focus on return on net worth. Companies which are likely to earn 20-25 % on its net worth going forward.
- The focus is on buying undervalued companies
- Buying stable earnings / cash flows in reasonably priced assets
- To identify potential long-term wealth creators by focusing on individual companies and their management bandwidth.
- Focused strategy construct: The portfolio consists of around 20 stocks
- Long-term investment view: Strongly believe that “Money is made by investing for the long term”
- Margin of safety: To purchase a piece of great business at a fraction of its true value.