Everyone Value Investor by Strategy but few by Principles
Yesterday a friend sent a snapshot (attached) regarding comments by Charlie Munger on Value Investing and I totally agree with the Genius.
Investing is simple buy low (Market price), sell high (value); if we are seeing the difference then we are value investor in strategy by default (but when & whom you buy can be categorized) and if there is no difference, then either you are chasing the momentum or have more money to waste.
In my view there are only 3 types of investors, on the basis of when & whom you buy (not counting traders, as have no knowledge about trading):
1) Cigar Butt: Here, you look for the mispricing in the price compared to the value while taking into account Margin of Safety (MOS). Eg: After Ex- dividend date, Majesco stock fell to ~12.5, resulting in Mcap of 35 Cr. while the Company has cash of 100 Cr., not counting real asset, thus value gap with MOS
2) Growing Company but with MOS (GARP — Growth at Reasonable Price): Here you are limited to good companies with good management, but you buy them by taking into account MOS. Eg: Buying Nestle when Maggi crisis was there.
3) Growing Company at any Cost: Here you are limited to good companies with good management. Eg: Buying Nestle at current price
In 1st you have to take various decisions (in frequency wise) compared to 2nd or 3rd and area of investing in 1st is large compared to 2nd or 3rd, as it may involve good companies, cheap companies, where you expect turnaround / NCLT results / Mispricing compared to assets, mispricing due to growth rate (reverse DCF) etc.
Difference between 2nd and 3rd is of 2 things
a) Downside Risk — More in 2nd compared to 3rd
b) Time Horizon — Can generate return in short span in 2nd compared to 3rd
In 2nd, as you have some downside protected thus you can generate decent returns in few years (short span) — strategy in my view commonly used by most mutual funds, as people investing through ELSS see which MF performs better during last 3 year period — thus either change the incentive structure of the managers or increase the time duration of ELSS.
People following 3rd have to hold stocks for long period of time, otherwise short term volatility will have a major effect.
Have attached pdf link to download the excerpts from the book (The Joys of Compounding), which includes results of research paper by Credit Suisse (“Was Warren Buffett Right: Do Wonderful Companies remain Wonderful”)
But whatever strategy you follow, try to have few mistakes and learn from it.
Till now, we have discussed strategies of Value investing, but what i have read till now about Value Investing, its more than that and it effects in positive way, how you live your life.
