How Value Investing Works? Meaning, Benefits, Risks
- 25 Apr 2023
- By: BlinkX Research Team
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Value investing in India is a well-regarded investment approach where investors, using a stock market app, look to find undervalued stocks and make long-term investments in them. Value investors want to purchase companies at a mouthwatering discount to their real value, offering a margin of safety against future losses. They do this by applying fundamental analysis and other valuation parameters.
What is Value Investing?
Value investing is an investment approach that is based on the crux of finding undervalued stocks and investing with the expectation that their price would eventually rise. If we had to to get technical or nuanced—value investors look to invest in companies that are trading below their intrinsic value.
The key word here is undervalued—meaning lower than the intrinsic value—and not cheap; so don’t mistake value investing as a strategy that focuses on stocks that have witnessed a severe price erosion. Value investing strategies must be employed in the Indian stock market by looking for businesses with solid fundamentals.
Understanding Value Investing Using an Example
Take the Indian IT giant Infosys, for instance. After the CEO of Infosys departed in 2017, the stock price of the business decreased by around 15%, raising doubts about its future prospects. Value investors understood the business's strong financials, business reach, steady sales growth, and substantial profit margins. So they recognised an opportunity to buy the company at a reduced price.
Value investors who had invested in Infosys during the decline saw a healthy return over the course of the following several years as the stock's price recovered and eventually hit new highs. Thus, by examining a company's financial records and fundamentals, a value investor seeks out businesses that are trading below their intrinsic worth.
Table of Content
- What is Value Investing?
- Steps of Value Investing
- Benefits of Value Investing
- Risks of Value Investing
- Conclusion
Steps of Value Investing
Now, let’s look at the steps of choosing stocks for value investing in India; the following only outline the steps in brief, so it’s worth noting that you must spend considerable time on each step and there are plenty of nuances to be explored.
Step 1: Stock Screening
Value investors frequently filter the market for inexpensive stocks using different financial criteria including the price-to-earnings (P/E) ratio, dividend yield, price-to-book (P/B) ratio, earnings per share (EPS) and other valuation metrics. They may also include some growth metrics in the screening process like the ROE and ROCE metrics.
Step 2: Performing Fundamental analysis
Value investors then assess the financial statement and other company and industry fundamentals to ascertain their intrinsic value. Examining variables including revenue growth, profits growth, profit margins, return on equity (ROE), return on capital employed (ROCE), levels of debt, and other important financial parameters is part of this process; additionally, they also evaluate industry and economic trends. Investors also may use complex methods like the Discounted Cash Flow (DCF) methods.
Step 3: Finding a margin of safety
The disparity between a stock's intrinsic value & its current market value is referred to as the margin of safety. Value investors want to acquire stocks at a price that is substantially below their real worth, offering a cushion against possible losses.
Step 4: Long-term holding patience
Value investing is an investment approach for the long term, therefore investors must have the patience and self-control to hang onto their holdings even when the market is experiencing a slump.
Benefits of Value Investing
High return potential: Historically, the Indian stock market has produced high returns, surpassing other asset classes like bonds, fixed -income deposits and gold in the long run.
Lower downsides: Generally, since the investor is buying the stock at value lower than its intrinsic value, the downside is relatively less—how much lower can it go before it bounces back up? Investors can further limit their downsides by maintaining diversified portfolios.
Liquidity: Due to the Indian stock market's high level of liquidity, investors can swiftly and easily acquire and sell shares.
Benefits with regard to taxes: Long-term capital gains from stock investments are tax-free in India up to a specific threshold, making them a desirable investment choice for long-term investors.
Risks of Value Investing
Market turbulence: Share prices frequently fluctuate in the Indian stock market as a result of shifting market circumstances, political unrest, and economic considerations.
Risks particular to the firm: Investing in the stocks of individual companies exposes you to risks specific to that company; the risks include management changes, operational difficulties, and regulatory changes that could affect the stock price.
Regulatory risk: In order to make wise investing decisions, investors must be updated about changes to government regulations and policies that may have an impact on the Indian stock market.
Conclusion
Value investing in India is a well-regarded investment approach where investors, using a stock market app, look to find undervalued stocks and make long-term investments in them. Value investors want to purchase companies at a mouthwatering discount to their real value, offering a margin of safety against future losses. They do this by applying fundamental analysis and other valuation parameters.
While this approach gives investors the chance to create low-risk, high-return liquid, diversified portfolios; however, there are risks as well, including market volatility, company-specific risks, and regulatory risk. Overall, for investors who are prepared to conduct their own research, practise patience and discipline, value investing proves to be a profitable approach if done properly.