{"id":22757,"date":"2018-03-15T00:00:00","date_gmt":"2018-03-14T18:30:00","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/the-magic-of-value-investing\/"},"modified":"2018-03-15T00:00:00","modified_gmt":"2018-03-14T18:30:00","slug":"the-magic-of-value-investing","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/the-magic-of-value-investing\/","title":{"rendered":"The Magic of Value Investing"},"content":{"rendered":"

Value Investing\u00a0delivers consistent returns!\u00a0<\/strong><\/span><\/h2>\n

Let’s understand the magic of Value Investing. In the short term, valuation probably may not hold true because markets are driven more by sentiments. Cheap stocks may get cheaper, and expensive stocks may get more expensive. But, it has been observed that over a long period of time, there is a higher chance of making good and consistent returns, if you hold a portfolio of cheaper stocks i.e. stocks which in the lowest quartile of their valuations.<\/p>\n

Why?<\/strong><\/span><\/h2>\n
    \n
  1. Expensive stocks tend to have good news and growth expectations attached to it. Analysts and investors tend to extrapolate good news longer into the future. Similarly, bad news is extrapolated for cheaper stocks. This behavior leads to an overreaction at both the extremes. In reality, expensive stocks disappoint, as good news can\u2019t go on forever; while\u00a0cheaper stocks throw positive surprises,<\/strong>\u00a0as reverse to the mean eventually happens. This leads to higher returns from holding a basket of cheaper stocks.<\/li>\n
  2. A portfolio of cheaper stocks restricts the downside, as the\u00a0bad news is already factored in<\/strong>. While the portfolio may go down along with the market in short-term, but over long-term, the chances of losing a lot of money are less. This leads to\u00a0lower loss of capital.<\/strong><\/li>\n
  3. Since stocks are cheaper relative to cash flows, a pool of\u00a0cheaper stocks\u00a0<\/strong>generally has\u00a0higher dividend yield,<\/strong>\u00a0which improves the returns even in a flat market. Since,\u00a0expensive stocks<\/strong>\u00a0are likely to be growing fast, they retain all the cash flows for growing the business and also, since they are trading at high multiples to cash flows,\u00a0dividend yield happens to be lower<\/strong>.<\/li>\n
  4. The portfolio of\u00a0expensive stocks<\/strong>\u00a0experiences\u00a0more volatility<\/strong>\u00a0due to change in investor sentiment and PE multiples. Investments in the expensive stocks are done based on \u2018hope\u2019 and investors often overpay for the growth. The portfolio is likely to correct from time to time, if the forecast don\u2019t pan out. Moreover, an average investor is likely to sell out such a portfolio as s\/he is unable to handle the volatility. Absolute cheapness and high dividend yield leads to lower downside for a portfolio of cheaper stocks. Corrections are unlikely to be very steep as the stocks that qualify to be cheap have already fallen from their peaks. So, volatility could be low, and it doesn\u2019t scare away investors.<\/li>\n<\/ol>\n

    There\u2019s no denying the fact that following the tenets of value investing could (a) Boring, (b) Miss multi-baggers and (c) Often lag behind in bull market.\u00a0However, value investing\u00a0delivers consistent returns as opposed to low probability event of overnight richness.<\/strong><\/p>\n

    \n
    \"Value<\/figure>\n<\/div>\n
    \"\"<\/a><\/figure>\n","protected":false},"excerpt":{"rendered":"

    Discover how value investing can lead to consistent returns. Learn why holding a portfolio of cheaper stocks often outperforms expensive stocks over the long term.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_is2025_no_summary":false,"footnotes":""},"categories":[1144,1151],"tags":[],"class_list":["post-22757","post","type-post","status-publish","format-standard","hentry","category-sensible-investing","category-stock-investment"],"_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22757","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=22757"}],"version-history":[{"count":2,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22757\/revisions"}],"predecessor-version":[{"id":23220,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22757\/revisions\/23220"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=22757"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=22757"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=22757"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}