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What is Value Investing?

Value Investing is basically identifying the underlying value of the company by analyzing Financial Statements. It will find the real value of the company and compares it with the future value predictable through the financial statements. Based on these informations the value investor will decide on investing in the company. This is like finding the next Infosys Technologies® in Stock Market.

There are sideways that a company will be looking fantastic in the financial statements, but the value investor may not invest in it if the current market price (CMP) is very high than the book value. So if the company has a reasonable CMP the value investor take the steps forward.

 We are recommending investment based on following 3 parameters:

1) Intrinsic Value  (Major Weightage)

2) PE Ratio         

3) Book Value     

What is Intrinsic Value?

Intrinsic Value is the Future Value of the share after deducting Inflation and applying Margin of Safety.  It is a very important tool used by professional investors.  For detailed understanding you can click on the Intrinsic Value column for each scrip.  Simply saying if a scrip is having CMP 100 and Intrinsic Value 500 where number of years is 10.  This means the scrip has potentiel to multiply the invested capital by 5 times.  Intrinsic value calculation is based on the parameters EPS growth, Inflation and Margin of Safety.

In the site more weightage is given to Intrinsic Value.  Always enter a share if the Intrinsic Value is greater than CMP alteast by 5 times.

What is PE Ratio?

PE Ratio or Price/Earnings Ratio determines how expensive the stock is. Generally it is adviced to invest on companies having PE Ratio within 5. The lower the better. But it should not be the single parameter while investing in a stock. The investor should analyze the financial strength of the company before making investment decisions. PE = CMP / EPS
CMP is the Current Market Price EPS is the Earnings Per Share (How much rupees the company is earning per share in an accounting year)

 It is wise to enter for less PE (5-10) shares.  But if the Intrinsic Value is very high it means huge growth potential - then it is advisable to enter if PE upto 25.

What is Book Value?

Book Value is the value of share if the company goes liquidation today.  It means the value of Assets minus Liabilities divided by number of outstanding shares.  Thus if a company is having Book Value 400 and CMP 3000 (eg: Infosys) it means the share is trading at around 10 times the orginal book value.  Another interpretation is that a person having infosys shares of 500 crores book value will be worth 5000 crores.

For some shares the book value will be less than the CMP.  The value investor kings like Benjamin Grahim prefers entering these scrips and holding them to book profit.  He recommends that Mr. Market at some point will make the CMP equal to Book Value.

We are giving good weightage for  Book Value - but Book Value too less than the CMP is not advisable.

How long it will take for Value Investing?

The value investing method is preferred long-term as the underlying company should have time to grow. The least time is of 10 years and upper time circuit spans to 30 years and more. It is quite natural that a plant will take time to become a tree.

How to find a good scrip to invest?

The conditions for finding a good scrip for value investing is as follows.

A good Intrinsic Value (minumum 5 times larger than CMP)
A good PE Ratio (maximum 25)
A good Book Value (CMP should not be larger than 2.5 times of Book Value)

What should be the action if the CMP of an invested scrip goes down?

It is seen in the bear market that most of the people will sell their holdings at loss. Comparing with the Professional Investors, these people are amateur in nature. The professional seeks the fundamental of the company again and re-invests if the quality persists. A professional way of investing we have seen is that buying the same scrip at 50% down times in CMP.

When to sell the scrip?

The Professional way of selling the scrip is at when the fundamental of the company changed or another company with better than current one is found.

The exit strategies we could suggest are:

1) Exit when CMP > Intrinsic Value

2) Check for NIFTY PE Ratio crossing above 25

After exiting it is adviced to park the amount in debt funds (fixed deposits, bonds etc.) and we can reenter at the bottom of a bear attack if possible.

What can be an appropriate amount for investing?

We analyzed that people have set 1 Lakh rupees in A group scrips. For investing in other groups they were using 25 thousand and 50 thousands. The investment period is set for 10 years and with a proper backup of diversification among different sectors.

What does the Red area in Graph denotes?

It denotes Financial Expenses and it is deducted from the Operating Profit. During the financial period the company will be taking loans from banks or other institutions to manage the working capital. In some companies this will be very huge part of the Operating Profit. According to Warren Buffett these companies are risky during the recession times. Financial Institutions having huge financial expenses may face issues due to credit defaults by the customers. It will affect the long term competitiveness of the company. Eg: Financial companies takes 7% loan and distributes at 10% for the customer. The 3% is the Profit for them. So huge loans means huge profits and on credit faults this will result in huge loss. This is one of the reason of credit market bust in United States.

How does a good performing graph look like?

A good performing company should be having the Operating Income, Operating Profit and Net Profit moving up steadily. This phenomenon will be repeated in the past years and it is expected to be happening in the future years too. The green area marked shows the Net Profit and red area marked shows Financial Expenses. A good company should have less financial expenses.

Although high Financial Expenses is not a good signal to enter a scrip - the banking and financial stocks will be having high financial ratios.  Proper analysis of the business can provide enough grounds on entering these scrips eventhough they have high financial expenses.

How does a bad performing graph look like?

A bad company will be unbalanced in growth and may not be having any growth in Operating Income, Net Profit etc. It may also have loss reflected as the Net Profit going down the x-axis. There are cases like high financial expenses marked in huge red area. One should keep away from such companies.