What is Value Investing?
Value investing is a strategy where we pick stocks when they are trading less than their book value or real Value and invest in them. Investors search for stocks that the market seems to have undervalued. Since these stocks are of low price, investors will benefit from positive or negative news about stock irrespective of the base fundamentals of the company. These reactions will helps investors earn profits as they would have brought these stocks at a discounted price.
Why Value investing doesn’t seem to work?
Warren Buffet’s Value investing doesn’t seem to work anymore, especially in India. While these stocks look attractive, but they have limited potential to grow because of their low return ratio, high debts, and poor financials.
In the US also value investing is not giving good returns because of low-interest rates; quantitative easing might have stopped mean revision which happens with the economic cycle. A rise in most of these big tech companies like Facebook, Amazon, Microsoft, etc. has destroyed retailer’s sectors, which in turn slowdowns or stops mean revision. When there are no mean revisions, then the intrinsic values of these stocks will not increase but decrease over time.
Value Investing in Bear Market
In a bear market, Investing in lower-priced stocks in a bear market will not get us good results as the Value of these stocks will drop along with the market, as it’s headed downwards.
Value Investing in Bull Market
In Bull Market, despite appearing overvalued at one time, stock prices can still increase along with the market. That is why most investors abandon their value investing strategies as low price is less important when investor’s sentiments and stocks are giving higher than expected returns.
Value Investing has not given good returns in the last decade mainly because of the above aspects. But once current economic situations change probably this strategy might over again as these are cyclic in nature. Check out this post on penny stocks in india.