Are value investors committing this huge error? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are value investors committing this huge error? 

A  A  A
In this issue:
» Is the Infosys share price battering justified?
» One thing most economists agree on
» Global economy dividing into three zones
» Gold has another down week
» ...and more!

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If one can get someone as well-read as Warren Buffett excited then one surely is onto something. Howard Marks is one such person we believe. In the investment community, Marks is famous for his investment memos where he has been sharing his investment wisdom since many years. And it is precisely these memos that also attract the interest of the Oracle of Omaha.

Marks sat for an interview recently with an investment portal, And in it, he shared some interesting insights into the world of investing. One of these had to do with value investors and their discipline of value investing.

Mark opined that value investors are being unrealistic and even downright arrogant when they say they just do bottom up stock picking. He argues that value investors buy cheap stocks and there is nothing wrong with this. But to do this without taking into account the macro environment and the temperature of the stock market just doesn't make sense to him. Thus, value investors are committing an important error as per him.

Well, if what Marks is saying is correct, how come value investing has survived for so long? Not just that, how come there have been so many successful practitioners of the art including Warren Buffett, one of the richest men in the world.

Thus, we have to admit that we don't quite subscribe to Howard Marks' thoughts. Value investors certainly do not ignore macro nor do they ignore market levels. However, they have a different way of dealing with these factors.

They deal with macro by thoroughly examining the quality of the company they are investing in and also making sure the company's earnings are not inflated due to favourable macro conditions. And if they are, they certainly take that into consideration by arriving at intrinsic value. This way they ensure that the company is able to survive all economic conditions and also that they do not overpay for it.

Now, to Marks' other point of ignoring market levels. We do not think a stock should be overlooked just because markets seem pretty overvalued. If the stock has a very good chance of increasing its intrinsic value over time or is available at a steep discount to its intrinsic value, it should be bought irrespective of the environment. Waiting for markets to correct would be akin to timing the market and this is not an ideal approach as per us.

Hence, in conclusion, we believe that value investing is the best way of investing out there and certainly does not suffer from any of the shortcomings just discussed.

Do you, like Howard Marks, also think that value investors ignore macro and market environment? Please share your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
How would you define a stock that has gone down 95%? Well, it's a stock that has fallen 90% and then corrected another 50% from there. Scary, isn't it? Thus, if you would have thought Suzlon Energy is a good bet after it fell 90% from its 2008 price levels, you would have suffered another 50% loss in the stock. This is not all. There are a few other capital goods stocks that have suffered the same fate over the last five years. Today's chart of the day highlights the worst performing stocks in the capital goods space over the last five years. Good luck finding 10 and 20 baggers to investors to merely break even on the losses they would have suffered in these stocks.

Source: Ace Equity

Leading IT company Infosys Ltd declared its fourth quarter and full year results for the financial year 2012-2013. Major brokerages are calling the performance a disaster. Here are a few reasons why? The revenue growth was lower than the guidance. The operating margins were the lowest in history. The company saw an increase in attrition levels. Most importantly it gave growth guidance for next year which is lower than NASSCOM's guidance for the entire industry. Also, it declined to give earnings guidance.

The common word in all these negatives is 'guidance'. The guidance was so important that the stock markets penalized the company's stock. It ended yesterday's trading session down by over 20%. One wonders whether such a decline was necessary.

The investors and brokerages appear to be taking a short term view of Infosys. Let us not forget that a company that derives a large portion of revenues from US and Europe is likely to face a decline. These regions are witnessing tough times which should have an adverse impact on companies that depend on them for earnings. One may argue that Infosys could have done better to manage this. It could have looked at emerging markets or even India for that matter. We agree that it could have done better. But that is not to say it did too bad. Penalising a stock for poor earnings and guidance over a few quarters or even a year for that matter is nothing but taking a myopic view we believe. The fundamentals for the Indian IT industry are strong over the long term. And Infosys is a company that has the necessary cavalry to take advantage of these opportunities. It is necessary to take a long term view of a company when investing in it. If you believe in the long term story then such declines just provide good opportunities to invest more in the stock.

War and economics share a very intricate relationship. If you look carefully at the history of wars, one of the most crucial drivers has always been the underlying economic forces. And like businesses, wars too go through cycles. So what is the world heading towards? If some leading economic advisers are to be believed, a major international war may in the offing. Some parts of the world, such as the MENA (Middle East & North Africa) region have already been going through a severe socio-political crisis. There have been rising nuclear threats from North Korea.

Noted economist Nouriel Roubini recounts the precursors to World War II. The 1930s were characterised by financial instability, defaults, money printing and currency devaluations. This was followed by capital controls, trade wars and the rise of aggressive regimes in Europe. This eventually culminated in World War II. It does seem that we are in a pretty similar situation like the one in the 1930s. If events do unfold as per the script, we are all in for big trouble. A major war in the current global environment would be akin to the last nail in the coffin. In our view, investors must bear in mind the risks arising out of such events before investing in stocks.

How is the global economy shaping up? As per an article in Financial Times, the world was dividing into three groups - some countries doing well, some on the mend and some still in trouble. At least that is what Christine Lagarde, managing director of IMF, believes. Because of this uneven pace of growth in various pockets, new fiscal imbalances are getting created. And this has the potential to develop into a new crisis in the future.

Take the emerging markets for instance. No doubt, they are growing faster than the developed world, although growth in some countries has slowed down. However, low interest rates in the overseas markets means that borrowings by emerging countries have increased. Meanwhile, debt continues to haunt the US and Europe. Ms Lagarde considers US to be on the mend and supports quantitative easing undertaken by central banks in US and Japan. We believe that she may have a point when it comes to emerging markets piling on too much debt by indiscriminate borrowing. But we do not believe that the US is on the mend based on the weak economic data that has been released so far especially with respect to unemployment. Nor do we believe that quantitative easing can do anything other than create asset bubbles and raise the spectre of inflation.

Meanwhile, global markets appear to have shaken off the doubt that was in the air last week. Majority of the global stock market indices ended the week on a high note. The major US indexes recorded new highs throughout much of the week, as evidence suggested the U.S. and other major economies were continuing to grow. The stock market in Japan posted a 5.1% jump over the week. The continuance of the strong bull run was after the Bank of Japan (BoJ) announced a huge monetary stimulus to infuse US$ 1.4 trillion in to the economy in less than two years. However, the other Asian equity markets declined. The Indian stock markets ended the week in the red, down by 1.1% on earnings growth concerns.

Source: Yahoo finance, Equitymaster

04:55  Weekend investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

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    Equitymaster requests your view! Post a comment on "Are value investors committing this huge error?". Click here!

    4 Responses to "Are value investors committing this huge error?"


    Apr 22, 2013

    iwill on reading the book not before that

    Like (1)


    Apr 14, 2013

    I don't think you have interpreted Marks correctly.He is meant to say that if a value investor says thet he only does bottom fishing,he is telling a fact according to him a good value investor will always give more importance to macroeconomics and company future prospects.

    Like (1)

    Kirit Pathak

    Apr 14, 2013

    Marks is absolutely right, people should first understand the grimics of investing.

    Like (1)


    Apr 13, 2013

    I would agree with Howard Marks. What he is trying to emphasize is - not to be stupid instead of trying to be intelligent while value investing.

    Like (1)
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