Value Investing Will be the Best Stock Market Investing Strategy in 2025

• 'The stock market is a device for transferring money from the impatient to the patient.' - Warren Buffett

There is a certain divergence in emotions among investors in the Indian stock market.

On one hand, they are bullish on the long term growth story in India and want to remain invested in stocks...and even buy more on every correction.

This is completely understandable. After all, this strategy has worked like a charm ever since this bull market began after the covid crash of 2020.

On the other hand, they have become nervous. Optimism has been replaced by a deep sense of caution. There is a sense that the major reasons for the market going up are starting to unravel.

First, we have the steady decline in GDP growth combined with fall in corporate profits.

Then there is the market's valuation. As long as earnings were rising, investors didn't care too much about the Nifty's PE ratio, which is a good measure of the market's valuation.

But now things are different. Investors know there won't be any cushion of earnings growth. This makes the stock market vulnerable to a sharp correction.

Many on Dalal Street believe that the correction has already begun.

And no one seems to know when will the stock market recover?

So, what is a retail investor to do in this kind of market?

What is the best investing strategy to employ?

In this editorial, we will examine the reasons why value investing could be your best friend in 2025.

What is Value Investing?

Value investing is an investment approach that seeks to profit from identifying undervalued stocks. It's based on the idea that each stock has an intrinsic value, i.e. what it is truly worth.

Value investors calculate the intrinsic value of a company by using fundamental analysis. They arrive at a per share estimate of intrinsic value. Then they compare this estimate with the stock price.

If the stock price is lower than the intrinsic value they buy the stock. If the stock price is higher than the intrinsic value, they sell the stock.

The idea in value investing is to buy stocks that trade at a significant discount to their intrinsic values, usually more than a 20% discount, i.e. when there is a big margin of safety.

So, if the estimated intrinsic value is Rs 100 per share, value investors will buy it only if the stock is trading below Rs 80. Once you buy an undervalued stock, the price will eventually rise towards its intrinsic value and make a profit for you in the process.

The same idea holds true in reverse when selling a stock. Value investors sell when they think the stock price is above what it should be worth i.e. when there is no margin of safety.

So, when value investors make their buy and sell decisions they disagree with the market's assessment of the stock. They're contrarian by nature. They don't follow the crowd. They tend to buy when everyone else is selling and sell when everyone else is buying.

Value investors are active buyers during market crashes and bear markets. And they are active sellers during phases of high momentum and bull markets.

Value investing is one of the best ways to build long term wealth in the stock market. This investing style was developed by Benjamin Graham - the father of value investing, about 100 years ago.

The core idea of value investing, in Graham's own words, is this...

• 'An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.' - Benjamin Graham

The stocks that promise 'safety of principal' and 'adequate return' are called value stocks. These are shares of companies with superior quality fundamentals and decent growth prospects.

However, do to any reason these stocks can be undervalued by the market in the short term. This makes value stocks extremely attractive to long term investors.

If purchased is sufficient quantities at the right price, these stocks can deliver high returns.

Finding Value Stocks

So how do you find a good, value stock that also happens to be undervalued by the market?

Value stocks are cheap stocks in terms of valuations. They usually trade at low price to earnings ratio (PE ratio) and a low price to book ratio (PB ratio).

Of course you can't buy any cheap stock. The quality of the business matters. The quality of the management matters. Corporate governance matters.

However, all things being the same, the cheaper the stock, the better is the long term potential returns.

This is because the stock price of a company is forward looking. Everything in financial markets is about the future. Investors and traders in the stock market are constantly factoring in everything that could influence a company's stock price.

So, if a stock is cheap, that means the market believes that the future of the company is not very bright.

In other words, the market has already factored in the bad news that is expected to come in the future.

This gives an opportunity to value investors. If the market has become overly pessimistic, then the stock price could be offering a margin of safety. It could be trading below the company's intrinsic value.

If you are interest to know which stocks are potentially presenting such opportunities, then you could check out Equitymaster Stock Screener: Top Value Stocks in India.

Important Points to Keep in Mind

Investors can often mistake a bad quality stock for a value stock.

If a company's fundamentals are bad, then its stock deserves to be cheap. This is because the market demands the company turn around its performance before rewarding it with a higher valuation.

In other words, low PE stocks and low PB stocks probably deserve the low valuations.

It's the responsibility of the value investor to determine the intrinsic value of a stock to a reasonable degree and compare it to the stock price.

Even then the value investor should consider buying the stock only if there is a sufficient margin of safety, i.e. if the stock is trading about 20% or lower than the intrinsic value.

Answer for the following questions before deciding whether a stock is a value stock or not.

• What's the potential growth rate in revenue and profits?
• Are the company's margins improving or declining? Why?
• The company's position in the industry?
• What are the return ratios?
• Is the operating cash flow stable and/or growing?
• What is the debt to equity ratio and the interest coverage ratio?

There are more questions that a seasoned value investor will have to answer but these are enough to get you started.

Conclusion

2025 is unlikely to be a year to make easy money in the stock market.

Ever since this bull market began in 2020, most investors haven't seen a significant correction. This year could be the year of that correction. At least that is what Dalal Street seems to be expecting.

If that turns out to be the case, then value investing will be the order of the day.

The sooner you begin the process of creating a value investing watchlist the better.

We hope this article will help you get you going on this journey.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...