Value Investing overview Deepak Shingadia

‘You are buying a piece of a business’ Who is a value investor? Widely used definition of value investors suggests that they are investors interested in buying stocks for less that what they are worth. ‘You are buying a piece of a business’ Not a piece of paper Not trading on price movements Focused on fundamental analysis of the company

How well does Value investing perform? Graham’s best claim to fame comes from the success of the students who took his classes at Columbia University. Among them was Warren Buffett. However, none of them adhered to his screens strictly. Must read: The Superinvestors of Graham & Doddsville – by Warren Buffet Fund Manager Investment approach and constraints Fund Period Fund Return Market return WJS Limited Partners Walter J. Schloss Diversified small portfolio (over 100 stocks, US$ 45M), second-tier stock 1956–1984 21.3% 8.4% (S&P) TBK Limited Partners Tom Knapp Mix of passive investments and strategic control in small public companies 1968–1983 20.0% 7.0% (DJIA) Buffett Partnership, Ltd. Warren Buffett 1957–1969 29.5% 7.4% (DJIA) Sequoia Fund, Inc. William J. Ruane Preference for blue chips stock 1970–1984 18.2% 10.0% Charles Munger, Ltd. Charles Munger Concentration on a small number of undervalued stock 1962–1975 19.8% 5.0% (DJIA)

The Buffett Mystique

The Different Faces of Value Investing Passive Screeners: Following in the Ben Graham tradition, you screen for stocks that have characteristics that you believe identify under valued stocks. You are hoping to find market mistakes through the screens. Contrarian Investors: These are investors who invest in companies that others have given up on, either because they have done badly in the past or because their future prospects look bleak. You are implicitly assuming that markets over react. Activist Value Investors: These are investors who invest in poorly managed and poorly run firms but then try to change the way the companies are run. Growth at a reasonable price Investors: These are investors who invest in ‘high quality’ companies at a reasonable price.

I. The Passive Screener This approach to value investing can be traced back to Ben Graham and his screens to find undervalued stocks. With screening, you are looking for mispriced companies i.e. no real reason for them to be cheap e.g. Buying a property based purely on its rental income. No real consideration given to its location, size, layout, quality of tenant etc.

Example of Value investing Screens suggested by gurus PEG – Jim Slater Price/earnings – Peter Lynch EV/EBIT- Joel Greenblatt Price/book value – Benjamin Graham Forward rate of return – Yackman Shiller PE – Robert Shiller Price/owner earnings – Buffet Margin of safety% - Buffet/Graham/Klarman Important to not use these metrics in isolation but use these to start your journey into researching the company.. ‘One size does not fit all’

II. Contrarian Value Investing: Buying the Losers You believe the market has over reacted to good and bad news. Consequently, stocks that have had bad news come out about them (earnings declines, deals that have gone bad) are likely to be under valued. Property crash 1980’s/ 2007

Determinants of Success at “Contrarian Investing” Self Confidence: Investing in companies that everybody else views as losers requires a self confidence that comes either from past success, a huge ego or both. Patience: These strategies require time to work out. For every three steps forward, you will often take two steps back. 4. Stomach for Short-term Volatility: The nature of your investment implies that there will be high short term volatility and high profile failures.

III. Activist Value Investing Passive investors buy companies with a pricing gap and hope (and pray) that the pricing gap closes. Activist investors buy companies with a value and/or pricing gap and provide the catalysts for closing the gaps. - Ability to follow some big activist investors/hedge funds into stocks - Carl Icahn ‘Previous landlord has not maintained the property. You see the real potential’

IV. Quality at a reasonable price ‘Moving away from cigar butts’ Moat Consistent operating history Favorable long term prospects Good management Mgt know how to reinvest High and stable profit margins Buying with a ‘margin of safety’ Ideally buy and hold forever ‘Buying a property in Mayfair where there will always be demand from people with money’

Become a learning machine One up on wall street – Peter Lynch The Dhandho Investor – Mohinish Pabrai The little book that beats the market – Joel Greenblatt The big secret for the small investor - Joel Greenblatt Future reading Intelligent investor – Benjamin Graham Berkshire Hathaway letter to shareholders – Warren Buffet

Value Investing Deepak Shingadia