Do you think global macroeconomic environment like exiting of Greece from Euro Zone & slump in US growth or downward pressure of growth in Asian economy should affect your decision as value investor? I believe no.
Value investing and economic growth is not always 100% synonymous. As the name suggest value investing is more about investing on fundamental of business rather than economic condition. Economic growth can improve the prospect of value investing but it is not the core feature of value investing.
No person is better value investor than warren buffet. Warren Buffet philosophy is that an investor should identify investing as life time opportunity and in his whole life he should not invest in more than 10-15 companies.
Yes it’s true that not everyone can become Warren Buffet but an investor can adopt his philosophy of value investing as life opportunity. Now a day’s investors are giving more emphasis on technical analysis to earn short term return that makes the market volatile and even doesn’t show real picture.
Over a period of industry life cycle fundamental value of companies in an industry comes to an average. There may be some companies that give higher return in initial years however there are some which provides low return but over a period of industry life cycle all of them come to an average.
GDP growth rate of an economy should not impact the decision of value investor. All the major value investor like Warrant Buffet, Rakesh Jhunjunwala earn their fortune during the gloom period of economy cycle i.e. somewhat current global economy condition.
Investing is more about understanding the business. If you understand business very well then it doesn’t matter in which industry you play like retail, finance, technology, infrastructure etc. Warrant Buffet never invested in technology sector (except in the recent years when he invested in Microsoft) though we saw boom and bust of technology sector in the last one and half decade. Warren Buffet says “I don’t understand how technology works so I don’t want to invest; I understand how insurance works so I invest in it”.
Value investor should always focus on basic fundamental of business like-
Will the company able to sell its product by beating competitor?
Do they differentiate them with their competitors?
Is the growth sustainable? How they are evolving themselves in changing circumstances?
How they will earn their future cash flow (discounting it with appropriate rate)?
Does the company undervalued?
Growth and value investing are not 100% synchronized. However in gloom and doom economic condition there are more chances to get more value investing opportunities because during the period lot of companies deleverage themselves, invest more on R & D and hold lots of cash to take advantage of low base to future high return.
Current Indian scenario is perfect platform for value investing as equity market is almost bottoming out with below average 12 P/E ratios, hugely depreciated currency, high fiscal & current account deficit and high inflation & interest rate and global uncertainty. These tough conditions put pressure on companies to restructure their business & financial model to leap forward for future growth trajectory. In these conditions there are lots of values investing opportunity an investor just need to indentify it.
How to indentify value investing opportunities:
Look for companies with low P/E and P/BV multiple
Look for companies with Optimal Capital structure
Look for companies with good future free cash flow generation capacity
Look for low EV/EBIT ratio (Enterprise Value ratio considers capital structure of a company. Two companies may have same EV ratio however market capitalization of one company may differs with other due to availability of more or less debt as compare to its peer)