Why Value Investing Trumps all Else

By Dr. Mark Mobius


Value investing is the most successful method of investing in equities. It grows out of a common sense approach to investing: that you are more likely to make money by investing in companies with high and growing earnings in relation to the stock price, and those with strong balance sheets. Many successful investors have adhered to and expounded on value investing such as John Templeton and Warren Buffet. Value investors focus on searching for "bargain" stocks. These are stocks that are trading below their "intrinsic" or "true" values. In general, investors look at a wide range of criteria in addition to just price to earnings, price to book value and dividend yield to determine whether a stock is a bargain. These additional criteria include profit margins, debt/equity, return on capital employed, return on equity, and many others.

A fundamentally sound stock may be trading at low prices due to numerous reasons, such as poor market sentiment or unfavourable industry performance. It is these stocks that provide opportunities to value investors. Value investors tend to invest in stocks when things are looking bad so that they are able to invest cheaply and then wait for the market to realise the true value of the stock and eventually lead to higher prices. In general, value investors tend to avoid paying unreasonable prices for stocks.

History has taught us that when we buy value stocks which are trading at low valuations despite strong fundamentals, over time the market will uncover the bargain and yield higher returns. As such, value investing can be successful in all types of markets, including high growth ones such as India or China. This is because it is not the type of market that dictates its success but more so factors such as, but not limited to, market sentiment, lack of knowledge or understanding, and industry life cycles, which lead investors to buy stocks with weak fundamentals or sell stocks with strong fundamentals.

One important factor making value investors successful is their long-term view. There will be periods when value stocks do not perform but over the long term, value emerges as the best method for profitable investing in equities. Taking a long term view, our experience has shown us, value investment trumps its counterparts.

This article appeared in the June 2010 issue of Wealth Insight