'Guru of Wall Street gurus' bets on value investing in India
by Sanat Vallikappen - DNA Money
Cheap, ugly, obscure and otherwise ignored: these are characteristics in companies that Professor Bruce C Greenwald of the Columbia Business School looks for when he makes an investment decision. Being one of the leading proponents of value investing, a paradigm of investing pioneered by Columbia University's Benjamin Graham and David Dodd in their 1934 text, Security Analysis, it's no surprise that Greenwald likes such companies.
Value investing, as the term suggests, works on the assumptions that the market is inefficient, and involves buying companies whose stock price appears cheap when viewed against its fundamental intrinsic value. For a lay Indian investor, who has been in the middle of a secular bull-run right from April 2003, and who has since seen everything he touches turn to gold, Greenwald may come across as rather conservative.
However, Greenwald feels his strategy would best fit the Indian investor. "When Indians plan for their kids, and their kids' kids, that's very long-term planning. Value investing is about planning for the very long term, maybe 30 years," he says. But will it work in India, where every stock is on overdrive and does not exhibit the characteristics that compel Greenwald to invest. "There is always something, somewhere that will look underpriced, and therefore attractive," says this academic, who has been described by the New York Times as "a guru to Wall Street's gurus."
"It does not work for a company that is doing extremely well, and whose stock price gives you lottery ticket-type of returns," he says. Rather, he says his approach to investing works for companies that have a good management, the industry in which it operates has large entry barriers, has a geographic competitive advantage, captive customers and economies of scale, but whose share price may not have taken any or some of these into account. "An investor like Warren Buffett would like such a company," says Greenwald.
"When you buy a stock, you buy it presuming that it's undervalued. But in the same transaction, there is someone else selling it, thinking it's overvalued. One of you have to be wrong," he says. Again he advocates value investing to be the key to make you be on the right side of the transaction. "Strikingly and disproportionately successful investors have shown this," he says, adding that one of the prominent aspects of value investing is that it does very little by way of forecasting.
Greenwald feels that growth investing, in which investors put money into companies that exhibit above-average growth, even if the share price looks stretched, is riddled with a problem. "A company has to invest to keep growing. It needs to pay the people who pay for that investment. Growth is good only if earnings on the new assets being produced with fresh investments are more than the cost of producing those assets," he says.
For the lay investor, the value approach, which uses all information from the balance sheet and organises information by rank from reliable sources, may be a tough nut to crack because of the lack of access to such information, and their inability to calculate intrinsic value. For Greenwald, it would be enough if professionals (read mutual fund managers) in India adopt this approach, and pass on its benefits to retail investors in their funds.
