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Value Investing In India
Q. Why are valuations important?
Isn’t buying and selling at the right price the greatest skill in investment?
Q. Given that P/E multiples have expanded for high-quality companies, should an investor be concerned about the sustainability of stock returns if they buy at the current price levels?
“Our answer is a resounding NO”.
- The starting period valuation has very little impact on long/ medium-term investment returns in India.
- Lack of correlation between starting period valuations and long-term holding period return seems to be specific to India.
French Nobel Prize winner in economics and a few professors define the term value premium as “ the outperformance of value stocks over growth stocks when measured using risk-adjusted returns compared to a high P/E multiple stocks.” - Low P/E multiple stocks achieve a high risk-adjusted return compared to High P/E multiple stocks.
- Analysis of the Indian stock market suggests that a low P/E multiple-based investing approach does not improve the return profile of an investor.
Given this analysis of value investing, it's clear that investors in the Indian stock market should stick with high-quality franchises for the long haul without giving undue importance to valuations.
So buying cheap stock is not a very clever idea.
Etee Bajaj
This document is curated by Etee Bajaj. A BBA (HNRS) Graduate from St. Xaviers College, she has also completed her M.Sc.(Finance) and CFA from ICFAI University, Hyderabad. She takes keen interest in stock markets and believes in Value Investing and Fundamental research and considers the storyline of a company a crucial factor in investment. Reading autobiographies of renowned people is her hobby.