“Investors are always looking for that “winning” style that helps them make maximum returns. However many terms are taken by them to define the manner in which they invest to achieve their goals. Over the last few years the terms “value” and “growth” have often been used to define certain investment styles that help describe an investment process.
Value investing is popular due to the fact that legendary investors such as Warren Buffet have proclaimed themselves to be value investors. Many such popular and successful investors also share their style as “value”. However there is much confusion regarding the word “value” itself.
In simple terms, value represents in layman terms an expectation of having paid a little less than what is perceived for some asset or investment hence leading to a profitable situation. It is like acquiring an asset at a discount to “fair value”. Now why would something be available at a discount? Usually this is true due to some issues that concern the market at that time that bring the price down; but are not permanently detrimental to the longer term value of the asset. This discount may not continue in the future once this concern is out of the way.
Growth on the other hand is easier to comprehend. Companies that project a certain confidence in their ability to grow in the future are sought after by investors as the ultimate goal of profit maximisation which will be achieved if these companies are able to deliver on this growth. The questions of course is that, unlike most peoples expectations, growth estimates are difficult to predict. And hence sometimes investors could end up overpaying for assets that do not deliver on the promised growth prospects and the price will not reflect in the same leading to sub standard returns.
Once we have established what these terms mean we can then decide what sort of investor are we. Whether the investor is an individual or a fund manager most evolve a certain investing philosophy for themselves. This philosophy depends on which of the above they prefer to use as a more consistent manner for profitable returns.
India has always been a “growth” story and investors are used to investing on the hope of such growth aspirations being achieved. Hence India has been a breeding ground for growth investors. While some investors have indeed made impressive returns using this strategy in hindsight it appears very intuitive. However from a forward perspective estimating growth rates is indeed difficult for most investors. But having said that most investors in India will call themselves growth investors
Value investing is a difficult art to achieve as the whole idea of discerning value in an asset or a listed company vis-a-vis its market value is a little complicated and subject to individual assumptions of certain financial variables such as the discount rate or the concept of terminal value. Without getting technical at this time it is suffice to say that value investors are rare and rarer are their success stories, especially in a “growth” economy like India.
Ultimately it is up to the individual investor to choose what style suits him or her and have conviction their investment style.