Value Investing

Why Value Investing Works

Lower Risk: Undervalued stocks with solid fundamentals, such as a P/E ratio below the industry average, have limited downside.

Long-Term Gains: Markets often correct pricing over time. A stock trading at ₹150 with an intrinsic value of ₹300 could double in value when re-evaluated.

Inflation Protection: Value stocks usually pay consistent dividends. This can help maintain purchasing power. For example, a 4% dividend yield beats 3% inflation.

The Challenges of Value Investing

Value Traps: Some stocks remain cheap for a reason—declining industries, poor management, or weak growth prospects. Nearly 25% of "cheap" stocks underperform for 5+ years.

Time-Intensive: Deep analysis of financials is required. For example, a debt-to-equity ratio over 1.5 could signal excessive risk.

Patience Required: Unlike growth stocks, value stocks may take years to reflect their true worth.

Smarter Value Investing Strategies

• Use Key Metrics: Look for P/E < 15, P/B < 1.5, and dividend yield > 3% in INR terms.

• Avoid Herd Mentality: Market crashes or big sell-offs can lead to great buying opportunities.

• Diversify Wisely: Holding 10-15 stocks across sectors reduces risk.

• Monitor Free Cash Flow: Companies with ₹100+ Cr FCF each year can reinvest. This gives them flexibility for long-term growth.

The Power of Buying Cheap

If a company has an EPS of ₹50 and a P/E of 10, its stock price is ₹500. But if intrinsic value (based on DCF analysis) is ₹800, it is trading at a 37.5% discount—an ideal scenario for value investors.