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What makes value investing non-violent

Ahimsa or non-violence is one of the core principles of Mahatma Gandhiji s philosophy. (Illustration: Shyam Kumar Prasad)

Ahimsa or non-violence is one of the core principles of Mahatma Gandhiji s philosophy. (Illustration: Shyam Kumar Prasad)

By Jimmy Patel

Ahimsa or non-violence is one of the core principles of Mahatma Gandhiji s philosophy. He equated non-violence with patience, tolerance, self-restraint, self-sacrifice and moral duty and emphasised the need to observe non-violence in one’s daily life. He believed that non-violence should not just be about inaction but also about the way we think and speak.

Non-violence in violent markets
Markets are volatile and in a constant state of flux. On an average, stock prices can witness sharp movements in either direction. These sharp movements cause stocks to sometimes trade way above or way below their intrinsic value. Frenzied activity geared towards reaping short-term gains is not an optimal option for an average investor. Investors must understand that such violent stock price movements are just noise and should adopt a steady and non-violent approach to investing. No one profits from violence. A non-violent approach in investing would mean not reacting to intermittent new flows and price actions and staying tethered to the larger investment goals. Value investing embodies this.

Value investing: A non-violent approach
Nearly 80 years ago, Benjamin Graham and David Dodd introduced to the investing world the then revolutionary and interlinked concepts of value investing and margin of safety in their book Security Analysis. Value investing is an investment strategy where one chooses to invest in stocks that appear to trade for less than their intrinsic or book value.

Value investors search for discrepancies between the actual value of a business and the perceived value of a business and seek to exploit these discrepancies. Graham & Dodd suggested that this could be accomplished by investing in companies that trade at a low P/B, low P/E multiples relative to their peers and have low debt on their books. Such investments meant that your purchase price would be significantly below the fair value of the stock thus providing a margin of safety for the investor.

The very foundation of value investing is simple and steady: seek out stocks that you believe are currently under-valued by the markets and then hold the stocks till their true value is reflected in the price. Investors who use this strategy think that the market overreacts to good and bad news, resulting in stock price movements which do not correspond to a company’s long-term fundamentals.

This overreaction gives the value investor an opportunity to profit by purchasing stocks at a deflated price. By shunning violent stock market behaviour in favour of a non-violent steady approach, value investors can reap the benefits of long-term.

The writer is MD & CEO, Quantum Mutual Fund