by Mr. Praveen Reddy,
Principal Advisor,
Induswealth.com
This is going to be a series on
valuation – we will be discussing the “value investing” approach.
 |
Mr. Praveen Reddy,Principal Advisor,Induswealth.com |
Before we embark on valuation
we want to discuss the 3 P’s of investing, we believe that a clear
understanding of the 3 P’s is crucial for investment success.
1. Philosophy..!
Investing philosophy is the set
of underlying beliefs that will drive your investment approach.
For instance –
there are value investors who will invest only when the valuations are
reasonable, contrarian investors who will do the opposite of the crowd,
technical investors who will invest based on the charts, Black swan investors
will take bets on rare events and expect a high pay off when such events happen
etc. these philosophies give a lens from which one can view the market, its
participants and spot profitable opportunities.
All of these philosophies have
blind spots and caveats that need to be well understood to be a successful.
Philosophy
|
Key belief
|
Blind
spots/challenges
|
Value
investing
|
Based on understanding the
business fundamentals a specific value can be assigned to a stock which may
be different from the market value, hence profitable opportunities can be
spotted
|
Value arrived through the
valuation process has many assumptions (discount rate, rate of growth etc.,)
that are very subjective. Valuation can vary significantly based on the
assumptions used.
|
Contrarian
investing
|
Crowd behaviour is often
wrong, and hence profitable opportunities can be spotted.
|
Clarity of understanding of
the underlying reasons will be a key. Markets can stay irrational for longer
than investors can stay solvent.
|
Technical
investing
|
Patterns consistently repeat
in the market as they are a reflection of human behaviour and hence
profitable opportunities can be spotted.
|
Potential to confuse signal
and noise. One looks hard enough patterns can be found, but they may not have
a causal relationships.
|
Black swan
investing
|
People are unable to account
of the extreme events and extreme events in real life are not as rare as
statistics predict and hence profitable opportunities can be spotted.
|
Ability to stay solvent is
the key here, in this philosophy people will lose small amounts on a regular
basis and will win big when rare events happen. Key will be to predict the
magnitude and direction the extreme event.
|
2. Process..!
This is the framework that is evolved to put
philosophy into practice. This involves methods used for identification of
opportunities, tools to review current investments and frequency of review.
Though
the “process” seems/feels mundane – but it is one of the key aspects for
successful investing. All the philosophies can be made to work if there is a
good process and the greatest philosophies will fail if the process is sub-par.
Processes
should be “live”, all philosophies have their lacunae and the process need to continue
to evolve based on the feedback so that many of these lacunae are addressed as
and when they are discovered.
3.
People..!
Just like in any other aspect of life, investing
also needs right kind of people to succeed. It is the responsibility of the
people to understand the philosophy and its bind spots, to follow the process
in a disciplined manner and have the discipline to update the process from time
to time.
When
we talk about the people, this is less about the intellect and more about
individual discipline. Very few geniuses have been great investors, whereas all
the great investors have (and had) a disciplined approach to investing.
In
summary..!
Philosophy drives the investment strategy,
process gives the framework for executing the strategy and people are
responsible for understanding the strategy and
exercising discipline in executing the strategy.
All
these 3 P’s are essential for investment success.
Happy
investing...!
For More details
Mr. Praveen Reddy
Principal Advisor,
IndusWealth.com
Email id: Praveen.reddy@induswealth.com
Web Site: www.induswealth.com
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