Investing

The Economic Times Wealth, February 2-8, 2015

11

What I learned from the

gurus of value investing
Value investing is the art of picking great stocks when they are attractively
priced. Sankaran Naren shares the knowledge he has gleaned from the
teachings of three well regarded names in this field.

MICHAEL
MAUBOUSSIN
He teaches you to assume what is
likely to happen and act
accordingly to reduce mistakes.

JAMES MONTIER
In his book on value investing, he lists out the rules that can help you
pick stocks that can give spectacular returns in the long term.

Value, value, value

Warren Buffett famously invested (top down) when the economy was at its worst. Post-Lehman
Brothers, when in 2008 it was in
a shambles, he scooped up preference shares of GE and Goldman. He didnt look at the general economic situation, but that
macro-economic environment
ensured that the gap in price and
intrinsic value of an investment
was so wide that it proved worthwhile to invest.

The author is the

CIO, ICICI
Prudential
Mutual Fund

Be contrarian, Be patient
Buyers and sellers set prices. Too
many buyers push up prices; too
many sellers push them down.
When sellers are a-plenty, buying is easy. Montier says to wait
on ones investments for a very
long time. Thats the only way
they can grow.
Be unconstrained
At times, global equities are inex-

HOWARD
MARKS
According to him,
investing is common
sense. What is
important is
controlling ones
emotions as an
investor.

pensive; other times, debt, midcaps or commodities are. So, one

has to go outside ones sphere (or
benchmarks) to gain returns.

weaken. From then till now,

however, it has been strengthening. We periodically traverse cycles.

Dont forecast
Six months ago who knew crude
oil would be below $50. Almost
no one had a clue that Brent
would slide. Such situations are
found in assets and currencies.

Treat your clients as you

treat yourself
Investors have to gain investment experience. So, fund managers should invest clients money as they would invest for themselves, knowing where real value
lies. Treat clients as you treat
yourself, and plenty of money
will be made.

Be sceptical
Scepticism prevents mistakes.
That does not mean be cynical.
Investors who were sceptical in
2007 gained good experience between 2007 and 2009, as they
better withstood market troughs.
Cycles matter
Investors dont grasp market cycles, which plague all asset classes. At the top of a cycle, people
are bullish; at the bottom, they
are bearish. Three or four years
ago, they said the dollar would

Respect cycles
At certain times a pendulum
is positive. Other times, it is
not. In both situations, act
contrarion. Often, it is in the
middle. No sense then in extreme views (positive or negative). Such cycles are commonplace in all markets in
all asset classes. Recognise
such cyclicality.
Risk is a function of price
Buying the best company in
the world at a very high price
can be a high-risk investment. Similarly, distressed
assets, which are inexpensive, are low risk. Hence,
Marks states: if you focus on
price you can buy a consum-

History matters
Today, the price of crude has
slumped due to which some
countries are in trouble. Check
similar situations in the past. Buffett says matters have been improving. So Montiers model is
easy to practice. However, it involves pain in troubled times,
particularly during a bubble, but
it has worked.

er company and lose money.

Or you can make money purchasing a distressed real-estate company.
Either you are trying to
make money or trying not
to lose it
Most people (even fund
managers) dont realise that
you have to try to make money, or try not to lose it. A year
back if you were trying the
former, investing in smalland mid-caps, it actually
made money. Whereas last
year, if you were trying the
latter, investing in the safest
stocks (consumer goods,
healthcare), you actually
avoided losing money.

Do a pre-mortem
The intriguing insight I obtained was
during the general elections in 2009.
We had conducted a post-mortem
on what we had done before the
election. But then we realised that
the manner in which we handled the
elections was not quite right. Mauboussin says, Do a pre-mortem, ie,
assume what is likely to happen. So,
before the elections in 2013, we did a
pre-mortem. We found equities a
great asset class. The pre-mortem
suggested we needed great effort on
our part to get investors into equity,
which we did.
A post-mortem is OK. But, approaching investing with the various
options before you of what could
happen would reduce mistakes. It
also helps us become less emotional.

Investing is common
sense. Controlling
emotions, however, is key
Over time, everyone recognises that investing requires
much common sense. That
sounds easy. The problem is
to control emotions. That is
difficult, particularly in a
bubble. In 2000, avoiding
buying information-technology stocks was difficult. How
to control emotions is the
biggest long-term task.