Value-investing revisited (Part I)

Value-investing involves investing in assets, which are priced substantially below their intrinsic value. This valuation discount or “margin of safety” serves as a buffer and provides protection against non-achievement of intrinsic value.

This article (as part of a series) deep-dives into the individual components of value-investing

Value-investing goes beyond the cacophony of information overflow

“We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.”
-Keynes, General Theory of Employment, Interest and Money, 1936

Increasingly higher availability of information works wonders for people who are able to sift through massive amounts of data yet focus on the most important factors. However, majority of the investors find themselves overwhelmed by numerous sources of information ranging from global ‘shocks’ to ‘expert’ opinions and end up reacting mechanically in a way they have seen markets do in the past. Like technical factors, fundamental drivers too have become cues for markets to move in a predetermined fashion. This strategy could work in the short-term as a self-fulfilling prophecy but cannot sustain over time.

Value-investors, on the other hand, remain resistant to persistent noise around them. They believe in doing extensive research before investing and remain confident of their analyses as well as estimates of intrinsic value. Even if the market goes down, ‘margin of safety’ ensures their downside is limited, if not non-existent. This is not to say value-investors don’t change their investment views in light of new information. When a new undiscounted information comes to their knowledge, they do modify their valuation but only proportionately.

Value investors follow configural analysis

Configural thinking requires a multitude of factors to be considered simultaneously by the decision-maker. It involves analysing the entire decision at once in contrast to linear or sequential thinking, which involves interpreting the variables independently and combining them subsequently to arrive at a collective meaning. It goes without saying that configural thinking is more rigorous as it demands a holistic understanding of a particular field.

Typical investors follow linear thinking in their interpretation of various factors impacting the asset valuation. They start analysing information in silos and often end up ignoring the inter-relationships, which leads to valuation being a sum of different blocks as if they existed in vacuum. The urge to simplify the valuation framework and chase false certainty takes them away from the true goal of valuation.

Value-investors believe in multi-disciplinary learning to conduct a configural analysis of an investment.”

Value-investors believe in multi-disciplinary learning, which is very crucial to develop a configural understanding of an asset. They acknowledge the

presence of dissonance among multiple factors and work at reconciling the differences before committing to an investment decision. As their understanding of the investment area evolves, they don’t shy away from modifying their valuation paradigm, which is made possible only by cognizance of dynamic interplay among various valuation drivers. They don’t crave for false precision and remain comfortable with ranges while ensuring capital protection at the lower end.

Arthveda Star acknowledges the presence of varying sources of information in the real-estate market but instead of getting overwhelmed and creating a ‘me-too’ product riding on the ‘momentum-bandwagon’ of premium housing in Tier-I cities, it relied on objective assessment of the core economic drivers of housing demand. A configural analysis of those drivers was further conducted to identify pockets-of-inefficiencies i.e. mid-income housing in Tier-II/III cities where demand has been consistently robust but without sufficient supply due to relatively unorganized investment markets. This risk was mitigated by getting access to appropriate ‘sources of information’ via collaborative agreements with DHFL.

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