|
At its core, ‘value investing’ is about investing in securities where the per-share ‘intrinsic
value1’ of the firm is greater than the ‘price’ paid for acquiring it. Even as the price of a security
can be precisely quantified at any instant from the exchange ticker, determining the ‘intrinsic
value’ of a firm at best delivers an imprecise valuation. Among many other dimensions, the
firm’s current asset valuation, broadly represented by ‘book value’, and potential to earn
profits in future, estimated with past ‘earnings’, are the two most fundamental dimensions on
which its ‘intrinsic value’ is estimated. Therefore the ‘Price-Book’ (P/B) ratio and the ‘Price-
Earnings’ (P/E) ratio, which roughly represent these dimensions, are the two most popular
measures for a firm’s current valuation.
For more than half a century now, researchers have investigated the effectiveness of
‘value strategies2’ of varying complexity and sophistication, and found evidence of existence
of ‘value premium3’ based on backtesting of listed securities data. While earlier studies focused
on securities listed in US and other developed countries, there are fewer studies investigating
the existence of ‘value premium’ in India.
|
