Does Value Investing Work in India?

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Beginning as early as 1977, there have been academic studies comparing value stocks vs. glamour/growth stocks. A seminal work in this area is “Contrarian Investment, Extrapolation and Risk”, written by Josef Lakonishok, Andrei Shleifer and Robert Vishny and was published in 1994 in the Journal of Finance. Lakonishok, Shleifer and Vishny (LSV, for short) found that from 1968 to 1994 value stocks outperformed glamour stocks by a wide margin based on US data. Now you might be asking what does this have to do with Indian equities and value investing? Fortunately, the Brandes Institute used the LSV framework to analyze emerging markets in a paper titled “Value Investing: Has it Worked in Emerging Markets?”. You can download the paper for free from the Social Science Research Network (SSRN). I’ve provided a link here. They essentially categorized all stocks residing in emerging markets as defined by MSCI into deciles based on Price to Book Value (P/B) ratios and tracked stock performance using data from June 30, 1980 to June 30, 2007. First, India is categorized as an emerging market by MSCI and thus Indian stocks were included in the study. Second, deciles simply means that the universe of stocks used in the study were split into ten segments based on their P/B ratio. Stocks with the lowest P/B ratios or “value” stocks were placed in the higher deciles and those with the higher P/B ratios were categorized in the lower deciles. The cheapest stocks or those with the lowest P/B ratios would be placed in decile 10 and the most expensive stocks or those with the highest P/B ratios would be placed in decile 1. Once the stocks were categorized, Brandes tracked their performance over a 5 year period from June 30, 1980 through June 30, 2007. The results were quite simply amazing. The researchers found that decile 10 or value stocks produced on average 5-year annualized returns of 19.6% vs. 2.6% for decile 1 glamour stocks. Value stocks had an annualized premium of 17% relative to glamour stocks. Basically, you could expect the cheapest value stocks to return 17 percentage points more than the most expensive glamour stocks on an annual basis. If you’re not amazed by these results, you either have access to a currency printing press (e.g. a central banker) or you have too much money to worry about compounding. I’m in neither category so I’m seriously amazed. However, I’m not surprised because Joel Greenblatt also found in The Little Book That Still Beats the Market that over a 17 year period if you owned a portfolio of 30 stocks with the highest combination of earnings yield and return on capital you would have achieved an annual return of 23.7%. During that same period the average market return was 12.4% per year. It’s clear based on a variety of studies that even simplistic mechanical valuation based models produce some pretty amazing results. So, you might be asking what is the catch? Yes, you’re right there are a few complications. The main problem is that although returns for value portfolios are excellent over long periods of time in the short-run you can drastically underperform the market. Thus, it’s difficult to maintain your investing discipline when markets are raging and you’re underperforming or vice versa when markets are crashing and you feel like pulling your money out at exactly the wrong time. Fortunately, you now have the Value Investing India Report monthly subscription service to help you make the right portfolio decisions at various points in the economic cycle. I can’t promise that you’ll avoid all volatility, because it would be a lie. But I can tell you that by incorporating a value investing mindset into your investing strategy you can become a better investor. Finally, if you think the results in the Brandes study were to broad based to be applicable solely to the Indian market, see the chart below.


The 5-year average annualized return for the MSCI India Value Index was 8.6% vs. 1.9% for the MSCI India Growth Index as of March 12, 2012. If that chart above doesn’t convince you about the benefits of following a value investing based investment strategy in the Indian market then I’m not sure what will.

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