Tuesday, May 24, 2016

Yes, value investors are retrograde - for a good reason too!

Speculators are always crystal gazing the future; it seems they are always forward-looking.  On the other hand, value investors always look back into the past. As far into the past as possible. And so can we call them retrograde?  I say yes, with pride. A value investor is retrograde literally, and for a good reason too!

When investing being retrograde is better than crystal-gaze the future

Every day I read in financial newspapers that the Indian share market is reasonably priced.  They say that presently the market is trading only at 15 times the two year forward earnings. They add that this is in contrast to the long-term average of 16 times, which is the norm.

Two years forward earnings?  Who can predict what profits may a company may earn two years hence? What greater foolishness could there be than buying a share at 15 times the earnings expected two years hence? while value investors are taught not to buy shares at not more than ten times the past earnings?

Further, when we say past earnings, we don't simply mean the earnings of the previous year. We mean the average earnings in the five preceding years.  We take this extra precaution to avoid buying a share by mistake.  Because a company may have a bumper year owing to sheer luck. Whereas the five-year average past earnings criterion will eliminate that risk.

When you make investment decisions based on future earnings, you are ignoring the time-tested concept of buying the share at or below its intrinsic value and paying a fair price.
While the media is howling the market is cheap, I am scouring the market every day, with utter disappointment, to make the new find of a reasonably priced share!


We value investors do not mind the world labelling us retrograde.  Looking back into the past is the essential ingredient of our craft. For, when investing it is far more beneficial to be retrograde than crystal-gazing the future.