INERTIA WEALTH CREATORS

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FOCUS ON VALUE, NOT JUST THE PRICE!

November 5, 2016

 

In the stock markets, most people are confused between price and value. In fact, for most of the market participants, price and value might even be synonyms - they think the value of a stock is the last traded price in the stock exchange. Nothing would be farther from truth... 

 

In fact, the art of investing is actually about spotting and benefitting from the gap between price of the stock and the underlying value. Higher the gap, more attractive the opportunity because of higher 'margin of safety'. To quote legendary investor Mr Warren Buffet: 'Price is what you pay, Value is what you get'.

 

So how does one distinguish between price and value? Knowing the price of a stock is fairly simple, isn't it? Its available on television news, newspapers and the internet. In fact, most media only tells us about price because it is so easy to report about it: X stock went up, Y went down, 52 weeks high, 52 week lows etc....

 

Coming to the difficult part of investing, how to determine the value of a stock? This involves understanding the current and future earnings trajectory of the business whose shares you are investing in. Its not easy: one needs to understand the economics, sectoral trends, competitive advantage of the company, its pricing power, headroom for growth and a variety of other things. One needs to read a lot, including company Annual Reports, analyse the financial statements and be well versed with the ongoing developments int he company and the sector it belongs to. That's not easy and most retail investors are not equipped to do it on their own...

 

However, make no mistake: avoiding 'value' analysis all together and just focusing on the stock price is the biggest road to disaster in the stock market. Why? Because, in the long run, the price of a stock is perfectly correlated to the earnings or profits that the company is making. So, just looking at the price without having an inkling about the underlying earnings and value would be akin to driving a car by looking at the rear view mirror! Is it then a surprise that so many people go through 'accident' in the stock markets?

 

This is where Inertia is committed to guide its clients. Rather that blindly focusing on the stock price movements, we closely track value as represented by the earnings growth of the portfolio companies. This keeps our investors ahead in the game as our portfolio has been consistently outperforming. As someone rightly said: 'Stock prices are slaves of earnings'.

 

Focus on value, not just the price:)

 

Happy Investing!

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