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Tuesday, August 19, 2014

Value Investing:Will Grahamandodd Please Stand Up?

Value investing ...the Holy Grail of investment philosophy pioneered by Benjamin Graham and  David Dodd with their most famous disciple Warren Buffett.

There are many variations to the philosophy but the basic remains that if the stock price of a company is lower than its intrinsic value by 25-30% then the company is worth investing in with the believe that in future the price discovery due to valuations will catapult the stock price to at par if not above the 'true'valuation.

Another basic premise is to find 'Growth' companies in sectors that have high entry barriers(Moat investing) with honest managements that will provide YoY upsides in earnings.

The most successful Mutual Fund,Peter Lynch's Magellan Fund generated 29% YoY return for 20 years between the years 1977-1990

So it would seem that the Value Investing philosophy has stood the test of time to deliver exceptional returns to its followers.

TECHNOLOGY DISRUPTION.

“When I took office, only high energy physicists
had ever heard of what is called the World Wide
Web... Now even my cat has it's own page.”
- Bill Clinton




Now everyone wants to be connected.Everyone wants to be in on the latest gossip,everyone wants to be or is hardwired to the Internet.Our interactions with people around us usually takes 3 forms -
Creating
Consuming
Communicating

To this purpose we use or used many products and services and interacted with many others.Now all this can be done via the internet digitally.
To give an example,instead of watching TV you can catch shows on Hulu.You read ibooks or twitter.To listen to music you download Spotify app on your mobile.To watch a move you go to Netflix.And you pay for all this with ipayments through your Mobile phone again!


Companies need to adapt to this lateral shift which strange as it may seem has just begun.Those familiar with Everett Rogers thesis on the Diffusion of Innovation can relate to this theory that says Technology adoption follows a bell curve and early adopters gain majority advantage.

Even here the word 'technology' is a misnomer.A Flipkart has raced ahead of TCS,Wipro,Infosys in market cap even those these bluebloods of Indian IT have been around for more than a decade.

Its the new way of doing things that is leading to such valuations.Facebook offcourse is the byword in this new genre.

How do you value such ventures ? How can you predict the technology for the next decade when its almost impossible to predict the next six months...!!

Then comes user interfaces,buyer psychology,age of the population...a host of questions.

Marc Andreessen wrote a piece in 2011 tittled,"Why is Software Eating The World".That happened after Amazon downed Barnes&Noble and Netflix competed with Blockbuster and HBO.

When was the last time you wrote a letter?Took notes in shorthand?Used a landline phone?

I admit.Over a decade ago!!

There happen to be just too many options and more in the pipeline.I feel it was far easier to judge the brick and mortar businesses that had a predictive life cycle and a product cycle that grew in yearly mode.

So a new challenge for Grahamandodd arises...