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A preview to Value Investing…

I had the privilege of taking a course with Prof. Bruce Greenwald, touted as the “guru of wall street gurus”. This was a course titled Economics of Strategic Behavior and concerned a strategic analysis of how a firm (already within an industry or trying to enter one) needs to assess the industry’s competitive advantage situation and accordingly work towards a strategy. This course is based on his best-selling book, “Competition Demystified”.

However, at the fag end of the course, Prof. Greenwald also touched on his most favorite topic, Value Investing, whereby he offered a glimpse of a unique value of corporate valuation. There are two value approaches to investing…

Short-term approaches
A. Technical approaches
– Look at price / volume patterns to predict future price / volume
– Disciplined investment momentum
B. Fundamental (value) changes
– Take current prices and forecast near-term future changes using micro and macro views
– Current price + Forecast change
Long-term approaches
– Fundamental (value) – levels
– What is this company’s worth?
– Market price vs. value

MYTH: Markets are efficient so you want to diversify risk and minimize transactions.

In fact markets are not efficient… but the strategic fact one has to know about investing is that when you buy, someone else is selling with an opposite view. There are no competitive advantages in investment market due to immense competition so only possible advantage is efficiency.

Where can efficiency come from?
It can come from using the value investing process involving the following steps:
1. Search
2. Valuation
3. Review
4. Risk management

Specialization is key to building efficiency. That is why, statistically, industry specific portfolios tend to outperform the market.

Basic elements of Value

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  1. May 7, 2011 at 9:27 pm
  2. May 7, 2011 at 9:28 pm

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