What is value investing? Amit Premchandani of UTI AMC explains

What is Value?

In common market parlance the term 'Value' has come to denote cheap valuations based on multiples such as low price to earnings or price to book rather than the concept of 'Intrinsic value'. For me, 'Value' is a reference to 'Intrinsic value' and there are many ways to derive intrinsic value. Intrinsic value was best described by Warren Buffet as - "the discounted value of the cash that can be taken out of a business during its remaining life".

As an investor, focus should be on buying businesses for less than its 'Intrinsic value'. Our core belief remains that the market has moved away from the approach of "cigar butt investing" which essentially meant buying a company at a significant discount to liquidation or replacement value or book value.

The kind of free lunches available in the age of information asymmetry are hardly available now, and in case something is really cheap as compared to its liquidation value or for sake of convenience its book value, generally that company is dealing with specific issues. These kinds of free lunches are now available only during times of significant market dislocations. Buying a bond at 80 percent of maturity value hoping for full repayment at maturity including coupons works well in debt investing but caps upside in equity investing. Applying such an approach essentially means buying stock at say 60-70 percent of book value and expecting that to move to 100 percent of book value, essentially selling off post it reaches 100 percent as not much "value" is left. This is a narrow interpretation of value and in many cases has led to significant erosion of principal as investors fail to account for capital requirement of such businesses or inability to monetize the resources which were part of their net assets.