Investment Philosophy
Value Investing
is the art of picking stocks that trade at a discount to their intrinsic value. Over the last many years, value investment strategy has a consistent history of beating index returns across multiple equity markets. Investors determine “value” in companies using valuation methods like Discounted Cash Flow or metrics, like multiples of their profits or assets.
Quantitative Value Investing is our innovative approach to Value Investing that combines the power of quantitative analysis (quant) with the principles of Value Investing. It is based on the foundation of two firm beliefs:
Therefore, value is a function of the performance of the company and the reaction of the market. Quantitative methods can be used to design, implement and back test strategies to identify such companies. One such strategy/model is our proprietary Expectations Value Model (EVM).
EVM correlates Intrinsic Value with the Expectations from the Company. It decodes market expectations determine their viability for an expected return. More viable the expectations, better the value.
Quantitative Value Investing is our innovative approach to Value Investing that combines the power of quantitative analysis (quant) with the principles of Value Investing. It is based on the foundation of two firm beliefs:
- Value Investing Works
- Numbers Reveal the True Character of a Company
Therefore, value is a function of the performance of the company and the reaction of the market. Quantitative methods can be used to design, implement and back test strategies to identify such companies. One such strategy/model is our proprietary Expectations Value Model (EVM).
EVM correlates Intrinsic Value with the Expectations from the Company. It decodes market expectations determine their viability for an expected return. More viable the expectations, better the value.
Expectations Value
The Expectations Value Model (EVM) is the foundation of our investment philosophy. EVM is a quantitative model that focuses not only on the business quality but also the market perception and expectations.
EVM is based on the principle that it is not whether the stock is cheap or expensive that drives its value, but its potential to meet or beat the investor expectations that is the critical factor. Why else would expensive stocks like Bajaj Finance continue to deliver stupendous returns while cheaper stocks like SBI cannot even beat market returns.
Market expectations range from simple growth in earnings to management behaviour to return on invested capital and others. A combination of these expectations and the company’s actual performance determines how the market values the company. Though base valuations matter, their impact is limited when the company continues to beat the expectations.
EVM is based on the principle that it is not whether the stock is cheap or expensive that drives its value, but its potential to meet or beat the investor expectations that is the critical factor. Why else would expensive stocks like Bajaj Finance continue to deliver stupendous returns while cheaper stocks like SBI cannot even beat market returns.
Market expectations range from simple growth in earnings to management behaviour to return on invested capital and others. A combination of these expectations and the company’s actual performance determines how the market values the company. Though base valuations matter, their impact is limited when the company continues to beat the expectations.
What factors influence stock prices?
Markets do not always follow value investing principles. Stocks that are valued low remain that way for years while stocks that are very expensive, continue to remain expensive or even get more expensive.
What drives these stock prices? What kind of stocks generate market-beating returns? Why do stock prices of expensive stocks not correct? Why, when even the most optimistic value investing models cannot justify the valuation, the market continues to price the stock even higher.
Further, we observe that every year a different set of stocks do better than the market. So, keeping the same stocks for multiple years may actually reduce overall returns. This disconnect is what prompted me to develop expectations value model. The concept of value had to be altered.
Value per EVM is the ability to meet market expectations and not the traditional present value of future cash flows. If present value of the cash flows would be the true value of stocks, why would over valued stocks deliver market beating returns?
Market in its collective wisdom values a company on the expectations of its earnings growth for the current year. Meeting or exceeding these expectations result in the markets rewarding these stocks. With this principle, the focus now shifts to defining, what “expectations” mean. It can mean anything from operational profit to cash flows to balance sheet improvements or a combination of all of these. How EVM derives the expectations is proprietary information and cannot be shared here, but it does include most of these aspects.
Once the expectations are determined, the second step is determining the viability of those expectations. Those companies which are most probable to meet or beat those expectations are filtered to be in recommended list (portfolio) for that year after applying traditional business quality filters.
This process is repeated every year post the annual results are available. Previous year’s holdings are sold, and the newly filtered companies are purchased.
You can read more on the model in our blog section.
What drives these stock prices? What kind of stocks generate market-beating returns? Why do stock prices of expensive stocks not correct? Why, when even the most optimistic value investing models cannot justify the valuation, the market continues to price the stock even higher.
Further, we observe that every year a different set of stocks do better than the market. So, keeping the same stocks for multiple years may actually reduce overall returns. This disconnect is what prompted me to develop expectations value model. The concept of value had to be altered.
Value per EVM is the ability to meet market expectations and not the traditional present value of future cash flows. If present value of the cash flows would be the true value of stocks, why would over valued stocks deliver market beating returns?
Market in its collective wisdom values a company on the expectations of its earnings growth for the current year. Meeting or exceeding these expectations result in the markets rewarding these stocks. With this principle, the focus now shifts to defining, what “expectations” mean. It can mean anything from operational profit to cash flows to balance sheet improvements or a combination of all of these. How EVM derives the expectations is proprietary information and cannot be shared here, but it does include most of these aspects.
Once the expectations are determined, the second step is determining the viability of those expectations. Those companies which are most probable to meet or beat those expectations are filtered to be in recommended list (portfolio) for that year after applying traditional business quality filters.
This process is repeated every year post the annual results are available. Previous year’s holdings are sold, and the newly filtered companies are purchased.
You can read more on the model in our blog section.
The EVM Process
