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In Pursuit of Value

Investment guru Warren Buffett has made his biggest purchase ever, basing it on a simple, yet profound, premise

Mamata Bannerjee and Lalu Prasad Yadav would hardly believe this, but the world’s smartest investor has decided to pay a huge sum for becoming the owner of a railway. Warren Buffett is acquiring a company called BNSF, which is America’s second largest railway company. BNSF is not small by any standards — its network is almost as large the Indian Railways. It’s also not small by Warren Buffett’s standards. In fact, it’s the largest investment that the man has ever made. He already owns some 22 per cent of the company and is now paying an $26 billion (Rs 1.21 lakh crore) for the remaining stake.

But what an unglamorous investment! While glamour-obsessed Indian tycoons are intoxicated by planes and the world is fascinated with technology, alternative energy, biotech and such, the old man has decided to be as unfashionable as ever and has put down a huge chunk of cash for a business that was last considered exciting in the century before the previous one (the last railway stock boom ended in 1840). But then, Value Investing is not about following fashions, it’s about following value. That’s something that Buffett has learned from his guru, the original conceptualiser of Value Investing, Benjamin Graham.

At the heart of Value Investing lies a very simple concept which every housewife shopping for vegetables understands, but which far too many investors do not — you must buy things cheap. When it comes to investments,  that means buying a stock for less than it is inherently worth. And that means that its current price should be less than its inherent worth, not some future price and future date. There can be many ways of judging a stock’s inherent worth, but the basic principle is that you must buy a stock when it’s underpriced.

In India, Value Investing has had a chequered history of sorts. There have been funds that make some noises about Value Investing, but in a growing, momentum-driven market like India, the concept hasn’t made much of a headway. Value Investing requires patience and commitment in investors on a scale that is probably not easy to come by in India. Later this month, Fidelity Investments is launching a value fund, probably the first one in India that is explicitly pegged to be a Value Investing fund. It will be interesting to see how Fidelity’s version of the concept pans out and how investors take to it.

Interestingly, Warren Buffett has narrated how some fund managers he knew became value investors. He says that buying things cheap is not something that takes a lifetime to figure out. It’s not as if someone has to do a 5-year course and read big books and understand complex mathematical formulae and then finally you learn enough to understand the theory of Value Investing. None of that. You just have to appreciate the idea of buying things cheap — of paying less than they are worth to you.

To understand this, it just takes five minutes of thinking, perhaps not even that. Either you get it or you don’t. Either you are the sort of a person who buys things cheap or you are the sort who buys things expensive in the hope of selling them even costlier later on. It goes without saying that the actual practice of Value Investing requires some study and a great deal of discipline. However, once you have made the decision to buy stocks only on the basis of their fundamentals and not on momentum or on future hopes, you have made a beginning.