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Real value and real growth

Real value should lead to growth and real growth should lead to an accretion of value

Real value and real growth

For the investor, there are few words that hold so much meaning and so much promise as 'value'. For me personally, it's been a lifelong fascination with the concept, as is evident from the name that I gave my company when I started it at the age of 20. In fact, back in 1990, the point of the phrase 'Value Research' was not that it was the name of the company, but that it was literally the activity I was spending all my thinking hours on. Thirty years later, that remains just as true.

Of course, it's not all milk and honey. The trouble with the term 'value' is that it holds the potential for as much doubt and confusion as it does promise and meaning. It's easy to define but hard to recognise, except in hindsight. And while we can mock hindsight as much as we'd like, it's actually the only tool we have. After all, hindsight can mean learning from the past. And since we cannot see into the future, the past is all we have which we can learn from.

Remember, what you want to buy is a value stock but what you want to sell is a growth stock. That's the ideal, and it's often unattainable simply because ideal results are unattainable in real life. However, when it does happen in some companies, then it's worthwhile to analyse and study those examples closely.

If you sit back and think about what the concept of value is, you will realise something quite interesting. Value or growth is not just a characteristic of the company itself but of what the market thinks of the company. That's where we get the dreaded concept of 'value trap'. What you want is a company that is attractively priced. But what you do not want is a company that stays attractively priced for a long time. That's usually an indication that there's something inherently wrong with the business. Of course, it's possible that you have recognised value and the rest of the market has not, but what use is that? For you to eventually make money, the rest of the market has to agree with your judgement! If it doesn't, then it doesn't.

A few months ago, when the coronavirus had barely started off and so the context was different, I had quoted Warren Buffett on how the concept of value had evolved. "Whether appropriate or not, the term 'value investing' is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a 'value' purchase. Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value."

As usual, the old man provides a lot of food for thought. Value has to lead to growth, but growth too has to lead to an accretion of real value in business! It's a hard concept to appreciate, but most things worth understanding are hard.