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The Five Questions You Must Answer if You Want
to Be a Value Investor
So, you want to be a value investor? Value investing more than any other
type of investing is about the ability to bear pain. Are you confused? Let
me share with you a quote from legendary value investor Jean-Marie
Eveillard:
Most people arent cut out for value investing, because human
nature shrinks from pain. - Jean-Marie Eveillard, First Eagle Funds
Markets are for the most part efficient. If a stock is trading at a large
discount to its intrinsic value, investors are concerned about a threat to
the underlying business. It could be a new competitor has just entered
the industry, new government regulation or a recession may be looming
on the horizon. For a stock to trade at a meaningful discount there is
something identifiably wrong.

The key to value investing is to know when a problem is fixable and
when its not. When you invest in a company simply because its cheap
and it cant fix the problem, youve just entered into a value trap. In
many instances the dividing line between a value trap and an excellent
investment is quite thin.
Going against the grain is clearly not for everyone - and it doesnt
tend to help you in your social life - but to make the really large
money in investing, you have to have the guts to make the bets that
everyone else is afraid to make. - Carlo Cannell, Cannell Capital
When you initially make an investment in a depressed stock, you wont
know for a very long time whether you made a good decision.
Additionally, you wont have the support of the financial media, your
broker or your friends when making such investments. By definition
value investments are out of favor. Very few individuals have the
ability to remain objective and to not follow the investing herd.

Special Report:
May 12, 2014
Version 1.0

The Five Questions You Must
Answer if You Want to Be a
Value Investor:

1) Do I have the emotional ability
to avoid the latest market fads
and focus on my investment
methodology even when its not
working?

2) Am I prepared to do the vast
amount of screening and
research necessary to pick
winning stocks?

3) Am I strong enough, financially
and emotionally, to follow a
focused portfolio strategy?

4) Am I capable of determining the
intrinsic value of a stock with a
high degree of accuracy?

5) Am I willing to take a long-term
view for bigger gains in the
future?

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Tweedy, Browne & Company, a US based asset management firm found that successful value investors
underperform their benchmark from 25-40% of the time. It can be a lonely feeling watching your portfolio
underperform, while the broader market is rallying. It takes a high level of conviction to stick with a value
investing methodology in the short-term to ensure you outperform in the long-term.

Thus, value investing requires great patience and the ability to take a differentiated view from the market.
Most investors either dont have the patience to be successful or the ability to be a contrarian. If you dont
have either ability, I can guarantee you it will be both painful and difficult to be successful as a value
investor.
Value Investing Is Hard. So, Why Pursue It?
Fundamentally, value investing is based on an extremely simple principle: exploit the discrepancies
between the value of a business the price of ownership for that business in the market. Yes, thats it. All the
volumes written about value investing boil down to the preceding principle. If youre thinking thats an
obvious statement, you would be correct. However, dont confuse elegant simplicity with being simple. The
trick is not in understanding the principle its in the execution.

Ive already laid out for you why value investing is hard. Well now explore why anyone would want to be
a value investor in the first place. The answer again is straightforward. Value investors as a group have
demonstrably shown superior investment returns across time, geography and stock market cycles.

Ibbotson Associates and the Center for Research in Security Prices conducted a truly comprehensive study
on the performance of growth vs value stocks and published the results in a white paper titled A
Comprehensive Set of Growth and Value Data. The study definitively showed that value beats both growth and
the overall market over long periods of time.

From 1968 - 2002, a portfolio investing in US growth stocks realized an annualized return of 8.8%. Over the
same period, a portfolio invested in US value stocks realized an annualized return of 11.0%.

If the difference doesnt seem like much, consider that in just 10 years, your brokerage account balance
would be more than 22% larger by investing in value stocks than growth stocks. And as you keep investing,
the gap becomes even larger.

If you had just invested $1,000 in a portfolio of value stocks in 1968 it would have grown to $34,630 by 2002.
If you had invested the same amount in a portfolio of growth stocks over the same period, it would have
grown to only $17,520. Your value portfolio would have been 98% larger than your growth portfolio at
the end of the period studied.
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Figure 1: Value of $1,000 invested in Growth vs. Value stocks from 1968-2002
Is Value Investing for You?
Value investing in my opinion provides the best opportunity to compound your wealth over the long-term.
If you value financial freedom, value investing is probably the most effective method you can utilize to
achieve your goal. If youre still not sure whether you could be a successful value investor, answering the
following five questions will help clarify whether its right for you.
1. Do I have the emotional ability to avoid the latest market fads and focus on my investment
methodology even when its not working?
There have been numerous studies that show value investing works over time. However, the sad reality is
that most individual value investors fail to outperform the overall market. The main reason for this failure
is not related to intelligence. After all, Buffett himself has famously stated:

You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the
guy with 130 IQ." Warren Buffett, Berkshire Hathaway

I think the biggest mistake that most investors make is that they are unable to be inactive. Value investing
more than any other type of investing requires patience, which is in short supply these days. No other form
of investing requires you to sit and wait indefinitely for the right opportunity to show up. The bigger issue
is that while youre waiting to find the right opportunity your friends, cousins and uncles are all talking
about the latest killing theyve made in whatever is the latest fad in the market.

Each month I religiously get a call from my broker hyping up the latest fad in the Indian equity market. I
actually track many of his recommendations on a spreadsheet and most of the time they are money losing
propositions. I actually shared the spreadsheet with him and his only response was that he can only advise
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but I must decide. Not exactly confidence inspiring. Thats why I always emphasize doing your own
research or utilizing a service like Premium Access.

This is only one example of the inefficiencies and irrational behavior that stalks the Indian market. I dont
care how many neat formulas and equations that academics derive to prove the existence of market
efficiency. The Indian market is most definitely not efficient. Primarily because the investors that make up
the market are not rational decision making robots. Theyre humans driven by greed and fear.

Thats why you need to follow an investing approach that implicitly benefits from this irrationality. Price is
not the equivalent of value. Bargains will undoubtedly appear in the form of high quality businesses trading
at discounted prices, when market participants start panic selling. Its not a question of if they will panic,
only when they will panic.

The problem for most investors is having the courage to take action when a stock or the market as a whole
is trading at fire sale prices. I wish that I could say that I was buying hand over fist during the 2008 financial
crisis, but I wasnt. I was too scared. It has cost me in the long-run.

The problem was that I wasnt fully fledged value investor at that point in time. I was still brain washed by
my pricey MBA education to believe in rational and efficient markets. Only my personal investing
experience has convinced me that value investing works because markets are irrational, fear driven and
rarely if ever at equilibrium. Fortunately, Ive now been extremely successful with value investing and now
have both the knowledge and confidence to avoid the mistake I made in 2008.

The key for you to make money is to have the emotional maturity to control your fear. Its not easy and
many people are not capable of doing it. I dont care how analytical or rational you think you are. When
youre watching your portfolio fall by 50% in the matter of a few months no amount of analysis is going to
keep your fear in control.

Only having gone through a cycle or two will you have the experience and emotional maturity to buy when
there is blood in the streets. Its one thing to acknowledge that being a contrarian is the only way to achieve
out-sized returns in the market but putting it into practice is where the rubber hits the road.
2. Am I prepared to do the vast amount of screening and research necessary to pick winning
stocks?

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This sounds obvious, but perhaps the most common mistake that investors make is failing to
thoroughly investigate the stocks they purchase. Unless you know the business inside and out, you
shouldnt buy the stock.
1

Identifying good value investments is a four part process:

1) Screening
2) Accounting
3) Reading annual reports
4) Valuation

Finding good value stocks is a labor intensive process. While investors will differ on the main tools that they
use, the basics are always the same. First, you need to narrow down the thousands of listed companies
available in a particular market into a target list that you want to analyze and research further. For some
investors this simply means reading the newspaper daily and learning more about businesses. Buffett
famously uses the Value Line Surveys. The majority of professional investment managers use either
Bloomberg or FactSet, which both cost thousands of dollars a year. Regardless of the software you use, you
need to develop a systematic way of screening potential investment ideas.

Also, you need to follow this process religiously. I personally review my own proprietary screens at the
beginning of every week. Ive been following this same process for years. I can tell you from my own
personal success its not about having the most sophisticated quantitative screening model, rather its the
consistency of continually screening that will produce big results.

Once youve identified a potential investment candidate through your screening process, you dig into the
financial statements. Without understanding basic accounting youll have no way of truly understanding
the economics of a business. You dont need to be a Chartered Accountant, but you do need to understand
intuitively how all three accounting statements are compiled and how theyre connected. If youre not
willing to put in the work and truly analyze financial statements, youll never have the ability to stick with
a position for the long-term. Youll be quick to sell your position because you dont fully understand the
underlying economics of the business.

After youve come up to speed on accounting, you need to start reading annual reports. I cant emphasize
enough that if you read annual reports youll be ahead of 99% of investors. Most investors dont take the
time or the effort to read through annual reports, which is a mistake. Warren Buffett spends the majority of
his day reading annual reports.


1
Dorsey, P. (2004). The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the
Market [Kindle version]. Retrieved from Amazon.com.
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Knowledge much like money compounds over time. The best way to learn about a new industry and to
increase your circle of competence is to read the annual reports of the three leading companies in that
particular industry. When reading annual reports you need to look for three things:

1) How the company uses excess cash
2) What metrics the company uses to measure success
3) How the CEO/Chairman explains the company differentiates its products and strategy

At the Value Investing India Report (VIIR) we only invest in high quality businesses that have a sustainable
competitive moat and are conservatively financed. If you focus on these types of companies, they will
undoubtedly be excellent cash generation machines. How management uses that extra cash flow will
ultimately determine your results as a shareholder. If management uses the excess cash to grow their empire
and acquire new businesses without taking into consideration profitability, youll be on the losing end as a
shareholder. The goal is to find management teams that talk about returning cash to shareholders. You want
to read about companies that have a defined dividend or share buyback policy. If you can identify
management teams who are focused on returning cash to shareholders, youve virtually guaranteed
yourself solid returns.

Annual reports will also disclose the metrics that management uses to measure success. Again you want to
find businesses run by managers that emphasize shareholder friendly metrics such as Return on Equity or
profitability. You want to avoid management teams that are solely focused on growth and pro forma
earnings
2
.

Also, you want to make sure management is aligned with your interests as a shareholder. Charlie Munger
is a big believer in incentives. Always make sure that managements incentives are aligned with yours. If
you see over-sized stock option packages, its a clear danger sign.

Finally, the last thing you want to identify in annual reports is how management will broaden or increase a
companys moat. You want to find management teams that will be able to define a unique strategy that will
build on the companys existing competitive advantage. Moats as most things in life are never static. They
are either widening or narrowing. You want to stick with companies that have management teams focused
on widening a companys moat.

If it sounds like a lot of work, you would be correct. It is a lot of work. Thats why 99% of investors dont
read annual reports. They would rather turn on the TV or read the latest best-selling novel. To be successful
as a value investor doesnt require a high IQ, but it does require a lot of work. If youre not prepared to do

2
Pro forma earnings are earnings presented by management teams that dont conform to GAAP (Generally Accepted
Accounting Principles). These earnings are usually provided by management teams to paint the company in a better
light.
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the homework, I would recommend finding a good newsletter written by an investor who has a value
focused methodology or at a minimum investing your funds in a low cost index fund.

3. Am I strong enough, financially and emotionally, to follow a focused portfolio strategy?
We wanted to really drive home the point that, you first have to pick the stocks and secondly, youve
got to put them together in a portfolio. The thing that really kind of took me aback after I wrote the
Warren Buffett Way was that it seemed like everyone had the Warren Buffett conversation down: We
only buy the right businesses, we want good managers, were looking for high returns on capital, good
profit margins, cash flow and earnings, and we always buy them for less than theyre worth. Thats the
Warren Buffett way. Then you find out about the portfolio they manage; its 140 stocks, [a] turnover
ratio of 90%. They got the stock selection part down, but not the portfolio management aspect. That was
part of the driving force in writing the book.
3

As the quote above from Robert Hagstrom highlights, many investors think that simply selecting the right
stocks is enough for investment success. Thats just 50% of the process. The remaining half is determining
position sizing and creating a portfolio. When you invest in a company youre not simply making an
investment decision in isolation. You need to weigh that decision in terms of the other alternatives in your
portfolio. You need to answer the following questions: Does it make more sense to add to a position
currently in your portfolio? Should you sell a position before adding a new one? And most importantly,
what is the correct position size?

I firmly believe that in order to achieve market beating performance, you need to take concentrated positions
in a handful of stocks. This focused strategy will pay-off over time but at the expense of near-term volatility.
If you cant handle the short-term ups and downs, you wont have the staying power to stick with your
positions. At the first sign of a market correction, youll be selling out of your positions at a loss.

I think most investors intuitively understand the type of stocks that you want to buy and hold for the long-
term. Where they fail miserably is the actual creation of a portfolio of stocks. Most value investing bloggers
that Ive read, focus on finding new stocks and then leave you hanging on the portfolio construction part.
In all fairness its not completely their fault. They havent had to manage money professionally.

At most professional asset management firms, the research process is undertaken by analysts and the
portfolio construction by portfolio managers. The primary role of the portfolio manager is to determine the
number of stocks and size of each position within the portfolio. Most investors are familiar with the analysis
of stocks but are simply out of their depth when it comes to portfolio construction.


3
Wettlaufer, D. (1999, May 10). Interview with Legg Mason Focus Trust Manager Robert G. Hagstrom. Retrieved from
http://www.fool.com.
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If you actually read the earliest Berkshire Hathaway annual reports youll realize that Buffett never owned
more than 20 stocks. In comparison, the average mutual fund has between 100-200 positions. Which means
that the average position size comprises 0.5% to 1.0% of the overall portfolio. Even if you find a stock that
doubles it will only mean a 1% increase in the total value of the portfolio, at best.

Most mutual funds will never be able to outperform the market because theyre not making concentrated
bets. If youre looking for average market performance then investing in a mutual fund is not a bad option.
However, if you factor in a 2-3% expense ratio as a percentage of assets under management, its almost
impossible for an active mutual fund manager to outperform the market.

In my view, a rational investor has two options when it comes to investing. 1) Invest in a low-cost index
fund, with expense ratios in the 40-50 bps range. 2) Invest on your own using a value investing
methodology.

You probably already know this but I would choose option 2. I dont want to settle for market performance,
because I think its possible to massively outperform the market using a focused value investing process.

The one caveat that I must add is that a focused portfolio will both amplify your potential rewards and
losses. If youre not a good stock-picker a focused investment methodology will do more damage to your
portfolio than good. You must be confident in your investment process and have the right mindset.

We not only provide investment recommendations to our Premium Access subscribers, but also a
comprehensive asset allocation plan. We tell you exactly how big a position to take and are constantly
monitoring our position sizing. In fact, I use the same exact process that my portfolio managers taught me
at my old firm, where we managed $1 billion in assets. Youll no longer be guessing about how big a position
to take, but will be making calculated bets on only the best and most attractive investment opportunities
that we come across.

The only way to develop the right mindset is to create an investment process in which you have complete
faith. After going through one or two cycles youll have the confidence to realize that youre investment
decisions were sound and that things will work out in the long-run.

The only surefire way to develop this confidence is through experience. However, it always helps to have
another investor with whom you can share ideas and obtain solace during market storms. Ive been through
enough cycles to know that value investing works, but it takes a huge amount of patience. I try to be the
stabilizing factor for my subscribers, who may not have the same amount of experience in the market as I
do.

In fact, I think one of the biggest benefits of being a subscriber is that youre continually fed a steady diet of
tips and strategies about value investing. In small steps you increasingly become more confident as a value
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investor. Small steps in the right direction eventually lead to big changes. When youre surrounding
yourself with other value investors you cant help but take a longer-term view and make better investment
decisions.

4. Am I capable of determining the intrinsic value of a stock with a high degree of accuracy?
Buffett recognizes that he is neither richer nor poorer because of the markets short-term fluctuations in
price, since his holding period is longer-term. Whereas most individuals cannot endure the discomfort
associated with declining stock prices, Buffett is not unnerved, because he believes that he can do a better
job than the market in valuing a company. Buffett figures that if you cant do a better job as well, you
dont belong in the game. Its like poker, he explains - if you have been in the game for a while and dont
know who the patsy is, youre the patsy.
4

An essential part of value investing is having the right skill-set to determine the intrinsic value of a stock.
Even if you have the right mindset it doesnt mean much if you dont have the technical skills to accurately
determine the value of a stock. There is only one primary method that should be used to value a stock:
discounted cash flow analysis.

If you dont know how much a stock is worth, how can you possibly know youre buying it at a discount?
While many investors like to focus on simple valuation metrics such as P/E and P/B thats not enough to
make accurate investing decisions. Multiples are like a shorthand for valuation. Theyre extremely valuable
for doing a short cursory overview analysis but I would never commit my own capital based on solely a P/E
multiple and neither should you.

A fundamental rule in finance is that any asset, whether its a bond, stock or even a mortgage backed
security is valued exactly the same way. By discounting its cash flows at an appropriate discount rate. Thus,
there is an underlying consistency to modern finance which simplifies many complex securities. Even if you
dont understand how a mortgage backed security is created, you can still value it by determining its cash
flows over its life and then discounting them back to the present. For some securities calculating cash flow
is easy. A bond, for example, has explicit interest payments and your principal is returned at the maturity
date. Thus, valuing a bond is usually the first security most business students are taught to value.

The same principles apply to valuing stocks. However, the difficulty lies in accurately measuring and
calculating cash flows. First, an investor must calculate free cash flow, which can be simplified to mean
operating cash flow less capital expenditures. The problem that most investors face is that they dont know
how to forecast these cash flows into the future. What growth rates do you assume? How much capital
expenditure is appropriate?


4
Hagstrom, R. (2014). The Warren Buffett Way, Third Edition [Kindle version]. Retrieved from Amazon.com.
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Unfortunately, there is no black & white answer. All valuation is a grey area. It takes years of practice before
you can accurately value a stock. Even if youre proficient in discounted cash flow analysis, the use of
multiple assumptions in your valuation can mean your estimate of per share value is way-off from reality.
Discounted cash flow analysis requires the use of a number of assumptions ranging from the appropriate
discount rate to the growth rate in FCF (free cash flow) into perpetuity. I can guarantee that no two investors
will ever come up with the same exact valuation for a stock because of the myriad amount of assumptions
used.

DCF is a powerful tool, but it also has its limitations. DCF is typically more accurate for high quality
businesses with stable operating earnings. If youre projecting cash flows into perpetuity, only a high quality
business with a strong competitive moat has a high likelihood of realizing those cash flows. Despite its
limitations, DCF is still an invaluable tool for a value investor.

You can project out cash flows with great accuracy over a 3-5 year period. If you find a stock that is
overvalued you can vary multiple assumptions to determine how the stock is being valued by the market.
Most importantly, you can identify stocks that have a limited chance of actually living up to the high
expectations being placed on them. DCF not only can help you identify winners but also avoid losers.

Discounted cash flow analysis is not difficult to learn. If youre a serious investor the best place to start is
with Pat Dorseys Five Rules for Successful Stock Investing. If you finish that book and are looking for a deeper
dive, than McKinseys handbook called Valuation should be next on your reading list. Ive written a review
of the book, which you can read here.

Of course, by subscribing to the Value Investing India Report you can be confident that all our investment
ideas are backed by fully integrated discounted cash flow models with projected income statements, balance
sheets and cash flow statements. More importantly, we constantly update our price targets and financial
models based on quarterly results. Trust me, its a full-time job. By subscribing to our Premium Access
service you can benefit from our high quality financial models, without having to do it yourself.

Clearly, valuation is not easy but its required if you want to succeed as a value investor. Make sure youre
doing it correctly. If youre not sure find a teacher or let a professional do it on your behalf. If youre a high
net worth investor its unlikely that you do your own tax returns. You most likely hire a professional
Chartered Accountant to file your returns. Leveraging the knowledge and research of a dedicated
investment professional is no different than hiring an accountant. Youll achieve better results and save
time. If youre not willing to put in the effort, I highly recommend that you use a service like ours.
5. Am I willing to take a long-term view for bigger gains in the future?
Your investment success is predicated on your ability to save money on a regular basis and to find a
small handful of wonderful investment opportunities throughout your lifetime. If in your search for an
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investment, nothing wonderful comes along in a particular day, close your Internet browser, walk away
from the computer, and go enjoy life for the day.
5

Every day were bombarded by the financial media with a list of the hottest stocks and biggest emerging
trends in global markets. Even your broker has an incentive to keep you actively trading. Due to constant
reinforcement of the wrong messages, we eventually start thinking to ourselves that inactivity is hurting
our portfolio returns. This couldnt be further from the truth. The key to success in value investing is to take
a patient measured approach.

If you get excited and start chasing stocks as the market rallies or conversely panic and start selling out
when the market declines, youll be following a strategy guaranteed to fail. I sometimes read the stock
commentary on moneycontrol.com just for pure entertainment value. Its amazing to me to see what passes
for fundamental research. I recommend you take a quick look for any stock youre currently researching.
What youll find are the biggest losers in the stock market. These poor individuals are usually day traders
or swing traders and for some weird reason believe that they can time the markets movements.

No one can time the market with any amount of accuracy. Not even Warren Buffett. If a person could in fact
time the market they would seriously be the richest person on the planet. Or at a minimum, would at least
be on the Forbes list of the richest Indians. Take a look at the list. There isnt a single technical chartist or
market timer on the list. Nor will there ever be. Market timing doesnt work plain and simple.

Now that weve learned what not to do, lets focus on what to do. Value investing is all about having the
mentality of an owner. If you owned the most popular and profitable restaurant in your neighborhood
would you sell out just because someone stopped by and gave you a low-ball offer. Most likely you would
just brush that person off and go back to counting your profits. The same principle applies to buying shares
in publicly traded companies.

Since shares in publicly traded companies can be bought and sold so easily, we forget to maintain an owner
mentality. The key is to buy a share in a business that will continue to produce steady cash flow well into
the future. You need to identify businesses that have strong competitive moats and unique selling
propositions. Once youre able to find one of these rare wonderful businesses, would it make sense to sell
your ownership position because its being quoted at a lower price in the market? If you apply the same
logic from the restaurant example, you wouldnt sell your shares either.

As a value investor you need to be patient enough to find bargains. But once you buy, you have to wait for
the price of the shares to catch up with the underlying value. Unfortunately, nobody can tell you in advance
how long it will take. For example, I recommended Hexaware to my subscribers in May, 2014 when it was
trading in the INR 80 range. At the time, the entire IT Sector was depressed because investors thought the

5
Ponzio, J. (2009). F Wall Street: Joe Ponzio's No-nonsense Approach to Value Investing for the Rest of Us [Kindle edition].
Retrieved from Amazon.com.
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US was headed for a double-dip recession. The entire Indian IT sector, which derives a large portion of its
revenue from US companies, was trading at a bargain price.

I didnt worry about the macro outlook for the US. I knew Hexaware was a good business that was trading
at a large discount to its intrinsic value. By October, 2013 when I recommended selling the stock it was
trading in the INR 130 range and produced a 62% return for my subscribers. When I recommended the stock
I didnt know how long it would take for the shares to reflect the underlying intrinsic value. The key is that
I was willing to remain patient. If youre buying undervalued shares in high quality companies, its very
likely that they are facing some near-term problems. In the case of Hexaware brokers and so called analysts
were down on the entire sector because of macro concerns. If there is one thing that you take away from
this report it should be that nobody has a clue how to predict broad macroeconomic trends. John Kenneth
Galbraith said it best:
The only function of economic forecasting is to make astrology look respectable. John Kenneth
Galbraith
You should be prepared to hold your positions indefinitely as long as the underlying business is performing
well. Your returns over time will essentially match the return on equity (ROE) the business is producing.
Companies create value by generating future cash flows at rates of return that exceed their cost of capital.
If you find a company that consistently generates returns above its cost of capital you want to hold on to it
for the long-term.
Summary
If you want to be a successful value investor you need answer yes to all five of the following questions:

1) Do I have the emotional ability to avoid the latest market fads and focus on my investment
methodology even when its not working?
2) Am I prepared to do the vast amount of screening and research necessary to pick winning stocks?
3) Am I strong enough, financially and emotionally, to follow a focused portfolio strategy?
4) Am I capable of determining intrinsic value with a high degree of accuracy?
5) Am I willing to take a long-term view for bigger gains in the future?
You might be able to answer one or two questions definitively and find yourself unsure about the remaining
questions. In the end, only you can determine whether value investing is right for you. Value investing is
not an easy discipline. But its definitely a worthwhile pursuit for those individuals dedicated to it.

The key to being a successful value investor is to be patient and to stick with your strategy over the long-
term. Most novice investors make the cardinal mistake of giving up on value investing when their portfolio
starts underperforming the broader market. Its all too human to start extrapolating recent results into the
future. If you have the capacity to handle the ups and downs of a value investing investment process, you
will greatly enhance your chance of long-term success.

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Finding great investments is difficult. Yes, having a value investing based process will help you to identify
potential investment ideas but it still requires dedicated effort and hard work. Modern screening tools
allows you to narrow down the universe of stocks that you are looking for, but it doesnt replace the actual
analysis and fundamental research done on a company. If youre prepared to do your homework, you will
already be ahead of 99% of other investors.

If you want to substantially outperform the market over a 10-20 year period, you must have the conviction
to manage a focused portfolio. Alice Schroeder the author of The Snowball: Warren Buffett and the Business of
Life, stated recently that the biggest lesson she learned about investing from Warren Buffett was the
following:
Warren believes in concentrating your bets, up to 15-20% of your assets, if you have high conviction.
As he put it, why invest in your tenth best idea. So, I have a very concentrated portfolio now.
6

Managing a focused portfolio has the capacity to either dramatically improve or worsen your returns.
Clearly, a focused strategy is risky if youre not an excellent stock picker. Despite the increased risk, you
must concentrate if you expect to outperform your benchmark index. The basic question you must ask
yourself is whether you have the drive, conviction and skill to be a successful focus investor. As legendary
value investor Howard Marks states, you have to dare to be great.

Warren Buffett is quite clear in his belief that if you dont have the skills to accurately determine the intrinsic
value of a stock, you would be better off putting your hard earned capital into an index fund. The logic
behind this statement is simple. If you dont know how much something is worth, how can you possibly
know the right price to pay for it? The intrinsic value of a stock is simply the present value of its cash flows,
discounted back to the present. The entire process of calculating intrinsic value is called a discounted cash
flow analysis (DCF). Learning how to do a DCF valuation can be difficult for novice investors. For those
willing to learn this skill, the payoff will be an increased likelihood of achieving market beating returns.
Only by assessing cash flows can you come up with an independent assessment of what a stock is worth
without relying on metrics related to price such as P/E and P/B. Knowing the intrinsic value of a stock
provides you with the information necessary to determine whether in fact youre getting a bargain.

Most value investors underperform their benchmark for short periods of time, but will outperform over the
long haul, meaning years and decades. Its very easy to get discouraged and switch to a different investing
strategy when your portfolio is going through a period of underperformance relative to the benchmark.
Ironically, the bulk of the underperformance will come late in bull markets when valuations are stretched
and momentum has taken over. Your friends, colleagues and family members will all be giddy with their
new found stock market wealth and will be more than happy to share the news with you. When the media,
brokerage analysts and popular opinion goes against you, it will be exceptionally difficult to stick to your
value knitting. Empirical research done by investment management firm Tweedy, Browne & Company,

6
Schroeder, A. (2014, May 09). Hi, I'm Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life.
Looking forward to your questions. Retrieved from http://www.reddit.com.
www.valueinvestingindiareport.com 14

showed that successful value investors can underperform their respective benchmark 25-40% of the time. If
you want to be successful as a value investor you must be able to take the long view in terms of both your
investments and performance of your portfolio.

As you can tell, being a value investor is not easy by any means but it is rewarding both from a financial
and intellectual perspective. The golden rule for all value investors remains: Focus on the long-term and
stick with your plan.

What should you do if you believe in value investing as an investment methodology but lack the time to
focus on it? There are basically two solutions. The first is to find a PMS or mutual fund manager that has a
value investing based outlook and invest with them. The problem as I highlighted earlier is that its difficult
for mutual fund managers to outperform their benchmark after fees are taken into account. Yes, even value
oriented managers have a tough time outperforming the market.

The second solution for individuals interested in managing their own portfolio but lacking the time to do
deep fundamental research is to subscribe to a value oriented investment advisory service. However, the
main problem remains that the vast majority of investment newsletters provide no track record and have
had exceptionally poor returns. In many instances the publisher is more concerned about selling
subscriptions than making accurate stock recommendations.

We solve both problems via our Premium Access product by publishing our track record in comparison to
the Nifty index on a quarterly basis. Furthermore, we keep an archive of our entire history of stock
recommendations available to all subscribers. Thus, you can easily audit our track record and verify for
yourself how successful weve been in growing our customers portfolios.

If youre just starting on your value investing journey and have experienced poor performance due to stock
selection, its most likely that you havent yet answered all five key questions, affirmatively. Additionally,
you probably havent been taught the ability to do valuation and fundamental analysis correctly. Value
investing like most highly developed skills must be learned under an apprenticeship model. If youve
pursued a self-taught approach, youve most likely picked up bad habits. If youre ready to start learning
how to value invest using a systematic and proven method developed over years of experience, the Value
Investing India Report Premium Access service is right for you.

To get started on improving your skills as a value investor and implement a focused value approach in your
portfolio click on the link below.

Value Investing India Report Premium Access

www.valueinvestingindiareport.com 15


Important Notice

No Investment Advice
This newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such
an offer or solicitation would be illegal. This document is provided for informational purposes only. Nothing contained
in this document constitutes investment, legal, tax or other advice or guidance and should be disregarded when
considering or making investment decisions. In preparing this document, VIIR did not take into account the
investment objectives, financial situation and particular needs of any particular person. Accordingly, before acting on
this document, investors should independently evaluate the investments and strategies referred to herein and make
their own determination of whether it is appropriate in light of their own financial circumstances and objectives.

Disclaimers
There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any
information set forth in this newsletter. Value Investor Media will not be liable to you or anyone else for any loss or
injury resulting directly or indirectly from the use of the information contained in this newsletter, caused in whole or
in part by its negligence in compiling, interpreting, reporting or delivering the content in this newsletter.

Compensation
The Value Investing India Report receives compensation in connection with the publication of this newsletter solely
through subscription fees and reproduction of content through re-dissemination fees.
Value Investing India Report is an independent value-oriented journal
of the Indian financial markets. Want to learn more? Please visit
www.valueinvestingindiareport.com

About the Author
Ankur Shah is the founder and editor of the Value Investing India Report (VIIR). Ankur has been involved in global
investing since 2004 and began his investing career at Security Global Investors, a San Francisco based global
long/short equity fund. Prior to founding VIIR, Ankur was a Director of Equity Research at Arqaam Capital, where
he was responsible for covering the MENA banking sector and building out the firms equity research platform.
Ankur earned his MBA from Harvard Business School and his BA cum laude in Economics from Pomona College.

Contact Information
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also be reached via e-mail at admin@valueinvestingindiareport.com.