‘India has many attractive features for the long-term investor; it combines: A low per capita income, a young population, and a heavier presence of high margin, asset-light firms in the technology sector.’
With growth taking precedence over profit and new-age companies becoming the new poster boys of the stock markets, value investing has taken a back seat.
Lauren Templeton, founder and president, Templeton and Phillips Capital Management, explains why the strategy can’t be written off.
In an interview with Samie Modak/Business Standard, the great-grandniece of Sir John Templeton, pioneer of global value investing, shares her investment philosophy.
Value investing is said to be going out of fashion, especially amid the liquidity gush caused by the stimulus measures. What is your take on it?
Value investing is inherently disciplined, and when monetary and more recently even fiscal stimulus overwhelm the financial system with liquidity, the surplus capital eventually finds its way into speculations that may generate large returns for the early buyers, yet always prove unsustainable and end in disaster.
Value investors are motivated by discrepancies between fundamentals and their representation in current share prices, and in the case of speculative assets, value investors are conditioned to actively avoid situations where fundamentals (if there are any) are wildly over-represented in the asset/share price.
Conversely, for those value investors willing to take a more aggressive stance, they could instead sell short in order to capitalise on wild or speculative mispricing.
Sir John Templeton famously did this during the crash of the dot-com bubble in 2000.
It is also important to recognise that value investing can take many forms and just because a low P/E strategy may not be working, it does not mean that a low-free-cash-yield perspective is not working.
It is important to not conflate value investing with a few specific ratios.
What’s your view on the philosophy of growth at any cost?
That strikes me as a dangerous philosophy.
There are some speculative buyers who may demonstrate skill in that practice, but in my view, it is reckless to wifully overpay for a stock in the hope it will continue to get bid higher.
Looking at the situation today, even following the large corrections in tech stocks during the past few months, we still count approximately 670 stocks in the US market trading at a price-to-sales ratio greater than 20x.
This implies that if these firms were able to remove all expenses and dividend 100 per cent of their sales without income taxes to the shareholder, the payback period is still twenty years.
Similarly, there are great historical examples providing evidence against overpaying for growth.
Consider Microsoft in 1998. Trading at 21.9x sales in 1998, it actually continued growing for the next two decades.
Investors paying 21.9x sales in 1998 had to wait 17 years to generate a positive return on their shares.
How difficult is it to find the right stocks at the right prices at a time when valuations seem stretched across the board?
It is not too difficult if you are careful. It is important though to avoid what has been popular since the beginning of the pandemic — where valuations have become too stretched.
It is important to remember that recovery from the pandemic has been very uneven, and remains largely incomplete.
What is the key to alpha generation?
The key to alpha generation is to avoid the consensus when it makes sense to do so.
Sir John always said: “If you buy the same stocks as the crowd, you will get the same results. If you want to have better results than the crowd, you must do things differently from the crowd.”
More often than not, this comes down to a long-term perspective and willingness to look for bargains where near-term share prices are too pessimistic.
This is one of the reasons we tend to confine our purchases to panics, corrections, and bear markets.
We have always found that our best returns come from these circumstances, and buying at exceptionally low prices can even cover your mistakes.
What are the key learnings from your great grand-uncle’s investment philosophy?
There were many important lessons, but two that stuck out were his enthusiasm to locate bargains in places few people dared to follow and his constant search for new selection methods.
You could probably distil behaviour into an endless curiosity and the intellectual humility to pursue answers.
He was constantly learning and growing. He had a growth mindset.
Since the markets are constantly evolving and becoming more sophisticated, it is important to be a lifelong learner.
Do you think Sir John’s approach can be applied in the current environment?
Absolutely. It is important to note that his perspective on value adapted with the markets.
When you look at his large investment in the US at the bottom of the bear market in the early 1980s, he was applying a discount to replacement value approach that gauged the effects of runaway inflation.
When I worked for him, we were focused on P/E to growth metrics; P/Es were calculated on a 10-year earnings projection.
He wanted to pay 2x or less for earnings 10 years in the future.
He was very adept at finding the flaw in the consensus and then developing and applying the analytical tools to exploit it.
You are an independent director of Fairfax Financial Holdings, which has made significant investments commitments to India? Are you bullish on India? Why?
Yes, I am bullish on India. India has many attractive features for the long-term investor; it combines: A low per capita income, a young population, and a heavier presence of high margin, asset-light firms in the technology sector.
For example, India’s per capita income is $6,390 compared with China’s at $17,200.
When countries experience economic growth from a low base, the creation of wealth among its citizens is transformative to the economy (much like China’s 20 years ago).
We believe technology will continue to be a source of economic growth and productivity in the years to come, and the country has a strong foundation in this sector.
Which are the broader investment themes in India that you’d like to tap?
Consumer-driven themes and the development of the Indian consumer on a per capita basis over time provide a compelling long-term growth story.
Banking and financial services are an obvious sector.
Additionally, the capital markets should have decades of growth potential as increased wealth leads to new demand for financial services through savings and investments.
What are the key risks when it comes to India investing?
To generate excess returns versus the index, you need to invest in smaller, under-researched firms, and this presents governance risk to investors without local research and boots on the ground.
The opportunities are large, but so are the risks.
While there are certainly managers doing this level of due diligence, many institutional investors are going to opt for the large, listed names and so part of the risk is that many investors will underperform the index since they resemble it but also charge fees.
Feature Presentation: Aslam Hunani/Rediff.com
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