Does value investing remain relevant in our post-COVID world?

The COVID-19 pandemic has led to drastic changes in almost all the facets of a business. Under such a situation, does the value investing approach still hold good?

Oct 23, 2020 09:10 IST India Infoline News Service

Most investors use either one of two approaches when it comes to investing in the stock markets - the value investing approach or the growth investing approach. The value investing approach has a lot going for it. Not only is it less risky when compared to the growth investing approach, but it has the potential to fetch handsome returns in the long-run as well.

Value investing has always been a popular investment strategy for decades till the COVID-19 pandemic came along. It stirred things up completely and left us with the question: Does value investing remain relevant in our post-COVID world?

If you’ve also been wondering about this, let’s find the answer to this puzzling question.

What is value investing, anyhow?        
Value investing is essentially an investment strategy that seeks to identify and invest in companies that are trading much below their intrinsic value. This is accomplished through a series of techniques of fundamental analysis such as calculation of various balance sheet and P&L ratios. Investors who utilize value investing pick up stocks that are undervalued, hold onto them for a while, and then sell them once the share prices rise to represent their true value.

Does such an investment strategy still hold its relevance even in the aftermath of the COVID pandemic? 
Now that you know exactly what value investing is, let’s see if it still holds true in this post-pandemic world. 

Value investing has a good track record of working across multiple economic cycles
Sure, there may have been times when this investment strategy has not succeeded in giving investors the opportunities that they’re looking for. However, despite that, experts strongly believe that value investing as a strategy has worked for investors in the past. And there’s strong evidence backing up the claim as well.

Across multiple economic cycles and past crises, value investing has managed to allow investors to capitalize on many opportunities. Considering such a deep track record, it becomes clear that this investment strategy is still capable of remaining relevant even after the COVID-19 pandemic blows over.

Habits of Companies have changed drastically post COVID-19
The pandemic has completely changed the business landscape. Right from their borrowing habits to their operational processes, almost every single aspect of companies and businesses have undergone a significant rejig. Going into the future, many experts believe that an increasing number of companies would think twice before taking on further debt.

Such drastic changes across multiple facets are likely to have a change on the intrinsic value of a company. And so, such a situation is likely to end up giving more scope and reason for investors to conduct fundamental analysis with a value investing view. Therefore, value investing as an investment strategy is likely to still hold its place even after the pandemic. 

Inflation figures play a huge role
For value investing to work properly, it requires the help of certain economic indicators like the inflation figures of a country. In a country where the inflation is quite high, the performance of value stocks tends to be much better than that of growth stocks. And in the post-COVID world, at least with respect to India, the inflation figures seem to be on a rise.

The country’s inflation figure for the month of September 2020 touched an 8-month high of around 7.3%. Such a situation actually favours value stocks, thereby making a case for the value investing approach. As long as the inflation figures stay on the higher end of the spectrum, the investment strategy of picking value stocks would continue to stay relevant.     

Conclusion
The evidence is overwhelming, isn’t it? Although value investing might seem like an old-school strategy, it still continues to firmly hold its position even in a post-pandemic world. That said, here’s something that you should note. While value investing is a great way to approach the stock market, it is always a good idea to balance it out by directing equal focus towards growth investing. It not only helps you diversify your risk, but also allows you to take advantage of the high return generating capability of growth stocks. 

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