Thread by @abhishec_s

Value vs. Momentum

(thread)

Investing is about buying businesses for less than what they are worth. One can argue that it is about 'making money', but this strategy is the most effective and consistent way to do that. If you disagree don’t read further.

Intrinsic Value (IV) of a business is discounted value of all its future cash flows. This is different from Quantitative Value (QV), which is usually low PE/PB. Value investing is about buying a business at a price that is less (preferably significantly) than IV.

In an age when most prominent companies were asset heavy, QV was a good approximation of (P-IV) but this is no longer true today. When people like Damodaran are criticizing Value they are talking about QV as a parameter for investing.

All intelligent investing is Value Investing. All intelligent investing is NOT Momentum Investing. Example: Good high yields, special situations, spinoffs kind of opportunities will qualify as Value but not Momentum.

Momentum is often the process through which value manifests itself and is realized. And Value and Momentum are not exclusive. A stock can continue to be a Value pick even when it has strong Momentum (that’s actually the sweet spot).

IVs are difficult to calculate. Momentum is easier to track. Easiest is to draw resistances/supports on charts and call it Investing. Hence # Chartists > # Momentum Chasers >> # Value Investors.

Momentum is also different from Growth Investing. All Momentum trades are not Growth trades. Both of them have performed extremely well over the last decade. Liquidity and low cost of capital have had a role to play here (the delta for growth is higher at lower cost of capital).

Momentum chasers are relying on others to make the value calculation for them. Value Investors are independent. In a world where everybody becomes a Momentum player who decides what something should actually be worth (passive vs. active debate).

Momentum is a valid investment approach. But when I have 10 businesses in my portfolio I don’t want to buy/sell them based on what the intelligence/madness of the crowds decide they are worth.

The only question in investing is what is the intrinsic value of a business. Rest is commentary. Sadly that question has been made redundant by central banks over the last many years.

When initiating a trade the first thing I want to know is 'what is the downside from here?'. It’s impossible to do that calculation without assessing the IV of the business. Stop losses for me are not based on price. It’s based on operating performance of the business.

I will continue to value businesses. This is something I would never change. I am and plan to stay a 'Value Investor'.

I hope my value picks light up on the screens of all the momentum players soon and stay there for long.

:)

(end)