Parag Parikh, the veteran value investor, and founder of PPFAS Mutual Fund, is an authority on “behavioral finance”. He is the author of two bestsellers titled “Value Investing and Behavioral Finance: Insights into Indian Stock Market Realities” and “Stocks to Riches: Insights on Investor Behaviour” in which he has explained in detail the mistakes that investors make and why they are unable to achieve the same financial success that they could have if they had gone about investing the proper way.
Sanjoy Bhattacharyya, the doyen amongst value investors, also adverted to this briefly in his recent talk.
Parag Parikh has now written an article titled “Why most investors shun Value Investing?” in which he has dwelt on the same theme.
Parag Parikh explains that by nature investors are attracted to “exciting stories”. They seek out companies that appear to be doing well and whose stock prices are soaring. Investors develop a “fancy” for such stocks and are eager to own them, unmindful of the exorbitant prices that they are paying.
In contrast, investors shun stocks that are “boring” or not doing well. Even if such stocks are available at throwaway valuations, investors are loath to buy such stocks till the time that these stocks catch the market’s fancy. Then, the same investors who could have bought the stocks at a steep under-valuation are happy to buy them at an inflated price.
Parag Parikh explains that the reason for this peculiar state of affairs is “psychology”. Investors instinctively believe that a stock that everyone is buying must be “less risky” than one that no one seems to be interested in. This is how the “herd” mentality works.
Parag Parikh urges us to realize our folly and correct our investing technique. He points out that the “despised” stocks offer a great margin of safety and are a far better investment. Such stocks significantly out perform the market as well as the admired stocks.
To exemplify Parag Parikh’s point, I can think of two live examples of “value investing“/ “contrarian investing” that we have seen recently. One is the case of Tata Sponge Iron which, despite sound fundamentals, was totally shunned by investors. Sid Choraria was among the rare investors who spotted the opportunity and put a buy on it when it was quoting at Rs. 270. Today, just a few months later, the stock is at Rs. 857 and investors are falling over themselves in a desperate bid to grab the stock.
The other example is that of Motilal Oswal Financial Services, the brokerage stock, which was totally in the dog house till Saurabh Mukherjea identified it and put in on investors’ radar. That stock is also much in demand nowadays and has given a return of 150% in less than a year.
Parag Parikh offers the sage advice that “Investing is for making your money grow. It is not for excitement. Value investing may sound boring but that is the only way you grow your wealth in stock markets”.
At the end, Parag Parikh sends the gentle reminder that the PPFAS Long Term Value Fund follows value investing principles.