Value Investing on Steroids

Apurva Sheth

Dear Reader,

So, my friend Rahul Shah - you might know him as head of research at Equitymaster, or editor of the fantastic newsletter, the Smart Contrarian - and I had one of our somewhat heated conversations a few days ago.

You can tell from the name of Rahul's newsletter that he is a contrarian, and that he is a value investor, HARD CORE. And you know of course that I, as a trader, am the exact opposite of him.

When we spoke, I pitched Rahul an idea that I thought was revolutionary. I thought he would either laugh it off, or pat me on the back. He said nothing.

You see, Rahul is a thinker. He thinks deeply about everything (even what he should eat for lunch).

But then he wrote this article that makes me feel like my idea left a mark on his mind! I call this idea - value investing on steroids. I am curious to know what you think of it too... Read Rahul's piece below...and hopefully, it will have you thinking about more than lunch too...

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Rahul Shah, Editor, Smart Contrarian

My post lunch strolls with Apurva these days are peppered with discussions of Kaun Banega Crorepati.

Quizzing is one of Apurva's passions - besides charts - and it shows. While I can usually find him at his computer way past sunset, these days he checks in early and flees in time to watch Big B grill contestants in his booming baritone.

Although not as big a fan as Apurva, I don't mind catching the occasional show myself.

'Did you notice how the audience keeps getting the audience poll question right all the time?' he started yesterday. 'These guys are no experts. They are common people like you and me, who are on the show just to have a good time.  And yet, their strike rate in terms of giving the right answer is amazing.'

Crowd Knows Best

I think I know what Apurva was talking about. American writer James Surowiecki calls it the 'wisdom of crowds'.

Surowiecki believes people are often irrational, lack good information, and make imperfect decisions. But collectively - when their decisions are aggregated - they seem to do a much better job.

In other words, considered individually, human beings can be lousy decision makers. But if hundreds are asked their view on the same topic, and their views consolidated, the accuracy rate could leave everyone amazed.

KBC is just one example. This experiment has been repeated plenty of times in different contexts with almost the same result.

You Don't Always Have to Be Contrarian - Sometimes There's Wisdom in Crowds

When I mentioned this theory to Apurva, his eyes lit right up.

'You know what Rahul, we chartists may be relying on the same phenomenon!

'Since the stock price at any given point in time is nothing but the aggregation of decisions made by thousands of investors out there, it is essentially the wisdom of the crowd in action. And when we see this wisdom trying to push stock prices higher and establish a trend, we jump right in. No point questioning the wisdom of the crowd and doing the opposite.'

Bringing the Opposites Together

'I know you value investors are contrarians and don't believe in the wisdom of crowds,' Apurva said. He knows me too well.

'So in a way, we are polar opposites. While you guys take pride in taking positions opposite to that of the crowd, for us chartists, it is all about being on the same side as the crowd'.

Wow, even I couldn't have brought the difference between the two approaches better.

But Apurva has gone one step further. He has found out a way to make both the approaches work in such a way that they complement each other.

You see, even though we value investors take positions opposite to that of the crowd, eventually we do want the crowd to agree with us.

And at times, it could take years for this to happen. I know that value investing requires a lot of patience but even our patience is tested to the hilt when the markets take too long to converge with our target price for the stock.

This is where Apurva's charting skills come in handy.

By employing the tricks of his trade, he can inform his readers exactly which value stocks is starting to find favour with the crowds. He could also tell readers which stocks are likely to remain sideways for a while, or go down.

The best of all - this is a chance for all the true-blue value investors out there, to take a quick detour for some quick short term returns on the side - on the same set of fundamentally strong stocks.

Apurva's method is just what the market needs right now.

If this has piqued your interest, read more about this fascinating strategy by clicking here.

Good investing,


Rahul Shah (Research Analyst)
Editor, Smart Contrarian

Editor's Note: If you're wondering what's got the usually reserved Rahul Shah sounding so impressed - find out by clicking here. We have a feeling you will soon be agreeing with him.

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