The art of value investing in a hot market

Over the past two years, the Stock Exchange of Thailand has climbed up from a level of around 740 points in January 2010 to around 1420 as of yesterday. Without a doubt, many investors have made large sums of money in this bull market, and one of their most widely mentioned philosophies has been "value investing". A large number of people are claiming to be value investors, able to make big profits. Especially prominent in this group are young investors holding stocks they "think" they know well for the long term. Thus, the aim of this column is to revisit what a value investor really is, and how it can be related to the concept of asset allocation.

So, how do we define a value investor? A value investor is clearly different from a speculator. Speculators often follow the crowd, and if they lose money, they simply say they are value investors who are willing to hold stock for a long time without the intention of cutting losses. Of course, these are not value investments, but what should be called "failed speculation".

In contrast a genuine value investor will only invest in a company that he/she truly understands and which is appropriately priced. Value investors need to understand its growth potential and its fundamental strengths and weaknesses. They will take into consideration its volatility, liquidity and its price/earnings ratio. They will also consider the quality of its corporate governance. Finally, they will be prepared to sell the stock when its fundamentals change.

Although the concept of value investment is both theoretically and practically important, nobody really knows where the stock market will head this year and which individual stocks will perform well and pay consistently high dividends. Will the Greece drama continue? Will the US recovery take place? Will the Thai economy prosper, supported by export growth and domestic consumption? Without a doubt, these external and internal factors will affect the total returns on your investment, consisting of both capital gains and dividend yield growth.

Therefore, the concept of value investing should be integrated with the concept of portfolio allocation. It is important that we all know our investment risk tolerance and our investment time horizon. There are no free lunches: aiming for a higher return always comes with a higher level of risk. If your portfolio already has high exposure to the stock market due to the increase in stock prices and your short investment horizons, it may be a good idea to take some profit from your investments.

Diversification into different asset classes is a powerful tool that can reduce the tail risk of your investment and help secure returns on your portfolio. As we move into the new year, now is a good time to revisit and rebalance your portfolio in line with your expected returns, risk appetite and your investment horizon.

Skul Boondiskulchok works in the Treasury Division at Bangkok Bank.