I have posted only twice this year. Ah, it feels like 2020 still not over, lol.
One thing that bothers me is what it means to be an investor. I am driven by substance, actual value creation, and, if possible, far away from foam and trends. I consider myself a value investor. I can’t invest without having a solid viewpoint/thesis or understanding of the business or clarity in terms of usage. I find too much diversification, following the trends, with no focus as BULLSHITTING.
Recently, I started delving deep to understand how value investors work in public equity-like Ben Graham (father of value investing), Charlie Munger, and Warren Buffet.
Are there learnings that I can draw in private equity and venture capital investing? After digging a lot, I came across David Teten’s post on this topic, which intrigues me to put my thoughts around this topic.
What does it mean to be a value investor in the private equity market?
According to Investopedia, value investors hope to profit from shares they perceive to be deeply discounted because they believe markets are inefficient in valuing correctly. There are few following reasons for it, which are very relevant in the venture capital as well, because of its speculative and private nature:
The economy is performing poorly, and investors are panicking and selling.
Investors have gotten too excited about an unproven new technology
Psychological biases can push a valuation up or down based on news, such as disappointing or unexpected announcements, product recalls, or litigation.
So, value investors try to find the intrinsic value of a venture themselves by evaluating on following two things:
Financial analysis, such as studying a company's financial performance, revenue, earnings, cash flow, and profit and
Fundamental factors, including its brand, business model, target market, and competitive advantage.
In the context of VC, this means an investor identifies ventures that are not yet accessible to other venture capital and private equity firms, potentially at a lower valuation in comparison to their actual intrinsic value, that can be extracted in the future.
Some other cool features of value investing that make it contrarian:
Markets are not Efficient,
No speculative investing,
Requires diligence & patience
Contrarian to the core - “Intelligent contrarian” :p
I love the way Charlie Munger describes -
“I think all good investing is value investing. It's just that some people look for values in strong companies, and some look for values in weak companies.”
Curated resources for further curiosity
[Blog] In Venture Capital, Should You Be a Momentum or a Value Investor? by David Teten
[Investopedia] Momentum Investing
[Investopedia] Value Investing
[Book] The intelligent Investor
[Book] The Essential Buffet
I am continuously looking for first-time fund managers looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.
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