Value Investing: Wealth creation through Value Investing

There has been a long standing concept of Value Investing. People claim to have made millions and billion by Value Investing. Basically known for Wealth Creation, Value Investing concepts are said to be followed by the stalwarts of the financial world like Warren Buffet and Peter Lynch. There are thousands of books available on the topics of Value Investing and Wealth Creation and the new media source, the internet is flooded with articles on Value Investing.

DBS Chola Mutual Fund has launched DBS Chola Tax Advantage Fund – Series 1 to take advantage of current market condition by adopting the approach of "Value Investing".
As per the ad mail we received, they are defining "Value Investing" as buying stocks of company with strong management capabilities where

• traded prices are at a discount to their value of assets OR
• there is a potential of high dividend yield or earning yield

Though it may be for their particular stock portfolio or their own mutual fund, but these details do provide pretty good examples of how one should look at Value Investing and how the investment industry professionals look at various parameters for Value Investing:

Primary criteria for choosing the stocks for "Value Investing"

• Price to book value less than that of BSE Sensex OR
• Earnings yield (inverse of P/E) higher than that of BSE Sensex OR
• Dividend Yield higher than that of BSE Sensex

How did "Value Investing" fare in the past?

DBS Chola also quote an example in their ad mail. Using March 2003 as a reference point, they back tested the "Value Investing" strategy and saw the results of the portfolio as on Nov., 2008. The results are as below for Value Investing:

• Out of 200 stocks of BSE 200 Index we applied the above criteria to build a model portfolio of 60 stocks which gets
classified as "Value Stocks"

Passive strategy: We kept the portfolio intact for the entire period (2003 to 2008)

Active strategy: We applied same screening parameters and churned the portfolio at the end of each financial yearfrom March 03 to March 08 in the new sets of stocks in equal proportion.

Now, the funds and data presented here are just for illustration from DBS Chola Mutual Funds. They also come with a disclaimer that "Past performance may not be sustained in future".