Value investing works when there's a disciplined central banking system, while momentum investing suits periods of cheap money, according to Ajit Dayal.
A value investor hunts for stocks that are trading below their intrinsic or book value but still offers long-term growth. That will work when people are worried about how long a company can sustain and pay more for the firms with a positive cash flow and good balance sheets, Dayal, founder of Quantum Advisors told BloombergQuint’s Niraj Shah in an interview.
"Value investing is a disciplined process but there are times when discipline doesn't pay and reward you like in 2018-19,” he said.
In a growth environment, investors "don't care" about companies' profits or cash flow because financing rates are close to zero, Dayal said. "In that sort of an environment, it is momentum investing that will do well."
The momentum strategy follows stock-price trends and investors expect stocks that have recently done well to outperform in the near future.
That's why in the current situation, when the U.S. Federal Reserve or the European Central Bank have cuts interest rates to around zero, the value investing approach would fail.
If there’s no disciplined central banking system, value investing is not going to work.Ajit Dayal, Founder, Quantum Advisors
But Dayal said individual investors don't have to get into the value versus growth debate.
Ajit Dayal’s Advice To Investors
Investors should not care about the style of investing because sometimes momentum won’t do well and at times value won’t, he said. They should not in general be wary of any of the two strategies as they will achieve their targets anyway.
As India's GDP is likely to grow at 6% and returns might be 15%, young Indian investors in 20s must have allocation in equities, Dayal said. Investors should have a basket of equity mutual funds which follow different styles of investing to reach their targets.
Watch the entire conversation here:
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