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Exploring the similarities between value style of investing and Indian Premier League (IPL)
IPL or the Indian cricket League is the most talked about sports event these days. For the cricket crazy nation, the Twenty20 cricket league is more than a game, it is an emotion. passion. IPL too, is not ordinary cricket. It starts with an auction where each team owner bids for the top performing player. The bidder tries to get the best talent at a low price. In other words, they look for undervalued players. Isn’t it like value investing?
Value investing is a style of investing which involves buying undervalued and out of flavor companies. It is based on the premise that the market will eventually realise the “true potential” of these companies and share price of these companies would catch-up, creating wealth for the value investor in the process. Value investing is very similar to IPL. Let’s see how.
Firstly, both value investing and IPL involve discovering under- valued assets. Undervalued assets are assets available at a low price but have immense potential. One such example is Rinku Singh, who played for Kolkata Knight Riders (KKR). Rinku Singh, who is best remembered for hitting five sixes against Gujarat Titans, was retained by KKR for just Rs 55 lakhs, he scored 474 runs in the season as compared to many other players. Similarly, value investors are also on the lookout for hidden Gems available at low price.
Secondly, both value investing and IPL benefit from valuation re-rating. In IPL, Yashashvi Jaiswal was bought by the Rajasthan Royals (RR) for Rs 2.4 Crs in 2020. His performance in 2020 was not memorable, in IPL 2021 he managed to score 249 runs in 10 matches with 32 fours and 10 sixes, thereby proving his potential. As a result, his IPL price went up from Rs. 2.4 Crs to 4 Crs in 2022 and remained at 4 crs in 2023. In IPL 2023, Yashashvi, scored 625 runs in 14 matches, the highest by an uncapped player (not represented by any team). His price in 2024 will be worth looking out for. This concept of price increase after the potential is realized, is known as valuation re-rating. Value investors benefit from valuation re-rating where once the value of a stock is realized, markets are willing to pay a higher price for higher future gains.
Thirdly, both value investing and IPL are based on strong fundamentals. In IPL, teams look for player’s fundamentals like their skills, attitudes, fitness levels, etc. to determine their price. In Value investing, investors typically look for companies which have robust balance sheets, sustained competitive advantage and strong management.
Lastly, both are based on long-term strategies. Value investors typically invest in a company and hold it over a long term to give the company enough time to unlock its potential. IPL teams scout for players and develop their talents and skills.
However, there is one major difference between value investing and IPL – IPL is a game whereas value investing is an investment style which could help investors build wealth over time. Hence investors need to be cognizant about their risk appetite and time horizon, while investing. Investors also need to beware of “Value Traps” which means opportunities or companies which might be available at a low price but could erode investors wealth in the future. Also, investors interested in value investing can consider professionally managed mutuals funds following the value style.
- From the Baroda BNP Paribas Asset Management Products’ Desk
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