The impeding resurgance of Indian value investing 🚀

Rahul is the Founder and Managing Partner of Willow Investment Management, a US based fund that invests in the Indian public equities. He lives with his family in NY. Outside of his work and family commitments he spends time teaching finance and wishing for value investing to make a comeback.



Many shall be restored that now are fallen,
and many shall fall that now are in honor.

:Horace, Ars Poetica


Once upon a time buying cheap Indian stocks made money. That’s no longer the case. For a decade now value investing has sucked in India. Why does it not work? Will it ever work again? And, if it does then what happens?

Let’s start by looking at the last 10 years of the Fama-French HML factor in India.

Sidenote: HML, which mimics value investing, stands for High-Minus-Low by Book to Price. Here’s how you build it:

(a) Stack all stocks by their P/B ratio, cheapest to most expensive

(b) Buy the cheapest one third

(c) Short the most expensive third in equal amount.

(d) Track the returns over a time period.

(e) At the end of the period start at step (a).

Building a long-short portfolio like this helps isolate and study a particular factor, in this case, valuation, while keeping everything else more or less constant. More detail here.

The dotted line is the performance of the value portfolio made up of Indian stocks. The solid line is the performance of the market over the risk-free rate.

The value portfolio lost about half its value over the last decade.

It’s obvious that value is having a tough time. How tough exactly? Here’s a look at the drawdowns from the peak.



As of Nov 2019, the buy-cheap-sell-expensive portfolio was down 56.9% from its last peak. A 5.4-year losing streak that continues to date.

Here’s the same data, but as a picture this time. A value portfolio will have to double from here just to get back to even.



This is usually the point at which folks start nit-picking — especially about the use of Book Value. The common complaint is that it’s a bad measure. It’s stale. It’s got accounting issues. It’s meaningless.

OK, let’s do these using earnings.

Picture, once again, rolling the clock back to 2010 and investing 100 Rupees in a value portfolio, but this time based on the P/E multiple. Buy the cheapest P/E stocks, short the most expensive, rebalance every year.

Here’s your next ten years:




What if, just for kicks, you did the exact opposite of value investing? And you did it without pretending to be a quality investor, or a growth investor, or momentum investor. What if you simply wanted to be, say, a Not-Value-Investor?

You take your 100 Rupees and buy the ten most expensive BSE 100 stocks. Keep them for a year, then switch into a new set of most expensive stocks. Here’s your performance:



You make 2.5x your money by blindly buying the most expensive stocks. Value investing has done so poorly for so long in India that it makes you wonder …

Whether it ever worked?

Yes, beautifully so. For an entire decade, just before its sudden demise. Notice below the performance of the HML portfolio from circa 2000 to 2010. A 13x return.



For reference, BSE 100 index was up 3.5x during the same period. Value annihilated the market, and every other strategy.

So here in lies the dilemma – which decade should we go by? The one where value made 13x or the one where value lost 50%? Which way does the weight of evidence tilt? And more importantly, if it has worked so well before then …

Even though I’m only really concerned about the Indian market here , fortunately for us, value stopped working in the US around the same time as it did in India.

Which means that like every other US financial phenomena, the death of value has also been sliced, diced, and julienned from every possible angle.

And sure enough, the brilliant financial pathologists of America seem to have found their culprit… Intangibles.

A recent survey piece in the Economist summarizes their findings as follows:

  1. Intangibles are the primary source of value for many companies, more so now than in the past. And intangibles are hard to account for using GAAP. So any strategy based on GAAP book value or earnings, like value investing, is meaningless as well.
  2. Businesses based on intangibles are easier to scale, so a small number of firms come to dominate. These firms have increasing returns to scale. As they grow bigger they get better, which makes them even bigger, and so on. Mean reversion is dead and so is value investing.
  3. The indices are dominated with tech. There’s too much disruption in tech, and value investing does a poor job of predicting disruption.

Before we get to whether any of this holds true for the Indian markets (it doesn’t), let’s examine whether it even holds true for the US. Cliff Asness, who runs a $140bn systematic strategies fund, did just that back in May. He argued that:

  1. If the problem is accounting then let’s buy cheap stocks and sell expensive ones within industries and see what happens. In any given industry the importance of intangibles should be about the same for all players. Besides, everyone more or less follows the same accounting rules.
  2. If the problem is mega-caps (Microsoft, Amazon, Facebook, Google etc.) that dominate due to increasing returns on scale then let’s exclude those mega caps and see what happens.
  3. If the problem is tech, with all that disruption, then let’s exclude tech completely and see what happens.

In each of these cases when Asness ran the numbers he found value investing to be severely underperforming over the last decade. Cheap stocks are the cheapest they have ever been regardless of how you cut the data. Those fancy explanations for why value doesn’t work are likely bunk.

If the explanations designed for the US don’t work in the US then one can hardly hope for them to work for India.

But here’s another cut — this time using common sense instead of statistics. Take a look at the top 10 Indian firms by market cap below (along with their American counterparts for reference). Together these 10 firms make up ~ 40% of the total Indian public equity.


Biggest Indian Firms Biggest US Firms
Reliance Industries Ltd Apple Inc
Tata Consultancy Services Ltd Microsoft Corporation
HDFC Bank Ltd Inc
Hindustan Unilever Ltd Alphabet Inc
Infosys Ltd Facebook Inc
HDFC Ltd Tesla Inc
Kotak Mahindra Bank Ltd Berkshire Hathaway Inc
ICICI Bank Ltd Visa Inc
Bajaj Finance Ltd Walmart Inc
Bharti Airtel Ltd Johnson & Johnson


What do you see?

Specifically, do you see any tech disruptors? Do you see blockchain based AI platforms enabling driverless EV revolution, which will ultimately lead to genetic editing designer babies?

I see a bunch of moneylenders, body-shoppers, and telcos.

So no, the death of value investing, at least when it comes to India, has got nothing to do with tech disruption.

But what about more intangibles, new business models, a change of guard at the top of the index, or some such? One way to find out is by examining where the large firms of today were a decade or two ago? Kind of like those then-and-now celebrity pictures.



Here’s the list of same ten firms from before, but this time along with their 2010 and 2000 market cap ranking.

Biggest Indian Firms 2010 Rank 2000 Rank
Reliance Industries Ltd 1 4
TCS Ltd 3
HDFC Bank Ltd 16 22
Hindustan Unilever Ltd 22 2
Infosys Ltd 5 3
HDFC Ltd 17 17
Kotak Mahindra Bank Ltd 44
ICICI Bank Ltd 10 35
Bajaj Finance Ltd
Bharti Airtel Ltd 8


  1. Nine out of 10 firms were in the top 50 a decade ago. Four were in top 10.
  2. Even two decades ago the list wasn’t that different.
  3. The only new kid on the block is Bajaj Finance, a moneylender.

If the top echelon of Indian business is so damn persistent, could you really attribute the death of value investing to any fundamental shift?

Maybe it’s all just random. Maybe value investing ain’t dead at all. Maybe it’s just taking a hiatus.

In his 1955 testimony to the Congressional Committee on Banking and Currency, Ben Graham was asked why value investing worked. Graham answered:

That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it in one way or another.

The problem with when value investing will work is that we don’t exactly know why it works in the first place. The most cogent explanation I have read in the recent times comes from Lyall Taylor’s blogpost on value investing. Lyall is a terrific thinker and I highly recommend following him. Here are a few choice quotes (please read the original):

One of the core reasons that value investing works is that investors systematically overestimate their ability to predict the future.

It is actually often the highest quality and highest rated companies that have the most to lose from disruption, as they have both high valuations with very long duration payoffs and very high profitability. This means not only do they have a long way to fall if anything goes wrong (and even the fear of disruption can crush these stocks, whether or not it actually transpires), but their fat margins also act to invite disruption by creating an outsized opportunity for would-be disruptors.

We know that value investing works because people get ahead of themselves but how far ahead before value starts working? That’s impossible to tell.

What we do know for sure is that when it does work, value investing will make us fundamental types look very stupid. Here’s Lyall again with an explanation:

Evidence of this stems from the multiple studies that have been done on net-nets — the worst of the worst in terms of business quality and future outlooks (the outlook is so assuredly bad investors are not even willing to pay a price above net working capital net of all liabilities). As a group, such stocks have substantially outperformed over time. However, very interestingly, when studies have been done where investors were given the opportunity to choose the ‘best of a bad bunch’, choosing only those that were profitable or paid a dividend for instance, the results were much worse. Taking out the ‘worst’ of the worst lead to inferior returns. Why? Because if it’s obviously bad to you, then it’s obviously bad to everyone else as well, and the stock will be priced accordingly, with the probability of unexpectedly favourable change underestimated, leading to greater scope for a major re-appraisal of its prospects if conditions do unexpectedly improve

When value works it works in surprising ways. The crappiest businesses sometimes do exceedingly well simply because our expectations from those businesses is so low. Here are the large caps that did well the last time around value worked in India.

2000-2010 Returns of few large firms
Vedanta Ltd 152x
Bharat Heavy Electricals Ltd 22x
Steel Authority Of India Ltd 20x
ABB India Ltd 14x
NLC India Ltd 12x
Siemens Ltd 10x
Container Corporation of India Ltd 10x
Adani Enterprises Ltd 8x


Chock-full of cyclical commodity type companies. And here’s what obviously looks bad right now- the lowest P/E stocks amongst Indian large caps.

Name P/E Ratio
REC Ltd 5.2x
Coal India Ltd 5.5x
GAIL India Ltd 5.7x
NTPC Ltd 8.3x
NMDC Ltd 9.2x
Oil & Natural Gas Corp Ltd 10.6x
Power Grid Corp Of India Ltd 10.8x
Hindustan Petroleum Corp Ltd 12.4x


Again, a chock-full of cyclical commodity names. Look beneath the surface though. Each of these businesses generates tons of earnings and cashflows. Each pays dividends. REC has a dividend yield of 7.8%, Coal India 8.25%, Power Grid 5%, and so on. As a group, these companies have reported 90 annual earnings over the last decade. 89 of those have been positive, and significantly so. Don’t be surprised if this is the decile that outperforms everything else when value investing start working next time around.

My edition of Security Analysis has 281,735 words spilled over 700 pages. These first seventeen are the truest of them all.


Many shall be restored that now are fallen, and many shall fall that now are in honor.

:Horace, Ars Poetica



Disclaimer from Rahul: This analysis is personal opinion and thoughts, and certainly not recommendations or advice of any sort. I and my firm may own stocks mentioned herein, including the ones I sometimes bad-mouth.


Happy investing,
CEO | | @rustapharian

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