Two of the most popular investment approaches in today’s context are value investing and index investing. Both of these investment approaches have many strong advocates, with many investors being able to succeed in the stock market by using either of these approaches.
Famous value investors both past and present include the likes of Benjamin Graham, Charlie Munger and Warren Buffett. Advocates for index investing include the likes of John Bogle (founder of The Vanguard Group), Bill Bernstein and yes, Warren Buffett.
What Are The Differences Between Value Investing & Index Investing
First, let’s explain what the two investment approaches are.
Value investing is an investment strategy where investors aim to find undervalued stocks that they believe the market has not priced fairly, and to invest in these stocks. Value investors believe that not all stocks are equal, and that some stocks make for better investments than others.
In contrast, an index investor isn’t concerned about whether or not individual stocks are fairly priced by the market. Rather, they are more concerned about being able to earn the return (as indicated by the index) in the market that they are investing in. Their aim is to match as closely as possible to the market (index) return while minimising transaction costs incurred. An index investor looks at the chosen market as a whole.
And in case you haven’t figured it out yet, index investing is considered a form of passive investing while value investing is considered a form of active investing.
Which Is Better? Well…Your Investment Objectives Matter
One of the favourite questions people like asking is which investing method works better? But that’s like asking which cooking method is the best? Steaming, grilling or frying. Or whether a steamboat is better than a barbecue.
Your investment objectives matter…a lot. An investment objective is much more than just saying you want to make money. It should include your investment horizon, the amount of money you have to invest, how much time and attention you can afford to monitor your investments and ultimately, whether you are contented receiving the market return, or want to achieve a higher return than the market return.
Value Investing – Some Factors To Consider
To better understand the intricacies of value investing, we decided to speak to Ken Chee and Clive Tan, the co-founders of 8I Holdings Limited. 8I Holdings is the holding company of the 8I Group and is listed on the Australian Stock Exchange (ASX). The company has an education arm called 8I Education, which specialises in educating people about value investing.
# 1 Small And Mid Cap Stocks Are Where The Investment Opportunities Are
Clive believes that it’s easier to find good value investing opportunities among small and mid cap stocks in the market.
The reason he gives is simple. Large cap stocks tend to be well-monitored among investors and analysts. With the constant attention on them, value investors would find it difficult (though not entirely impossible) to find undervalued stocks among these big, popular stocks.
In comparison, Clive believes that small and mid cap stocks that enjoy less scrutiny within the investment community can provide for better opportunities among investors looking for undervalued stocks.
# 2 Your Investment Horizon And Expected Returns
For someone who is younger and not familiar with the stock market (yet), Clive believes that index investing is a good place to get started. By investing a regular sum of money over the long run, investors will be able to slowly build and grow the returns from their portfolio.
Yet at the same time, it’s not a situation of choosing one over another. Value investing can be complementary to index investing as well.
For example, as investors become savvier, they might be interested to make investments in specific companies that they think may outperform the index over the long run. In such cases, investors may choose to redeploy some of their capital from index investing towards value investing. This allows investors to earn a potentially higher return from what they would have achieved if they remained invested in only the market index.
# 3 Start Value Investing On Sectors That Interest You
For new investors who are thinking about embarking on value investing, Ken suggests first starting out on sectors that interest them. This way, you will be able to start learning and researching on the sectors that already interests you, rather than on a sector that you may have totally no knowledge or interest in.
For example, if you love your car, start finding out more about whether the maker is a listed company. You could even find out more about the companies that made your tyres, gears or audio system. If you love food, you could find out more about the restaurants that you frequent or even the ingredients suppliers of your favourite dish.
With so many different sectors on the Singapore Exchange (SGX), and many more outside of Singapore, it’s really up to you to pick the sectors that you are interested in.
# 4 How Much Time Are You Willing To Spare
Value investing is about finding undervalued stocks in the market and that’s a process that would certainly take time. It would be wrong to suggest that people can do value investing without committing time to research the stocks and sectors that they are looking at.
In comparison, index investing is unlikely to require as much time though investors still need to pay attention periodically to look at the market and rebalance their portfolios accordingly.
That said, as Clive eloquently puts it, “knowledge – just like investment returns – also compounds itself in the investing world.”
A beginner who is just starting out in value investing may find himself needing to spend excessive amounts of time each week researching just a few stocks and sectors. Given the amount of time he has to spend, it may appear that simply doing index investing could be a better option.
As an investor becomes more familiar though, he may find himself requiring less time to arrive at the same conclusion. Instead of spending 10 hours each week on research, he may only need to spend just 1-2 hours each week, as he is now more familiar with the stocks that he has invested in.
In other words, as a person’s knowledge in value investing builds up, the time required for them to continue assessing and keeping themselves updated reduces significantly. They enjoy the compounding effect of knowledge as it builds up.
Value Investing And Index Investing
To sum it up, index investing is suitable for people who are not familiar with the stock market. For such individuals, index investing offers a good way to get their feet wet in the investing world.
As investors become savvier with the various stocks in the market, they might be tempted to buy specific stocks that they think will do well. That’s where the process of value investing, which 8I Education advocates, comes into play.
Last but certainly not least, while both of these investment strategies can be seen as different approaches, they are complementary strategies to one another in the bigger picture. An investor can stay invested in the index while simultaneously allocating a part of his portfolio into value investing.
At the end of the day, it all boils down to individual investors’ interests and their investment objectives.
Clive Tan started his career as a secondary school educator in Singapore. While teaching, the concept of value investing caught his attention and ignited his interest in investments. Within five years his investments enabled him to acquire a struggling childcare franchise and turn it into a highly profitable business, before selling it for a profit.
Clive Tan and Ken Chee identified a strong need in the Singaporean market for education in value investing in 2008 financial crisis, leading to the formation of 8I Education, which is now a part of ASX-listed 8I Holdings Limited (8IH). As a speaker and trainer, Clive has touched the lives of more than 10,000 individuals through numerous educational programs, engagements and at their annual Value Investing Summit – the region’s largest conference for value investing.
Clive is involved in the 8IH’s strategic planning, development and risk management, corporate policies and managing the group’s human capital.
Ken Chee is the co-founder of the 8I Holdings Limited (ASX: 8IH) and its subsidiaries. An entrepreneur at heart, Ken Chee co-founded 8 Investment in the height of the Lehman Brothers crisis with the sole mission to create sustainable value through investments, business, and education.
Within six years, Ken transformed 8 Investment from a private investment business with zero start-up capital, into a public-listed company 8I Holdings Limited (8IH) with a market capitalisation of A$250M in 2016. Today, 8IH and its subsidiaries is a leading investment and education organisation, enriching the lives of countless individuals and empowering their growth financially, emotionally & mentally.
In 2005, Ken received the Spirit of Enterprise, Honoree Award to for his contribution to entrepreneurship.