Value investing focuses on identifying businesses that appear mispriced relative to their fundamentals, while contra investing seeks opportunities where market pessimism may have created a disconnect between current sentiment and the underlying long-term potential of a business. According to Sirshendu Basu, head of product management and strategy at Bandhan AMC, 'All value is contrarian. Not all contrarian investing is value.' Value investing starts with earnings, book value and cash flow, looking for a price below a defensible estimate of worth, while contra investing begins with triggers such as cyclical downturns, controversies or technology scares, betting that the worst is behind the company. In practice, value investing focuses on companies whose worth is already visible in their financials, while contra opportunities lie 'not only in cheap stocks, but also in high quality, growth businesses, sectors, or themes that are temporarily out of favour.'
The two approaches read balance sheets differently due to their contrasting investment philosophies. For value investors, financials help estimate what a business is worth through what the company owns and earns, serving as the raw material for that calculation. Contra investors use the balance sheet as a survivability test, checking whether the business can withstand current troubles and last long enough for sentiment to turn. As reported by Mint, value investing tends to favour companies whose worth is already visible in their financials, while contra opportunities lie in 'cheap stocks, but also in high quality, growth businesses, sectors, or themes that are temporarily out of favour.'
Value investing waits for the market to recognize worth already reflected in financials, with the wait potentially being long but expecting value to exist. In contrast, contra investing depends more directly on sentiment change or business recovery. According to Ravi Kumar TV, co-founder of Gaining Ground Investment Services, 'In a value fund you hope the market recognises it at some point.' The risks differ significantly between approaches - value investors face the danger of value traps where fundamentals are permanently impaired, while contra investors risk the market being right about company prospects and expected turnarounds never materializing. As Kumar explains, 'In value style, the risk can be stock may be a value trap. On the other hand, in a contra style, sometimes the market consensus may actually be right.'
Both value and contra funds typically pick stocks from the bottom up rather than mirroring indices, and both can lag in bull markets led by growth and momentum. The same stock can sit in both value and contra funds simultaneously but for different reasons - one manager may buy it for compelling valuation, while another may bet on sentiment change unlocking long-term potential. Investors should remember these are style-oriented funds and should not be considered for core portfolios, instead looking at them for satellite holdings where they can complement more diversified core investments. As reported by Mint, investors should avoid new fund offers and allow such funds to build a track record before considering them, with both approaches requiring longer investment horizons similar to all equity funds.
