In 1973, Peter Cundill, then 35, stumbled upon the book *Super Money* during a flight, which marked the beginning of his journey into value investing. Introduced to the investing principles of Benjamin Graham and David Dodd, Cundill became deeply inspired and launched the Cundill Value Fund in 1975. Over the next 33 years, his fund achieved an impressive average annual return of 15.2%, translating to over 100x returns for investors.

Here, we explore six guiding principles that formed the foundation of Cundill's value investing strategy, while drawing parallels to the Indian stock market.

Cundill’s Value Investing Principles

1) A Low Price-to-Earnings Ratio Doesn’t Guarantee a Bargain

Cundill was adamant that a stock should not be deemed cheap simply based on a low price-to-earnings (P/E) ratio, high dividend yield, or even promising growth rates. To truly find value, investors must dive deep into a company's balance sheet and assess whether the stock price is significantly lower than its intrinsic worth. This philosophy aligns closely with Graham’s concept of margin of safety, which was a cornerstone of Cundill’s investing approach.

In India, this principle is critical in identifying opportunities amidst market noise. For instance, during the 2020 market crash following the COVID-19 pandemic, several well-known companies with strong fundamentals were trading at historically low P/E ratios. A notable example was HDFC Bank, a banking giant that continued to demonstrate robust asset quality and profitability despite a sharp decline in its stock price. Investors who applied Cundill’s principle of intrinsic value could have identified this as a temporary market overreaction, leading to significant gains in the stock’s recovery.

2) Value Investing Runs Counter to Market Trends

Cundill recognized that value investing often runs contrary to broader market trends. When markets are overvalued, value investors typically find fewer opportunities, leading them to sell and hold cash. Conversely, in times of fear and pessimism, even high-quality businesses become available at discounted prices, providing buying opportunities for those who remain patient.

This approach was seen in the Indian markets during the global financial crisis of 2008-2009. Many investors fled equities, driving down the prices of fundamentally strong companies. However, long-term investors who followed a value-based approach, like those who purchased Tata Motors during the market downturn, benefited immensely as the stock rallied in the subsequent recovery. Cundill’s contrarian approach mirrors how savvy Indian investors have historically profited from market downturns.

3) Evaluating Net Assets Goes Beyond the Obvious

Cundill had a knack for identifying hidden value in a company’s net assets—assets that might not be immediately obvious to the market. While tangible assets such as property and equipment are important, he also focused on uncovering undervalued intangible assets, such as brand value and intellectual property, that were not adequately reflected in the balance sheet.

This principle applies well in India, where some of the most valuable companies are trading below their book value. For instance, consider a company like ITC, which has been undervalued for years due to concerns about its reliance on the tobacco industry. However, a closer look at its vast real estate holdings, diversified consumer product portfolio, and strong brand equity would reveal hidden assets that might justify a higher valuation than its stock price reflects. Investors who, like Cundill, delve into the company’s true asset value may find significant opportunities for long-term appreciation.

4) Knowing When to Sell

Cundill developed a clear set of rules for selling stocks. He believed that when a stock’s price doubled, it was prudent to sell half the position, thereby locking in profits. The remaining shares could be held at the fund manager's discretion, depending on further growth potential. This disciplined approach helped Cundill protect capital while allowing flexibility for further upside.

In the Indian market, this philosophy holds true, especially during high volatility. For example, during the bull market of 2021, several stocks, such as Reliance Industries, saw rapid appreciation. By adhering to a structured selling plan, like Cundill’s, investors could have locked in gains while still holding onto shares that may continue to grow in value.

5) Expect Volatility in Even the Best Investments

Cundill recognized that even the most promising investments are subject to volatility and downturns. He advised investors to maintain composure during these periods, as they are an inherent part of investing. This philosophy of patience has also been observed in the Indian market, where even the strongest companies go through phases of underperformance.

Take Infosys, for example, one of India’s leading IT firms. Despite being a market leader, the company’s stock has faced multiple corrections over the years, often driven by external factors like regulatory changes or global tech trends. However, investors who stayed the course and remained focused on the company’s strong fundamentals were rewarded as Infosys consistently bounced back and delivered strong returns. Cundill’s lesson here is that long-term investors should expect temporary setbacks and stay focused on the bigger picture.

6) Tailor Your Investment Approach to Your Goals and Risk Tolerance

Cundill was a strong advocate of aligning an investor's strategy with their personal goals and risk appetite. He discouraged chasing excitement or market fads, urging investors to stick to an approach that best suits their objectives and risk tolerance. Flexibility, he believed, was key to staying relevant in an evolving market.

In India, this principle can be applied when considering the different investment approaches available. For instance, small-cap stocks like those in the pharmaceuticals or emerging tech sectors can offer tremendous growth potential but also come with heightened risk. Investors must tailor their portfolios based on their financial goals and ability to tolerate volatility. By doing so, they can strike a balance between high-growth opportunities and stability, much like Cundill’s adaptive approach.

Value Investing in the Indian Context

Cundill’s value investing principles resonate deeply in the Indian stock market. India, as a growing economy, is ripe with opportunities for discerning value investors who are willing to look beyond market sentiment and identify undervalued companies. The cyclical nature of Indian markets, with periods of high volatility and temporary setbacks, provides fertile ground for contrarian investors who can patiently wait for the right moment to buy.

One notable example is the Indian infrastructure sector. Stocks in this space often fluctuate with economic cycles, regulatory changes, and government policy announcements. However, companies with valuable assets—such as land banks or exclusive contracts—may be undervalued during periods of economic slowdown. Investors who analyze these companies through a value lens, as Cundill did, could uncover significant opportunities for growth as the sector recovers.

Conclusion

Peter Cundill’s value investing journey, grounded in the timeless principles of Benjamin Graham, provides enduring lessons for investors worldwide. His disciplined approach to identifying undervalued companies, knowing when to sell, and remaining patient during market volatility is highly relevant to Indian investors. By adapting Cundill’s strategies to the unique dynamics of the Indian stock market, value investors can navigate opportunities and risks to achieve long-term financial success. Just as Cundill was inspired by *Super Money*, Indian investors too can find inspiration in his methods and create wealth by focusing on intrinsic value and margin of safety.