Why Valuation Matters in Investing | PennyCounts Guide

By Penny Counts 

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now...” - Warren Buffet 

It was around late 2007. It was my first job with a private sector lender in Ahmedabad, Gujarat, where you can’t escape market chatter and it’s not optional.

Indian stock markets, alongside global equity markets, were booming and had created phenomenal wealth for many. FOMO (though I never heard the term then) was in the air. It was during this time that I opened my first Demat account—yes, approximately 17 years back.

Then came the sub-prime crisis and markets plunged. What a time to be a new investor.

Yet the fundamental belief in India’s arrival on the world stage was unshakable. The world around us was ravaged by bad news after bad news. India avoided the crisis to a great extent, but the Indian stock market couldn’t escape something that was global. My small initial capital was wiped out in the crash, and the dream of making it big from the stock market took a back seat. The market tanked, so did my confidence, and I lost the appetite for that rollercoaster ride.

“Regular investing keeps you in the game, but buying at the right valuation keeps your wealth intact.”

When I look back, what do I see? It was the worst time to be investing. Valuations were overstretched. The PE of Nifty50 was at 27.9 in January 2008 against its historical average of around 16, which then fell to around 11 in October 2008.

In hindsight, it looks absolutely suicidal to invest in December 2007 or January 2008. But did we know Lehman Brothers’ collapse was coming? Remember, it was not a hyper-connected world then. It was connected, but nowhere close to today’s standards.

In Gujarat, we say “Bhav Bhagwan Chhe.” But the real “bhav” is not today’s stock price—the real bhav is the underlying business value.

So the lesson was simple: never enter the market when valuations are overstretched. SIP is often sold as a panacea for investing. Regular investing makes money, but regular investing at the right valuation builds wealth. And as investors, our goal should always be wealth-building.

This brings me to the core of my argument. Investing regularly keeps you in the game, but buying at the right value keeps your wealth intact. I recommend a buy-and-hold strategy, not active trading. Trading is a recipe for wealth destruction because you settle for a fraction of the wealth you could have created by buying regularly at the right valuation and holding as long as fundamentals remain sound.

Buying at the right value is what Benjamin Graham called the margin of safety. In simple terms: don’t pay more than what the business is reasonably worth. It’s about protecting yourself from overpaying when the crowd gets carried away.

Generally, during bull runs, valuations get ignored—and honestly, you don’t find many good picks at a reasonable valuation in a bull market. This is where you must train your mind to be patient and look out for opportunities.

A reasonably valued stock gives you a two-fold benefit:

1. Earnings growth
2. P/E expansion

while reasonable valuations also give you downside protection.

Why You Should Not Ignore Valuation

The bottom line is simple: if you ignore valuation, your future returns shrink before the investment even begins. You expose yourself to three unavoidable problems:

1. Future returns collapse, because paying too much today guarantees weaker returns tomorrow.
2. When hype fades, overvalued stocks fall the hardest.
3. You panic more, because it is easier to hold a reasonably priced stock than an overpriced one.

Real-World Examples

Zomato

Zomato is the classic example of why valuation matters. The company was still building its model and wasn’t profitable when it listed. Being a well-known name, everyone pounced on it. Frenzy and COVID-era liquidity drove a strong entry.

Over time, the company improved operations and turned profitable in FY24. But the stock price ran much faster than the business. From its IPO in July 2021 until profitability, the stock underperformed.

The early rally came from sentiment-driven P/E expansion, not earnings. If earnings don’t catch up, valuation corrects sharply.

Zomato teaches a simple lesson: regular investing is fine, but buying at the right value protects wealth.

An investor who bought when Zomato turned profitable (2023–24) likely made more wealth than someone who bought into the hype.

Avenue Supermarts (DMart)

DMart is the perfect example of a great business commanding a high valuation. Investors love it for its stable growth, disciplined expansion, and unmatched operating efficiency.

But buying even a great business at an expensive valuation can lead to sub-optimal returns.

That is exactly what happened. Over the last five years, DMart’s stock returns remained subdued even though the business continued to perform well. The reason is simple: premium valuation leaves limited room for upside.

Long-term investors were still rewarded because earnings compounded. Revenue grew steadily, profit expansion continued, and the operating model stayed strong. That is why P/E compression didn’t drag down the stock drastically—the underlying business cushioned the impact.

DMart reinforces this lesson: a premium is justified only when the business delivers consistently but paying too high a price caps your returns.

A Simple Checklist for Value Investors

If you want to practice value investing instead of chasing the next hot pick, use a checklist and don’t invest until the stock meets enough of these criteria:

1. P/E below sector average or below its own 5-year median
2. EV/EBITDA below 12 for most industries
3. ROE > 15% (stable for 5–7 years)
4. Debt-to-equity < 0.5 (non-financial companies)
5. ROA > 1.5% (financial companies)
6. Consistent free cash flow in at least 4 of the last 5 years
7. Avoid cyclicals unless valuation is deeply attractive

Conclusion

Investing is a skill. You either learn it or trust someone who practices it every day. Regular investing builds discipline, but discipline without valuation is routine without reward. Real wealth is created when you combine the habit of investing with the wisdom of knowing what a business is truly worth.

Valuation protects capital, keeps emotions in check, and stops you from worshipping the wrong bhav. If you respect intrinsic value and insist on a margin of safety, the market will eventually reward you.

I learnt this lesson the hard way in 2008. That loss shaped my discipline. Today, after years of study and practice, I manage profitable portfolios for individuals who trust me with their hard-earned money. The mistakes of my early years built the philosophy that now guides PennyCounts: disciplined investing, fair valuation, and patience. It’s the only path that has consistently built wealth—and it will work for you too.

If my journey and philosophy strike a chord with you, let’s connect. A simple conversation can turn into a valuable association—one that helps you invest smarter and grow with confidence.

To be continued. . .