As Indian equity benchmarks scale unprecedented heights with the Nifty hovering around 26,000 and the Sensex sitting near 85,000, many investors are questioning whether there's any value left to extract from these expensive markets. The surprising answer remains a definitive yes for those who know where to look.
The Hidden Value in Expensive Markets
While headline indices might appear overvalued at first glance, experienced investors understand that expensive markets are rarely uniformly expensive. Even near record highs, pockets of genuine value quietly exist for those willing to look beyond the noise and embrace patience as their core strategy.
True value investing fundamentally differs from chasing momentum stocks. Instead, it focuses on identifying fundamentally sound businesses that the market has temporarily overlooked or punished unfairly. This approach demands temperament rather than trend-following mentality. Think of it as financial gardening: you plant during periods of dry sentiment, carefully nurture your selections, and patiently wait for market cycles to turn favorable.
Historical Proof: Midcap and Small-Cap Opportunities
Recent market history provides compelling evidence of how value emerges when others become distracted. Back in October 2024, midcap and small-cap stocks had surged to expensive valuations before profit-taking brought them down to more reasonable levels by year-end. The situation intensified when Sankaran Naren, CIO of ICICI Prudential Mutual Fund, issued a warning that triggered alarm across markets.
By March 2025, the damage became clearly visible: the BSE Midcap had slipped below 39,000 while the BSE Small Cap fell below 43,000. Within these declining aggregates hid dozens of fairly priced companies that weren't overvalued. However, as the financial tsunami hit, even quality stocks suffered significant beating, with broader indices falling 25% from their October 2024 peak.
This market massacre presented a golden opportunity for value investors, perfectly illustrating Nathan Rothschild's famous advice to "buy when there's blood in the streets." Investors who demonstrated courage during this downturn have been richly rewarded, with both BSE Midcap and BSE Smallcap indices shooting up 20% since their March lows.
Two Environments for Value Investors
Value investors typically find opportunities in two distinct market environments. First are absolute value phases characterized by sudden, fear-driven market wipeouts. The COVID-19 shock in March 2020 perfectly exemplifies this scenario, when markets tumbled and valuations detached from fundamentals, causing quality stocks to be discarded alongside poor performers. These rare moments represent the closest equivalent to bumper discount sales for value investors.
Second are relative value periods when markets move sideways. While indices remain stable, numerous individual stocks linger in the doldrums, creating ideal hunting grounds for value seekers. The challenge lies in identifying companies priced substantially below their intrinsic worth—businesses whose long-term earning power significantly exceeds what current market prices suggest.
Beyond Basic Valuation Metrics
While valuation ratios like price-to-earnings (PE) and price-to-book (PBV) serve as useful starting points, they don't always provide the complete picture. A stock might appear cheap simply because its growth engine is stalling. More important than earnings alone is the quality of those earnings.
Companies sometimes report inflated profits due to one-off events like asset sales, divestments, or windfall gains. These temporarily boost earnings per share (EPS) without strengthening the underlying business. Sustainable value originates exclusively from operations, not accounting maneuvers. Investors should always verify whether operating margins remain robust and consistent over time.
The Cornerstone: Margin of Safety
The concept of margin of safety forms the foundation of value investing. This represents the gap between a stock's intrinsic value and its current market price. The wider this gap, the lower your downside risk and the higher your probability of achieving outsized returns.
Consider this example: if a company's fair value is Rs 400 but it trades at Rs 350, you already enjoy a 12.5% buffer. Should it correct further to Rs 320, your margin of safety expands to 20%. For long-term investors, such declines represent opportunities rather than threats. Market pessimism often serves as the discount coupon for future wealth creation.
Avoiding the Relativity Trap
Bull markets frequently distort perception. When frothy stocks trade at triple-digit PEs, even a PE of 35 can mistakenly appear like a bargain by comparison. However, relativity poses a dangerous trap. Overvaluation remains overvaluation, regardless of how expensive peer stocks might be. Never purchase an expensive stock simply because another appears even more overpriced.
To distinguish genuine value from low-quality cheapness, investors must delve deeper into profitability metrics. Return on Equity (RoE) measures how efficiently a company utilizes shareholder capital, while Return on Capital Employed (RoCE) assesses overall capital productivity—particularly crucial in capital-intensive industries like infrastructure, engineering, or manufacturing. Consistent RoE or RoCE above 10% signals that management deploys capital wisely. In value investing, good businesses matter equally as much as good prices.
The Overlooked Dividend Advantage
Dividend payout often receives insufficient attention but delivers invaluable benefits. Companies that regularly share profits demonstrate financial discipline and cash-flow strength. A decent dividend yield not only cushions returns during volatile periods but also discourages sharp price declines. ITC serves as a textbook example—its steady payouts have anchored the stock price through multiple market storms.
Dividend-paying companies typically possess mature business models, predictable earnings, and conservative capital allocation—precisely the traits value investors should appreciate and seek.
The Final Verdict: Maths Meets Mindset
Value investing combines mathematical analysis with psychological discipline. The maths helps estimate fair value, while the mindset maintains calmness while markets decide their next worry. Whether at Nifty 26,000 or Sensex 85,000, the discipline remains constant: buy understandable businesses, insist on margin of safety, demand quality earnings, and respect time. Ultimately, patience—not predictions—transforms value investing into genuine wealth building.
