Play moneyball: Buy quality at fair prices

The latest round of auctions for IPL players dips heavily into a value investor's playbook. Relatively obscure players are crashing into the million bucks category alongside established names. Warren Buffett's investment philosophy is based on the principle of buying high-quality businesses at fair prices. Effort goes into determining the quality of a business and its fair price. IPL auctions are taking this idea forward by determining prices on select performance parameters in anticipation of supernormal profits. This style of investing is also common in PE that chases alpha in startups with an uncommon risk-reward ratio. The objective is the same for value investors, VCs and IPL team owners: market-beating returns.

The long-term investor is more than likely to be a patient bloke, having done his homework before stumping up the cash. In an efficient market, value discovery becomes sophisticated to the point where passive investment may be the most productive approach. But startups - and IPL players - do dwell in deep markets and there is scope for active selection. Done right by professionals, this investment style delivers outsized returns on capital employed. The gains accrue from discovering value before the broader market arrives at the same conclusion.

Value investing has never quite gone out of fashion since it was expounded by Benjamin Graham in the 1930s. Its most famous proponent, Buffett, has consistently outperformed the market with this strategy over a long career in investment. The idea is to 'simply' distinguish price from value and take an investment position accordingly. In the 2011 film Moneyball, a baseball team's manager says that after making one bad decision based on money, he won't make a money-based decision any more. His deputy wisely remarks, 'No. You're doing it for what the money says... That they're worth it.' Investment strategies have evolved beyond Graham's insights. But the concept remains a vital building block in finance. Its spread beyond the financial community speaks of its abiding value.