2020: An opportunity to set up portfolios for the long term
In a world where bubbles and inflated stock prices can lead to investors acting irrationally and diverging from their long-term goals, we lean on the foundations of our process, identifying contrarian value opportunities.
We seek to buy assets that are trading below their intrinsic value and do so with a margin of safety. Examining the dissonance between price and value, then, becomes the real challenge: and this is where rigorous analysis comes into play. While the prices of stocks change every minute, the quality of the company does not. So how do we determine what a company is truly worth? We look at the fundamentals: cashflow, balance sheets, and earnings, among other metrics, to determine true or ‘intrinsic’ value.
Different market participants will consider different measures of value. In addition to intrinsic value, there is relative value, which looks at price comparisons; and, perceived value, an emotional assignation determined by the buyer. Of these three, we believe intrinsic is by far the most important.
When buying an asset below its intrinsic value, it’s important to also ensure a margin of safety; just in case things don’t go to plan. Both price and value can be impacted by external forces: industries may be disrupted; economic environments can positively or negatively impact a company’s operations. Ultimately, when investing, we are operating in a world of probabilities, weighing up on balance what factors will affect the price of a stock versus what factors will impact its intrinsic value. Therefore, in entering any investment opportunity, it is important we also seek a margin of safety, and apply it to cushion our investments from sharemarket falls.
What this means is that we work to stack the odds in our favour. While much of the investing environment is unknowable, what we do know is that losses can’t be avoided altogether. We also know that not all drawdowns are the same. Some are permanent – these are the ones we want to avoid. But temporary, short-term capital losses can offer opportunities as asset prices fall.
2020 has been a challenging year across the board: politically, economically, and for many of us personally. It’s also been a testing ground for investors, with dramatic sharemarket drops at the start of the year followed by ongoing unpredictability. It’s in these conditions that deep value opportunities can be identified, and we believe a pragmatic long-term approach can help investors find and secure that value.
Ultimately, that’s how we find opportunities across all market conditions: we look for asset prices below intrinsic value with a clear margin of safety. And avoid those that have been assigned high perceived values. In doing this, we can set up a portfolio for growth over the long term.
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