Finding Value In Rising Markets
Value investing is a sound strategy for buying shares in high-quality companies at attractive prices.
4 min read
For investors able and willing to take a long-term view, value investing is a sound strategy for buying shares in high-quality companies at attractive prices.
As recent history reminds us, surprise political and economic events can push and pull financial markets in unexpected directions. The impulse to make sense of an uncertain world drives many investors to make emotional decisions that cause asset prices to behave irrationally, particularly during times of stress. Those who follow a “value” style of investing believe they can take advantage of these inefficiencies.
Value investing is an approach that involves looking for shares, or overall markets or sectors that are priced below where a company’s fundamental value suggests they should be trading. Value investors can also combine their approach with quality factors, for example by looking to invest in high-quality businesses at attractive prices, which can provide a margin of safety and minimise the risk of capital loss. These assets are often out of favour or overlooked by other investors.
The father of value investing, Benjamin Graham, explained this concept by saying that in the short term, the market is like a voting machine – adding up which firms are popular and unpopular. But over the long term, the market is like a weighing machine – assessing the substance of a company. What matters is a company’s actual business performance and not the investment industry’s fickle opinion about its prospects in the short term.
THINKING LONG TERM
Value investing contrasts sharply with the “growth” style, which is more interested in a company’s ability to achieve above-average sales as well as superior prospects for expanding future profits. Given this potential, growth investors are usually willing to accept relatively high valuations, such as price-to-earnings or price-to-book ratios.
In the current market environment, value stocks have languished behind the runaway train of technology shares, renowned for their growth prospects. Yet over the long term, value has outperformed growth, which can be largely explained by behavioural biases. Investors tend to overpay for growth companies because they overestimate their prospects and get caught up in the market hype. In contrast, value stocks have low valuations because people are fearful that something is wrong. Value investors are willing to be brave by looking off the beaten track and taking a long-term view.
PATIENCE CREATES OPPORTUNITIES
In line with our focus on preserving and growing private wealth over the long term, Coutts incorporates the concepts of value and contrarianism in our diversified portfolios. One of our guiding investment principles is patience – we are prepared to wait for the value style to assert its past record of superiority as we seek to capture long-term opportunities and avoid overreacting to short-term market movements.
We prefer assets that are inexpensive and which may be out of favour with other investors. For example, we believe US equities are highly valued at this point in the cycle and prefer European and Japanese equities on more attractive valuations.
We believe the extremes of sentiment and overreaction create opportunities for value and contrarian investors, and seek to take advantage of market fluctuations through a rational, dispassionate investment process. In the words of Warren Buffett, who has championed the value style of investing: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
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For long-term investors, value investing is a sound strategy for buying shares in high-quality companies at discounted prices. At Coutts we aim to buy into market weakness to purchase quality assets at attractive valuations.
About Coutts investments
With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.Discover more about Coutts investments