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The Vallée Perspective - Skiing is like investment but, no, not for the reason you just thought

06/04/2016

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Why is skiing like investment? As the winter sports season draws to a close, it seemed an appropriate moment to share a small epiphany that recently came to us here on The Value Perspective. And no – quiet in the cheap seats – the answer is rather more nuanced than any joke about the potential for things to go downhill fast. 

Our analogy is that with skiing, as with investment, the safer you feel, the greater the potential for danger. With skiing that is self-explanatory – if you are powering down a mountain at 60mph without a care in the world, then there is a strong possibility that while you will probably make it to the bottom, it may not necessarily be in one piece. If you treat the slopes with a healthy degree of respect, however, the chances of you enjoying your après-ski unencumbered by a plaster cast are greatly enhanced. 

And so it is with investment – if you buy an asset because you think it is safe, there is a good chance the wider market holds a similar view and so the price is likely to have risen to the point where you are taking on extreme valuation risk. 

On the other hand, if you buy an asset the wider market believes to be high-risk, it is likely the share price is already depressed. As such, when you buy, you immediately become the beneficiary of one of the largest margins of safety it is possible to have in investment – if not the very largest – and that is the protection afforded by a low price. The history of value suggests that, over the longer term, it ought not to be downhill from there.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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