In difficult and volatile markets, look to valuation as your guide

“Do you, as professional investors, have a view on ....?” Over the years, we have been asked that question in relation to topical concerns ranging from the financial crisis to Brexit and, most recently, the outbreak of the Covid-19 strain of the Coronavirus. While we have great sympathy with such anxieties as human beings, though, as professional investors we must stress they miss a crucial point of following a value strategy.

Here on The Value Perspective, we have no preconceived notions as to what happens next with the virus. One might reasonably expect some very worrying media reports, while organisations, businesses and individuals will respond in a range of ways. Inevitably, global markets will react – indeed, they have already – moving share prices up and down, depending on their estimates of the ‘winners’ and ‘losers’ from the situation.

The true fair value of businesses changes very slowly over time, however. There may be a prolonged economic downturn or there may not – no-one can say with any certainty. Of course, that will not stop the pundits guessing although, if they were honest, they could not say they knew. Either way, for most businesses with a 50-year life span, the coming months will have a relatively insignificant impact on that true fair value. 

It is therefore incumbent on us to do what we always do, here on The Value Perspective. That is, to take advantage of emotional swings in the market that are not justified by the swings in the true value of companies – in other words, to be buying when others are scared and to be selling when others are greedy. We have one guide – not headlines, emotions or predictions but valuation. Only valuation.

If, say, financial companies fall more than is justified – thereby becoming significantly cheaper and as a result significantly less risky – we are likely to be adding to our positions. If they do not fall significantly, we will not be. And if the more stable stocks we own in our portfolios rally significantly due to fear over the coming months, we are likely to be reducing our positions. If they do not rally significantly, we will not be.

We do not know where share prices will settle – not today and not over the coming months. Then again, nobody does. We will, however, act as we always do. Going wherever the value is in the market. Buying things others find uncomfortable. Often buying things others currently believe to be tainted in some way. Then as those negative perceptions and short-term issues alleviate, share prices rebound.

Investors who have followed our strategies over time have been compensated for short-term discomfort with considerable long-term excess returns. In truth, this is a different strategy to most other fund managers. We see very few competitors who follow this type of strategy – and that is good news. Those long-term excess returns our value strategies have delivered also serve to diversify our investors’ portfolios and so reduce their risk.

The coming months may be difficult and they may be volatile. As disciplined value investors, however, it will continue to be our job to strive to take advantage of that volatility and exploit the emotional reactions of the market – looking, as we have always done, to let valuation be our guide.