Nobody can know the future, which is why value investors prefer to play it safe
Is there such a thing as being too prepared for the worst? Here on The Value Perspective we would argue not and a number of high-profile examples should serve to support this view. This time 13 years ago, for instance, everybody was worrying about Y2K yet ultimately the preparations ahead of it were so aggressive that any problems that did result were relatively minor.
The same sort of scenario played out with the London transport system last summer in the run-up to the Olympics games. The preceding months were filled with dire warnings about how the infrastructure would be unable to cope with the expected rise in passenger numbers but, in the end, the measures put in place – in combination with some people choosing to stay away from London over the period – saw the system able to cope.
Something similar would appear to have happened with Hurricane Sandy. While there have undoubtedly been some very serious losses associated with this once-in-a-generation so-called ‘frankenstorm’, it would thankfully appear that the smallest number of losses relate to human life rather than buildings and other things that can be repaired and rebuilt.
It is often the foreknowledge of a coming event that means people ultimately prepare themselves in such a way the eventual impact is muted or in some way reduced – and that has obvious parallels with value investing.
As investors, we do not know when the market equivalent of a frankenstorm – for example, The Great Depression – will hit. Indeed, even in the late 1920s, most people were actually convinced The Great Depression would not happen. The whole underlying principle of value investing, however, is ‘what if?’
To take a single example, one way of potentially doing well in investing is to buy a business that has taken on a lot of debt because, should things work in your favour –as many home-owners with mortgages will have discovered over the last 10 or 15 years – you can make some fabulous returns.
The trouble is, when things do not go your way with such an investment, you can end up being wiped out and that is why we prefer to seek out good businesses with low levels of debt. The entire philosophy of value investing is built on the idea we cannot know what is going to happen in the future, so why not play it safe?
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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