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Why value investors should care – but in a focused way

It goes without saying we care about Brexit politically, socially, societally and personally, here on The Value Perspective – but how much should we care as investors?

29/03/2019

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Given the passions it has raised over the last three or so years, to say people care about Brexit would be a massive understatement.

Some care deeply that the UK leaves the European Union, others care with equal strength that it should remain.

And, here on The Value Perspective, it goes without saying we care about Brexit politically, socially, societally and personally – but how much should we care as investors?

What prompts us to raise the question is an interesting piece by investment commentator Morgan Housel, Not Caring: A Unique and Powerful Skill.

To be clear, this is in no way an argument for apathy – on the contrary, Housel argues one of the most unique and valuable skills in investment is not minding what happens, adding: “Not in a flippant way. You have to care about eventual outcomes, the people you work with, etc.”

Not caring because it doesn't matter

Of the four positive aspects of not caring Housel highlights, the one that really caught our eye as value investors was not caring about having an explanation for the majority of events.

In this regard, he observes, there are two types of “I don’t know” – one being “I don’t know, but I’m trying to figure it out” and the other “I don’t know and I don’t care because it doesn’t matter to what I’m doing”.

For Housel, the latter “I don’t know” is far more important because it forces people to acknowledge factors that do and do not make a difference to their investment strategy.

As we have noted on multiple occasions, here on The Value Perspective, there are all sorts of things we do not know about the future – with regard to the economy, to Brexit and so forth – and we can live with this as predictions of the future would not make a difference to our investment strategy.

From the perspective of what we do to keep the weekends apart, our job is not to try and predict the future – it is to try and understand what is implied by the valuations of the businesses we analyse and then, when we identify ones that are cheap in spite of their having strong balance sheets and sensible amounts of debt, we buy them.

Focus on what counts

Noting Albert Einstein’s supposed quip of “Not everything that can be counted counts”, Housel suggests it holds true “for maybe 98% of what happens in financial markets”, continuing: “And if you can put that idea to use, you free up time to focus on the 2% that does count. Figure out what you can control and obsess over it. Identify what doesn’t matter and ignore it. Determine what you’re incapable of and stay away from it.”

What we focus on as investors, here on The Value Perspective, is much closer to that ‘2%’ than the ‘98%’ – on a company’s risk and potential reward, its balance sheet and above all its valuation.

That, we believe, helps us to be better investors and so do our best for our clients – two issues we do care deeply about.

In the week the UK was supposed to have left the European Union, let’s finish by revisiting this piece we wrote the day the referendum result was announced on 24 June 2016.

“We do not know where share prices will settle – not today and not over the coming months,” we said. “No one 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 through considerable long-term excess returns.”

Past performance is not an indication of future performance and may not be repeated.

 

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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Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.