Staying on the road less travelled
For valuation-driven investors to succeed, they must do so unconventionally. They must overcome their biases and often take
actions that directly contradict the views of their peers. It requires great mental toughness to do this consistently, which is
why few investors are able to beat the market benchmark over long periods. What helps valuation-driven investors succeed is a process they can stick to
that gives them the confidence to always stay the course. We have identified seven tips to help
keep valuation-driven investors focused on meeting their long-term goals, even when market changes threaten to distract them.
- Find the right opportunities: This requires a consistent valuation framework for estimating the fair value of an asset. It also requires a willingness to consider
out-of-favour assets. The greatest value opportunities often lie in unglamorous industries or in companies that have recently experienced bad news, but remain fundamentally
- Do the fundamental research: You need to be able to distinguish the low-priced assets that will likely recover (the bargains) from those that will likely not
(the value traps). You will need to analyse the investments’ financial statements and pay close attention to its qualitative characteristics, such as its underlying business
model and governance, to determine whether these characteristics indicate it’s a sound investment.
- Stay mentally tough: Cheap assets tend to be unpopular. Valuation-driven investors must avoid being swayed by other investors’ sentiments or market trends.
That’s why it is so critical to build a solid investment process that includes a rigorous valuation framework and an insistence on a substantial margin of safety. This will
help give you the confidence to stick with your decisions, as well as the willingness to change them when circumstances change and an asset no longer appears attractive.
- Play the long game: Buying an undervalued asset is only the beginning. It may take a considerable period of time for an underpriced asset to return to its fair value.
Investors must be willing to hold investments for many years. Don’t waste time thinking about unrealised profits and losses along the way. The market only really matters at
two points: when you enter and when you exit.
- Wait for the right moment: Markets do not always offer the same number or quality of opportunities. There are periods in the market cycle when prices are low and
opportunities are plentiful and other periods when prices are high and opportunities are scarce. If investors cannot find assets that offer good value, they should conserve
cash and wait for more-attractive opportunities, rather than commit capital to lesser opportunities with limited prospects.
- Avoid trading too much: Many investors believe that activity is good and low turnover in a portfolio is a sign that the manager is not making decisions. In reality,
exceptional opportunities can be rare, while active trading boosts costs that act as a big drag on returns. Successful valuation-driven investors devote as much time as possible
to research and as little as possible to buying and selling.
- Hold a range of return drivers: A portfolio that depends too heavily on a single factor to drive returns effectively becomes a forecast of that factor. For example,
returns for a portfolio concentrated in oil stocks will be too dependent on oil prices. Such factors are often very difficult or impossible to forecast accurately. So investors
should aim to diversify their portfolio among different securities in such a way that returns will be driven by a range of unrelated factors.
The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The information
provided is subject to change without notice and does not constitute investment advice.
MeDirect Bank (Malta) plc has based this document on information obtained from sources it believes to be reliable but which have not been independently verified and therefore does
not provide any guarantees, representations or warranties.
MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services Act