INVESTING AND TRADING Making quality investments in uncertain times Grant Meintjes Head of Securities PSG Wealth
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett World markets have recovered since the market crash of 2008 and are trading at higher levels than before the crisis. Some are even trading at all-time highs. The local market, however, has moved sideways since 2015. Despite this, certain sectors provided massive opportunity over this period. The outperformance of certain sectors over others has provided investors with the opportunity to benefit from good growth in these sectors. In fact, great investment opportunities often follow in the wake of market instability.
Market provides opportunities Despite volatility, the market continues to offer the opportunity to invest into companies that are trading at a discount to their peers or, alternatively, into sectors that are performing better than the rest of the market. Many investors elect to invest in companies, strategies and sectors based on recent performance. Such strategies could easily disappoint, as the company or sector could come to the end of their particular investment lifecycle and investors could lose money. You need a robust investment strategy that can help you distinguish shares or sectors with potential to outperform and which are still trading below their fair value.
Do your homework The golden rule when it comes to investing is doing your homework before making a commitment. It is no different when it comes to focusing on a specific sector of the market. You need to spend the time and effort researching each share within the sector to pick the right one. When investors actively follow specific sectors instead of the market as a whole, they should try and pick value shares within each sector that will beat the return of the sector. Once you have found the share you want to invest in, log in to myPSG and review our research team’s company analysis on that share. This will provide the key financial data that could affect your investment decision, such as the share price, dividend yield and our recommendation on that specific share.
The perils in price Price is not always an accurate indication of a company’s intrinsic value – although it plays a key role in deciding when to buy or sell. Growing political instability in our market and the decisions of investors to move to safe-haven sectors such as the resources sector have, for example, caused the Anglo American PLC share price to move from R63.00 on 4 January 2016 to R220.70 in December 2016. If you invested over this time period, you could potentially have raked in a return of 250% on your initial investment.
If you had bought the same share three years ago, the investment would have returned negative returns of around 30%. The aim should therefore be to buy quality shares at a discount to fair value.
Quality shares at good prices Shares follow sentiment over the short term and fundamentals over the long term, so plan your investments with a margin of safety to ensure good growth potential. You should pay for what you know about the company and not for what you hope for. Your investment goal should also differentiate between investing for capital growth over the long term or shares that offer good value at the moment. Growth shares
• priced higher than • priced lower than broader market broader market • high earnings growth • currently priced below • less sensitive to economic similar companies in conditions than broader industry market • carry more risk than • lower P/E ratio broader market • relatively high P/E ratio Using these simple guidelines to differentiate between growth and value stocks will help you find quality shares worth investing in. Ultimately, your research should confirm that there is merit in your stock selections if compared to investing in passive investment products. In addition, consider your liquidity constraints, as you could struggle to sell some shares or be forced to sell them below market value in times of extreme volatility. The guidance of a PSG Wealth adviser could be invaluable in helping you unlock these market opportunities.
Always remain alert to opportunities in the market Applying sound investment principles and doing the required research can help you develop a targeted investment strategy. By doing so, investors have the opportunity to outperform the market, even when conditions are turbulent.
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