AdvertorialJun 26 2017

Successful investing - why value matters

Supported by
BMO Global Asset Management
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Supported by
BMO Global Asset Management
Successful investing - why value matters

History is littered with examples of asset prices surging to valuation levels unwarranted by underlying fundamentals.

When the exuberance that drove them upwards subsidies – as it inevitably does – the bubble deflates (often very quickly). Tulips in the 1600s, railways in the 1800s and tech stocks in the late 1990s all illustrate the cycle of price rises and subsequent rapid, and painful, correction.

The repetitive nature of such episodes suggests that many investors spend little time considering historic market behaviour or, perhaps more worryingly, fail to learn lessons from the past.

There are, however, plenty who recognise the merits of keeping a keen focus on value. Warren Buffett is a vociferous proponent of emphasising value when investing and in one of his better-known quotes he states that ‘Price is what you pay. Value is what you get.’ – a reminder that irrespective of how strong the argument for investing may seem, buy a share, bond or anything else for that matter at the wrong price and it is unlikely to be a good investment.

The chart illustrates the importance of keeping an eye on valuation. It looks at buying into ‘quality’ investments and the key part the price you pay plays on your resulting return. The message is clear, buy at an ‘expensive’ price and the value you get from an investment (even a quality one) is likely to disappoint. Conversely, buy quality when the price is ‘cheap’ and the outcome is likely to be much more profitable.

 

Source: SG Cross Asset Research/Equity Quant, FactSet, FTSE, I/B/E/S as at 14.04.2017. 

At Pyrford, value is a key driver of every investment decision we make. It determines the balance of our portfolio between equities and bonds and if neither looks good value, it means we are comfortable with cash-like investments. It influences geographic allocations and exposure to currencies as well as individual stocks. Often it means taking a contrarian stance – but if the consensus is pushing prices up beyond the level supported by fundamentals is that really such a bad thing? We think not.

Pyrford International Ltd is an independent investment boutique operating as part of BMO Global Asset Management.  

For professional investors only. Please remember that any income generated is not guaranteed and is subject to fluctuation. Past performance is not a guide to future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.

© 2017 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority.

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