Stick to your style guns
CHOOSING a wealth manager means believing the decisions they make are based on a robust investment philosophy that can withstand the vagaries of even the most volatile market.
Value and growth are, we believe, two sides of the same coin rather than competing philosophies. We don’t try to predict economic variables, but we do believe that human nature (which drives market sentiment) remains constant, and that over time excessively high or low market valuations will even out.
In a sense then, we are value investors, but we have added our own layers to the simplistic value approach.
Simple value investing can lead to the selection of “value dogs”, with the most common mistake being the abandonment of quality by the “value investor”.
Instead, we try to focus on the dual pillars of quality and value. Put simply, we buy top-quality securities at good prices.
These two pillars — quality and price — are needed for successful, low-risk investing. They are the cornerstones of a balanced approach to wealth creation.
Of course, we are also acutely aware of the importance of timing, which can have a significant impact on portfolio performance.
Investors shouldn’t be tempted to buy shares in poor-quality companies, even if they think them bargains.
Top-quality companies, on the other hand, will almost always deliver the goods over the medium to long term.
For us, we limit our share selection to the JSE Top 40 and FT Global 500, and look for companies with proven, long-term track records, top-quality management and preferably dominant market share or dominant brands.
Good examples of this are SAB Miller, Richemont, General Electric and Samsung. Buying shares in such companies virtually eliminates the risk of permanent capital loss through corporate failure — and dramatically reduces the risk profile of a portfolio.
A crucial fact about price: buying a top-quality share at fair value or, worse, paying too much, is never going to differentiate your portfolio from any other. Once you have identified your universe of quality companies, you then need to look for those that offer real value.
When the market is rising, such as after the 2008/09 market crash, it is easy to buy shares that are on the up, but as the cycle matures it becomes important to be more selective about what to buy.
If the herd is chasing certain shares or sectors, and driving those prices to overvalued levels, we suggest looking elsewhere and taking a contrarian approach. This requires patience since value can take time to emerge, and timing is at least half of the battle.
Of course, it can be very difficult to stick to your guns and maintain your investment approach when the market goes against you for any length of time.
It is important to have a robust philosophy because it provides decision makers with an unchanging frame of reference for process and strategy formulation. There is no substitute for experience. What clients want is a consistent approach from seasoned professionals, not a sudden scramble as the market fluctuates.