Value investing in the 21st century
Although there are several investment styles you can choose to follow, value investing has proven to be one of the most successful strategies over time. Although it has fallen out of favour since the 2008 financial crisis, it can still offer value.
Value strategies usually perform the best when the market is under severe pressure. But markets, especially those in the US, have not been under real pressure since 2008.
Instead, the US markets have enjoyed one of the longest bull runs in history. This environment has been conducive to growth strategies, which have become more popular.
So, some investors have started combining other factors with value strategies to capture any growth in markets.
Value investing 101
Value investing is driven by the concept of intrinsic value. It can be considered the cornerstone of value investing and is calculated through fundamental analysis to determine the present value of future cash flows of a specific share or company.
The intrinsic value of a company is generally far more stable than the price the market assigns to a share.
This creates opportunities to buy undervalued shares and avoid risks associated with overpriced shares. By buying a share when it’s low, investors can make significant profits when the share’s value rises.
Similarly, given that the share is already trading at a discount, your downside would not be as large. By focusing on a company’s intrinsic value (the numbers), value investors have an edge over other investors who open themselves up to the irrationality of market volatility (the sentiment).
Before committing to a specific share, value investors investigate factors such as:
● Earning patterns;
● Free cash flow;
● The cost of capital; and
● The market price of the share.
How has value investing evolved?
By considering other top-down factors, such as macroeconomics and geopolitics, which were not considered by value investors traditionally, value investment as a strategy has evolved. It has become imperative to adjust strategies to suit current times.
Investors must consider certain macro events that can influence a company’s performance, as well as rely on new skills and tools to interpret the available data.
Rather than focusing on one investment approach to the exclusion of others, PSG
Wealth follows a multi-managed investment approach. This means we are pragmatic and embrace various strategies so that we can build robust portfolios for our clients. We focus on facts and disciplined decision-making, instead of being caught up in the emotional responses often sparked by market volatility.
For this reason, our multi-management approach combines different managers, investment approaches, research strategies and analytical interpretations to ensure we produce diversified portfolios. We invest time and resources in producing research that provides our clients with insights and the ability to make informed decisions.
We aim to deliver more stable returns in our portfolios, especially compared to funds preferring to invest in either a pure value or pure growth strategy. Ultimately, we believe, a pragmatic approach is better suited to delivering consistent above-average returns. Over time, these add up to better investment outcomes for investors and, thus, a greater likelihood of them achieving their goals.