How 2017 taught us to invest

By Danielle van Wyk

With a few more weeks left of 2017 the time to reflect is now. With this the tendency is to look back at the year that has passed and how you have grown, failed, achieved and learnt. While your personal life may be the first area of introspection, experts suggest interrogating your investment life too.

The following are a few of the common lessons that 2017 has brought:

Say ‘no’ to the narrative, not the opportunity
“It’s easy to get caught up in market narratives. When news flow is good and sentiment positive, investors tend to buy popular securities at any price, paying little attention to valuation and risk. When news is bad and share prices fall, fear of loss makes investors retreat – from real risks, but also those that may be unfounded or overstated,” added Anet Ahern, CEO of PSG Asset Management.

While it is important to avoid getting swept up in the hype or gloom, it is equally important not to ignore the narrative altogether. “Some of the best investment opportunities can arise from strong negative narratives; in fact, they are a necessary pre-condition to finding quality companies at cheap valuations,” stated Ahern.

An example of this can be found in Brexit as the share prices of domestic-facing UK companies – which are likely to bear the brunt of any potential economic fallout – fell dramatically. “While concerns about the economic implications of Brexit are understandable, it is likely that quality companies managed by able individuals will continue to be good long-term investments if bought at sufficiently cheap valuations,” added Ahern.

Avoid locking in permanent losses
Should you be losing money on an investment, due to a current negative narrative or a negative event, be careful to not do what most do and lock in a permanent loss in your portfolio by selling prematurely or for the wrong reasons.

Before making any hasty decisions, you should ask yourself, “Are you selling a good asset that is merely undergoing a bad situation? If so, the loss in share price could be temporary, and could be opening up a buying opportunity to obtain more shares in a good company at a lower price,” Ahern said.

He further added that markets go up and down and, in the short term, there is little logic to how the market reflects news and other information. So, make sure your reasons for selling are sound.

Do capitalise on cash
“When opportunities arise, you need to have the flexibility and firepower to take advantage of them. This means holding cash in the absence of attractive investment alternatives,” explained Ahern.

In addition to narratives, negative events – such as a company scandal or the resignation of a senior executive whom investors consider essential to a company’s success – also create opportunities, Ahern iterated. Further, “when the share price of such a company falls, there is often contagion to other companies in the same sector. Adverse political or economic events can have a similar impact across a whole market. These situations often create buying opportunities.”

Ensure the price is fair
If you are looking to capitalise on a potential buying opportunity, make sure the price at which the share is available is in fact fair, Ahern advised. “One way to determine this is to ask yourself what an astute investor would pay for the company if it were to be sold, and to translate this into the price of its shares.”

Among the factors, according to Ahern, to consider are:

  • The company’s track record of financial performance – does it have a history of making good profits?
  • Is there a strong market for the company’s products and services, and how sustainable is this market?
  • What is going on in the competitive environment? Is it easy for other companies to enter the market or does the company you’re interested in have a competitive advantage?

“Of course, these are just a few of the many questions you need to ask and calculating intrinsic value is no easy feat – it is even complicated for professionals, and sometimes they get it wrong. So, it makes sense to try to buy a share at below its theoretical intrinsic value – in this way you give yourself a margin of safety if your calculations are a little off,” he concluded.

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