There are dangers to investing ‘at any cost’
The importance of human emotions in investment decision-making is firmly established. As investment professionals, we are witness to its impact on a daily basis when dealing with clients. It is often said that the drivers of stock market returns are fear and greed, and at no time more so than in the current environment.
The pandemic has created turmoil, not only by disrupting our own daily routines, but also that of whole economies. After a precipitous initial market plunge, many markets have (on the face of it) staged a subsequent recovery, driven by unprecedented stimulus from governments. Those who look below the surface, have however noted that this recovery has not been broad-based, but rather driven by a further crowding into a few market favourites. Past winners have continued to win. The longer this trend continues, the harder it becomes to hold fast to the courage of conviction and continue holding investments that the rest of the market is shunning. As a result, many people have begun question if they have ‘just been wrong’, sold out of the market laggards, and opted to side with the winners instead.
We believe this is dangerous, because current conditions are different to the ones that created these winners originally. Investors, however, seem content to simply be paying more to be part of the action, even when there are no clear indications that the outlook for companies have changed. Paying more at the outset, however, means that your investment needs to grow that much more to provide the same level of reward in the future. This sets a very high bar on the required future performance of your investment, and one that may not be met for any number of reasons.
What we find alarming, however, is that many investors believe investing in the popular stocks is a ‘sure thing’ and that investment at any cost is justified. We don’t disagree that there some excellent companies among the market leaders, including the likes of Microsoft globally or Naspers locally, for example. What we do disagree with, is the tendency to ignore the importance of the initial price you pay for an investment.
On the reverse side of this argument, we find the losers. These are companies that are unloved and unpopular. Some are listed on global exchanges (like Prudential Plc or AB Inbev), but many of these can also be found in our local market (like Discovery or Raubex). These shares are so unattractive to investors that the market seems to be pricing in very little chance of a turnaround in their prospects anytime soon. And yet these companies have proven revenue streams and management teams, and have been operating successfully for many years despite tough market conditions.
Thus there is a profound dichotomy in the current market: on the one hand we see investors willing to invest in a select few shares at any cost, and on other investors not willing to invest in the vast majority of the market, regardless how attractively they are priced. This imbalance cannot continue indefinitely.
These are extraordinary times. However, we will emerge from this pandemic at some point in time, and similarly, we believe the importance of price as part of the investment equation will reassert itself eventually. When it does, the roles of the current winners and losers may be reversed in a spectacular way.