By: Graham Wainer
It’s never an unhelpful exercise to consider doing the opposite to your plan. Instead of our more differentiated capital appreciation strategy, suppose we just follow the market. What would happen?
In some ways, it would be the easiest thing to do: go with the flow, follow momentum and stick to large cap growth technology stocks. That way, when the markets go up, you celebrate. When they go down, you say: that’s the way it goes, markets go down, bad things happen.
In the last few weeks, Microsoft, Apple and Amazon posted record results. Facebook also reported strong earnings, which were better than expectations. But big tech is under increasing scrutiny both from regulators and society’s ethical sensibilities. Indeed their successes have been overshadowed by concerns around data and privacy. Nothing is certain for the long term. For now, though, as far as many investors are concerned, big is beautiful.
Would we be comfortable, though, to just keep throwing more and more money into essentially what is ostensibly a very expensive part of the market? For a long-term investor, it doesn’t seem like a very smart thing to do. And it isn’t. Even if, sometimes, it turns out that it was.
When looking for value stocks, we are reluctant around the ‘deep’ value, broken businesses story. It is very difficult to get right.
We are also rather jaded around ‘cyclical’ value - value affected by systematic changes in the overall economy - because we don’t believe there is going to be a cyclical uptick. Growth has gone. At least, anything like the kind of growth magnitude you need where you are looking for rates to go up because it will help financials, seems rather elusive at the moment.
Instead, we continue to look for something else – something quite subtle: managers who sit in between those companies that are in decline and those which aren’t. These are the businesses prepared to close down operations, restructure and reinvent themselves. It is not only the biggest and strongest who survive, but those who have the capacity to change and shore up a sustainable future for themselves. There will be rewards for those who do.
More articles by Graham Wainer, Chief Investment Officer:·
House View - Q1 2020 - equity markets up despite slowing global·
Markets are getting wise to Trump’s rhetoric
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