The French fund manager, Jean Marie Eveillard, states “a good value (i.e. patient) investor aims to buy investments at prices that are less than they are truly worth and accepts there will be periods of short term pain. It is one reason why there are so few good value managers. It is not just psychological; you may lose clients or even your job.”
Billionaire investor, Warren Buffett, was once asked at a Berkshire Hathaway AGM what the company’s share portfolio (comprising a handful of equities) looked like today, compared to last year. He answered that it was exactly the same because in the intervening 12 months, he hadn.t come up with an idea he truly believed in. Imagine that, the best investor on the planet couldn’t summon a worthwhile idea over a period of 365 days. What on earth was he doing? It’s just as well he wasn’t running the average underperforming unit trust containing dozens of holdings; he’d have received his cards long before the earth had orbited the sun.
Because sticking to your guns involves reputational/career risk, it is perhaps no surprise that many managers’ portfolios cluster around the constituents of the benchmark index. However, instead of picking investments to match the complexion of an index, would it not be a more sensible policy to purchase investments you actually wanted to own? Of course, such a policy runs the ‘risk’ of not delivering what the index might. However, when you consider that, as I write, the FTSE 100 Index is no higher than it was in March 1998, even those hypnotised into believing that modest index outperformance is a commodity worthy of capture, might care to note there has been no capital appreciation since The Spice Girls threatened world domination.
Similar behaviour sees investors regularly mesmerised by fads and fashions; technology ….. commodities ….. emerging markets. The latter was all the rage under the guise of BRICs (Brazil, Russia, India and China). Now, don’t get us wrong, it is inevitable that an increasing share of world economic output will be claimed by the developing world but the fact that certain nations’ initials could be arranged into a snappy marketing acronym does not an investment policy make. Today, Brazil and Russia are deep in recession while China is clearly slowing. India is doing better but we return to the earlier logic of our argument regarding indices. Is it better to obtain exposure to countries that happen to be developing rapidly or alternatively, buy the better companies that operate within them whether they are represented within the benchmark or not? Only a BIRC would choose the former.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
