Investing in Uncertain Times

World Assets is aligned with our research provider Merlea Investments Pty Ltd, with regard to our investment strategies. This is particularly relevant given the current economic and share market uncertainty.

We are a value investor. Our deep conviction to the tenets of value investing is what makes us different. That conviction means we tend to buy when most investors are too scared to buy; and we’re out of the market when most investors are happily piling in.

We only buy stocks when they are priced below a calculated value. That means we are often buying in down or bad markets when stocks are oversold, so we can step in and buy good companies at cheap prices. We sell when stocks rise significantly above their estimated intrinsic value. That usually happens in strong markets, when there is little opportunity to buy undervalued stocks and a time when we manage exposure.

In over heated markets, we will recommend to hold a lot of cash. That was the case prior to the global financial crisis of 2008. At the time we believed that prices were too high and the economic outlook was too uncertain. At that time our advice was too hold close to 60 percent in cash, which protected us from the crash and allowed us to pick up good companies when they were oversold.

Being different is not easy. It requires a strong conviction in our investment philosophy and our ideas, particularly when conventional wisdom and even the market are running against us.

Being different can also mean looking wrong for a while. Remember “the market can remain irrational longer than you can remain solvent.”

Being different requires conviction and to be patient and wait for your ideas to play out.

We’re being different now despite the market’s strength, and despite the ‘feel-good’ factors at the moment, we believe the market is overvalued, particularly given the Australian economy faces numerous challenges. In periods of overvaluation, value investors will sit it out and wait. Staying on the sidelines is easy for a short period of time; but it’s more difficult when markets are overvalued for a sustained period.

The market is expensive now, and after last year’s market re-rating (especially with an economy that is not growing dramatically), it’s probably safe to have a higher percentage in cash.

The Central Bank stimulus is making this a trading market (a liquidity market), but that is risky. Many people are taking an enormous risk in chasing that last five per cent return. Investing is a seven to ten-year endeavour – if not longer.

If that view makes us different then we’re pleased, even if it is sometimes a tough place to be. This is because the only way to create real wealth and beat the market is to think and act differently.

We have been here before: back in 2007/08 when stocks were trading 10 to 20 percent higher than valuations right across the market.

Indeed, we recall that back in 2000 during the dot-com bubble, many commentators suggested that “value investing is flawed” when they claimed that there was a ‘new paradigm’ and conventional valuations didn’t matter anymore.

Remember that investors are the market. So if we behave like other investors, then we can’t beat the market – we will only ever be average.