Value investing in the long term

2010-10-16 00:00

UNDERSTANDING the intrinsic value of equities in relation to their share prices is one of the keys to unlocking returns for investors over the long term.

Speaking at the Harvard House/Witness Annual Investment Conference in Pietermaritzburg yesterday, executive chairperson of RE:CM (Regarding Capital Management), Piet Viljoen presented a strong case for “value investing”.

He stressed that investors really need to understand the fundamentals involved in buying equities.

“Buying shares is like buying part-ownership in a company. It gives you opportunities — a portion of the future cash flows of the firm — and rights.

“One must understand the difference between [intrinsic] value [of the business], which is a stable number, and the price of the share, which is volatile and changes frequently.”

He added that you also need to decide what type of investor you are: “Are you a price-driven investor driven by sentiment, emotion and news flow. Many professional fund managers manage money this way.”

Alternatively, there are investors who focus on value, “by looking at the annual report of the company — evaluating current cash flows and future cash flows”.

These investors then work out the value of the business in relation to its share price.

He stressed that investors should look to buy assets when sentiment is negative.

“Value-type investors are generally more successful, but they go through long periods of underperformance and are ridiculed in the market.

“We buy where price is below value and this is usually when sentiment [toward the share] is negative. It’s a tough place to be. Generally, when sentiment is negative, the price is low and it is generally a good time to invest … when the price is below fair value. The price you pay determines your return. If it’s below intrinsic value you’ll get a good return.”

He added: “Where are the good investments? They are in places where no one wants to be — the U.S. dollar, the U.S. economy, UK and Europe.

“Those areas are exactly where you should be looking to invest, where prices are below intrinsic value and negative sentiment exists toward these destinations.”

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