Anet Ahern, CEO at PSG Asset Management
Can you build wealth at times like these? The COVID-19 pandemic has undoubtedly derailed markets and economies across the board.
It is raising questions about the viability of many industries and businesses which have been part of our everyday lives until now. There have been precious few places for investors to hide, and the impact on investor portfolios has been severe. Despite how uncomfortable the market mayhem makes us feel, it also provides the opportunity to build great future portfolios – provided we can distinguish noise from material information and overcome emotion, to act rationally and take a longer-term view.
The dangers of a ‘smoother’ ride
It is conceivable that the biggest investment risk facing the individual investor right now is capitulation. Investors seeking a smoother ride by switching to cash or buying popular stocks at any cost may find that this ‘safe’ approach will in fact prove to be more risky over the longer term. Governments across the globe have slashed interest rates to counteract the impact of the COVID-19 pandemic on their economies. The result is that ‘safe’ assets have become even less likely to outperform inflation for the foreseeable future. In addition, higher volatility means portfolio hedging has also become more expensive. Equities remain the place to build your long-term wealth, despite the discomfort investing in them can cause us from time to time.
We typically find the best opportunities for our investors are in areas where valuations are lower due to fear and uncertainty, and which present the potential for mispricing. In the long run, the price you pay for an asset relative to its worth remains the greatest predictor of long-term returns. When prices fall across the board, quality securities become available cheaply, along with the rest. Those who can look past the turmoil and information overload can build robust portfolios for the future at bargain prices. There are always opportunities for patient investors – even if the market takes time to realise mispriced value.
Remove emotion by focusing on your process
When it comes to sifting through these opportunities, taking emotion out of the equation is crucial. Following a trusted process and focusing on the fundamentals are key. COVID-19 has had, and will continue to have, profound impacts on many businesses and industries. Each market crisis accelerates the change that an industry already on a weak footing needs to make.
We saw this with the demise of CDs in the early 2000s – an industry already under pressure had to reinvent itself, or die. Current examples are home delivery, content streaming and services relating to working from home. However, share prices spike quickly to reflect this and good businesses that are under temporary pressure, but able to survive and adapt in the long run, are being discarded by panicked investors.
This creates severe mispricing. Some sectors will be more affected than others, and some management teams will fare better than others. It is impossible to predict when and how the market will reward specific shares or sectors. But we know that in the long run, well-managed companies will continue to do business and grow over time, rewarding their shareholders, whatever the short-run challenges.
So how do you accurately evaluate a management team? One solution is to focus on finding the ‘footprints’ of past decisions – what management have done historically, rather than what they say they will do in the future. For example, consistently conservative accounting policies and comprehensive disclosure provide footprints that say something about the character of the senior executives. Other valuable evidence can come from evaluating company balance sheets, and how shareholder capital is applied. One of the most challenging, yet most important, aspects of assessing an investment is to assess the quality of management teams, and it is imperative that an investment process should cater for this.
More than ever, a long-term outlook matters
We firmly believe there are good opportunities to be found despite the current economic and market turmoil. The current environment provides fertile ground for the mispricing of investments, and thus for building great future portfolios – but only for those who are able to separate process from emotion, and are patient enough to wait.