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Balance your greed and fear while looking for value

Even though my daughters are no longer toddlers, I will never forget our regular play park outings when they were younger.

As toddlers, their favourite piece of equipment was the seesaw and this was the first thing they charged for. With one daughter being older than the other, pranks were never out of the question.  

So it happened that my older daughter often found it very amusing to jump off the seesaw while my youngest daughter was still in mid-air, resulting in an unfortunate downward slam.

This game provides me with the perfect analogy to illustrate my current opinion on risk in local shares.

Rather than using the analogy to explain market fluctuations, I would like to place investors on the psychologist’s couch to explain the two most determinative emotions in financial markets: greed and fear.

As in my story, these two emotions can be seen as sisters.

Together, they provide balance on the market’s ‘seesaw’.

The greatest danger for investors lies in the possibility that one of these emotions may jump off the seesaw while the other is still in mid-air.

Should fear jump off, greed will blow prices up like a balloon, which will inevitably pop in due course.

Should greed jump off, leaving fear all to itself, prices will be pushed down to abnormally low levels.

It is extremely difficult to maintain a healthy balance, but I feel that it can be managed by being disciplined – disciplined in sticking to your initial investment strategy.

I mentioned last week that when looking at price-to-earnings ratio (P/E) valuations, markets are currently trading at 20-year highs.

There are an increasing number of investors, however, who feel that the market still isn’t trading at high levels, especially when we take the exceptional cases of Naspers* and SABMiller out of the equation.

But the fact is that the current year-on-year earnings yield on our local market is negative, while the P/Es of the top 40 largest shares on the stock market, for example – excluding Naspers, SABMiller and local property shares – are now trading 67% higher than their averages over 10 years.

Before readers start to get the impression that I’m chasing them out of the ‘play park’, I want to make it clear that although my current local market outlook is underweight and, in being disciplined, it’s unlikely that I would resort to merely buying last year’s winners, there are still shares available that offer good value for money in this blown-up market of ours.

Here are three examples:

1. Coronation Fund Managers
Established in 1993, Coronation is an active asset management company.

As at the end of September 2015, it had R610bn in assets under management.

The company’s debt-to-equity ratio (how much debt versus equity has been used to finance assets) currently stands at 33%, which falls below a low ratio of 50% (the lower this ratio, the less debt used).

Coronation currently trades at a historic P/E of 12.4 times and a dividend yield of 8%.

*finweek is a publication of Media24, a subsidiary of Naspers.

Schalk Louw is a portfolio manager at PSG Wealth.

This is an excerpt from an article that originally appeared in the 3 December 2015 edition of finweek. Buy and download the magazine here.

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