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No matter what investment philosophy or style a private investor uses, the key to buying a share likely to make money (and protect downside risk) is the valuation.
Stock markets are not entirely efficient - if this were so, active asset managers wouldn’t have a job; furthermore, due to its large resources weighting, the JSE isn’t the most efficient market.
So how does an investor determine value and spot a share possibly undervalued by the market?
A good start: p:e
A previous report showed that while conventional rating tools such as p:e multiples can be useful, they may also be misleading. But, generally speaking, a clean p:e multiple and high dividend yield – respectively lower or higher than the market average or the ratings of peers in the same sector – are a good place to start.
But even when a share fits that bill, the investor must conduct some further research. Are ratings low due to genuine mispricing by the market, which does happen, or is there a more fundamental reason?
A dog's life
In other words, is the listed company in question a value play or a dog that deserves and will be stuck with the low rating?
“Value is predicated on buying good companies that can weather storms,” says Darron West of Foord Asset Management.
“Good companies” is the operative phrase: the rating of a good company will always come back once the market recognises the mispricing.
But that can take time. That’s why the performance of value investors often lags the market. However, when the value is recognised that’s when the investor starts to make money.
- Finweek
Stock markets are not entirely efficient - if this were so, active asset managers wouldn’t have a job; furthermore, due to its large resources weighting, the JSE isn’t the most efficient market.
So how does an investor determine value and spot a share possibly undervalued by the market?
A good start: p:e
A previous report showed that while conventional rating tools such as p:e multiples can be useful, they may also be misleading. But, generally speaking, a clean p:e multiple and high dividend yield – respectively lower or higher than the market average or the ratings of peers in the same sector – are a good place to start.
But even when a share fits that bill, the investor must conduct some further research. Are ratings low due to genuine mispricing by the market, which does happen, or is there a more fundamental reason?
A dog's life
In other words, is the listed company in question a value play or a dog that deserves and will be stuck with the low rating?
“Value is predicated on buying good companies that can weather storms,” says Darron West of Foord Asset Management.
“Good companies” is the operative phrase: the rating of a good company will always come back once the market recognises the mispricing.
But that can take time. That’s why the performance of value investors often lags the market. However, when the value is recognised that’s when the investor starts to make money.
- Finweek
