Business

Savvy investors look for value deals

SSL in the Money

Ryan Strachan

Wednesday, July 25, 2012    

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IT would be remiss to start my most recent contribution to SSL's 'In the money' without expressing my gratitude to all who shared feedback to the 'Diversification: the key to weathering financial storms' article. The truth about diversification is that it has a part to play in the composition of every investors' portfolio. The extent, however, will be tailored according to the investor in question.

All that said, and operating along the same continuum, an extension of diversification would be to speak to what I believe are the traits of the savvy investor. Investing at its core speaks to placing funds (a 'principal') with the intention of seeing an appreciation in value over time. Inherent in this is an underlying mindset which today's column will attempt to address. From where I sit, individuals — current clients and prospective alike — oftentimes inquire of my views concerning the global economy and where they should place their funds.

This most recent wave of questions provided sufficient inspiration for this column — which admittedly, had many titles — as really, one should give a lot of thought to objectives and market conditions before investing. So, what characteristics do I believe the savvy investor should possess?

Firstly, said investor must appreciate and understand the purpose of diversification. The prior article spoke to this briefly, and a 800-word limit won't allow me to expound past saying that in a world where entire continents and currencies have begun to implode, it pays to spread one's interests/holdings amongst several asset classes. Blue chips around the world, and investments in Apple, British Petroleum, Nike, Lasco Manufacturing, and Coca-Cola offer diversity and should pay dividends; literally.

The second characteristic I hope the average investor seeking to become savvy would adopt is that of the opportunist. History is replete with accounts of individuals, institutions and pension funds who have purchased relatively undervalued assets (be it real estate, pieces of art, vintage motor vehicles) in down periods, when the average outlook was negative, and benefited from the shift in perception when those who sold low turned around and bought high. The stock market is no different, since rather than buying a physical asset, one would essentially be acquiring company stocks at a discounted price. This is known as "value investing" and investment scion Warren Buffett practices this style of investing. For value opportunities, one needs to look no further than the Jamaica Stock Exchange which has shed $52 billion of its value in 2012, according to varying reports. Have solid companies with established track records suddenly become 30 per cent less valuable? I think not.

Point two provides a segue into the belief that an investor shouldn't be skittish in times of instability and turbulence in the global capital markets. Stories from Jamaica in the 1970s — a bit before the time of this writer, admittedly — tell of a mass migration of persons to North America and the United Kingdom due to political instability. In their wake was desirable real estate in Cherry Gardens, and similar high-end neighbourhoods, at prices well below market value. This allowed for opportunistic investors to purchase multiple properties in these communities which remain in their possession to this day. Others have taken profit, but the premise is clear. In order to benefit from investing, one has to have a clear understanding of value and the balance between risk and reward. Boldness in times of financial uncertainty can be the difference between surviving and thriving as many who have been successful in the post-financial crisis era of 2008 onwards will attest. The opposite can leave one literally counting the cost. With that said, risk is oftentimes a function of perception, but that's another story for future correspondence.

In closing however, attention will be drawn to the relationship between risk and reward, which is critical for truly capitalising in the capital markets, pardon the pun. I am often asked in conversation to multiply persons' principal without placing it at risk. My response is often that I build portfolios and not castles in the sky; for the reality is that in the real world growth and risk go hand in hand. A seed planted has to die in order to grow and the only way to achieve true growth above the rate of inflation is to take on some measure of risk. This explains why personalities in the financial sector were so opposed to schemes of yesteryear which promised the opposite, and also why the equities market — with all its risk — has proven to be the medium of greatest investor portfolio appreciation over the long term. It is imperative that investors be bold in the face of current adversity, while taking into account related risks, to potentially benefit handsomely from future profits.

Ryan Strachan is the Manager of the Wealth Division at Stocks and Securities Limited and can be contacted via rstrachan@sslinvest.com.

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