• 토요일, 10월 24일
토요일, 10월 24일

Value investors should hold true to their values

Value investors should hold true to their values

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[Newsphopick=Kingsley Lim} All recessions are different but sort of the same. If the prior statement is confusing, that is understandable. Are we even in a recession now? Yes, while all signs point to lower economic activity and gross domestic product in the second quarter of 2020, stock markets in the US have remained especially high, thanks to the Federal Reserve.

Nearly every metric that one looks at – it is likely to be significantly worse than the results in the previous years. An example of that is unemployment rate. In the US alone, the number of persons that were unemployed in July was 16.3 million. I believe that those numbers are very conservative and it is quite likely that those numbers are higher. 

But that is not the end of it though. Many businesses have had to shut down as the coronavirus continues to ravage the global economy. There seems to be no end in sight. Some companies were fortunate to be able to receive financial aid. An example of that is Cathay Pacific. The Hong Kong carrier quickly cobbled together a rescue package worth HK$39 billion – of which, the Hong Kong government, through Aviation 2020, will inject HK$19.5 billion in preferred equity into the company. This rescue package will likely help the company to survive in the next two years. 

Others have not been so lucky. Famed billionaire Richard Branson’s Virgin Australia had to file for bankruptcy as lawmakers within the country refused financial aid for foreign carriers. As such, the company has had to endure the pain of a restructuring via bankruptcy proceedings. 

There is much more but I think that readers get the picture. It is bad. And no one knows when things will recover. According to market experts, there is a growing consensus that air travel and tourism will only recover to pre-coronavirus levels in 2024. While predictions are often wrong, if this proves to be right, then there is more pain to come in the next two years. 

It isn’t just air travel that has been affected. Retail, real estate and other businesses will likely be scarred for a long time. In the meantime, what has happened to the S&P 500, the NASDAQ and Dow Jones? Well, they have all risen in tandem, oblivious to the road ahead. Of course, all these have been driven by speculators who have borrowed heavily to buy into the markets. These speculators move as herds to drive market prices up. The irony of it is that revenues for airlines, automotive companies and retail companies have fallen by between 30 to 90%. Growth has beaten value over the last decade 

For the last decade, growth stocks have been sweet for many investors. They claim that they are “investing in innovation”. Very often, my response to that is “at what cost?” The idea of paying a hundred times for earnings is probably the single most foolish way to invest in the stock market and it does not make sense. 

Paying a hundred times earnings for a growth stock means that there must be some tremendous growth prospects. But how likely is that? Ford Motors in 1999 rose to its higher value. Then, it was the growth stock of the era. Every era has their own version of growth stocks and this era’s happen to be the usual names if Tesla, Facebook, Zoom and more. But these things are not permanent. Things change and growth does not occur perpetually. 

While growth stocks have seen the light of day, value stocks have receded in importance as market observers say that value is dead. But recently, there have been signs of life in value stocks. According to Diane Jaffe, a portfolio manager at TCW Group, she said that “valuations for value stocks, as represented by the Russell 1000 Value Index, are the most attractive they have been, relative to the Russell 1,000 Growth Index, since 2001.” 

Could this be the beginning of a good performance in value stocks? No one knows for sure. I recently spoke to a friend. And we came to a consensus that value investing is game of psychology. When the markets were screaming ‘sell’, he forced himself to buy at those low prices. In a sense, he went against the herd and even himself. A part of him did not want to buy. “It was hard,” he said, suggesting that he used every ounce of will within him to do it. 

And that is one of the reasons why value investing is so hard. When stocks go up, it is easy to make the call to buy. But when it goes down, it is hard to make the decision to buy. To all value investors out there, double down on your convictions for one day, you will see the light.

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