Page 23 - DIY Investor Magazine | Issue 40

The swings in sentiment that create short-term market inefficiencies should, ultimately, be replaced by a more appropriate assessment of intrinsic value as the market becomes an effective weighing machine over time. Indeed, swings in sentiment work in both directions, under-valuing businesses when they are out of favour, and over-valuing them when they are popular.
“The stock market tends to overvalue companies when they are doing well because their shares become very popular. There are all sorts of behavioural reasons why this is the case – the fear of missing out, the comfort of the crowd, or recency bias where investors anchor to recent information rather than a broader long-term context. We see these behavioural biases time and time again in markets, and it’s why we occasionally see asset price bubbles forming.”
“When there’s an issue affecting sentiment, it can provide a great opportunity to buy good companies cheaply. If investors are nervous about a business, industry, or even the economy more broadly, it will tend to mean lower share prices. As long as we can become confident the issues that are affecting sentiment are temporary rather than permanent, this can represent a really attractive entry point”
Simon Gergel, Portfoilo Manager THINKING DIFFERENTLY
Value investors, by their very nature, have to be prepared to think differently to the consensus. This requires discipline and the ability to detach oneself from the emotions that can accompany investment decisions.
This isn’t as easy as it sounds, and it can be a lonely pursuit, as Simon explains:
“I have to be prepared to be different and be prepared to stick with it. Buying shares when they are depressed or going down – and selling shares when they’re on the up – means generally heading in the opposite direction to the majority, so I have to be absolutely convinced that it’s the right thing to do.
‘A LOT OF WORK GOES INTO EVERY INVESTMENT DECISION, TO BUILD CONVICTION IN AN INVESTMENT CASE THAT CHALLENGES THE CONSENSUS’
This means a lot of work goes into every investment decision, to build conviction in an investment case that challenges the consensus.”
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April 2024
DIY Investor Magazine ·
BUILDING CONVICTION
UK house builders are an example of where the team has been thinking differently recently. Share prices were generally weak for much of 2023, as the stock market worried about the impact of a potential recession and higher interest rates on the UK housing market.
Whilst this is understandable, value investors like Simon
are prepared to take a longer-term view of the industry. In doing so, Simon has seen some very attractive fundamental characteristics in select companies.
‘THE UK HOUSING MARKET LOOKS WELL UNDERPINNED AND SOME HOUSE BUILDERS ALSO POSSESS VERY ATTRACTIVE FINANCIAL CHARACTERISTICS’
SIDE NOTES – RECEDING CHALLENGES
In the wake of a number of challenges to the UK stock market in recent years, Merchants’ Portfolio Manager Simon Gergel looks at how those challenges and headwinds look to be falling away and what that may mean for markets, particularly if one of the more recent headwinds, higher interest rates, do indeed start to fall.