Introduction
This article is written in Autumn 2020 when the UK stock market is very much out of fashion with international investors. So in relative terms it is cheap. Because at this time a critical final phase of the Brexit process is in progress (or not, according to which reports you read!) and the UK has struggled to contain the Covid-19 pandemic, there are all sorts of unusual influences in play in the decision making processes of global investors when they look at UK shares.
This will perhaps lead to the mis-pricing of plenty of companies shares and that offers a chance for ‘value’ investors to buy up shares at bargain basement prices. This is the simple application of that saying attributed to the legendary Warren Buffet suggesting that buying cheap and selling dear is the basic rule for all investors.
However, there are problems with this proposition when it comes to selecting funds because the factors that are suppressing share prices may be many and varied and some may be unlikely to reverse in the near term.
Factors that I think are usually fundamental include these:
- Buying an investment that comes up in performance tables as being in the bottom quartile of its peer group requires a certain self discipline because human nature is to back successes not apparent failures. This is why we refer to investors who like to look beyond past performance to bet on the potential future results as contrarians.
- It is also true that many companies may have low share prices for justifiable reasons to do with their business model that have been established by multiple professional analysts and there may be very little chance that such companies will magically turn around. This is the idea that the market knows best, so ignore its pricing mechanism at your peril! A phrase used to describe companies that seem to be paying high dividends relative to a low share price is (potential) ‘value traps’.
- Some perfectly solid established businesses may be in the doldrums in terms of share price because of ‘macro’ reasons, meaning overarching economic, financial, political or economic factors that may vary, but who knows when? For example at the time of writing, the inability of companies to pay normal dividends while their activities are constrained by epidemic lockdowns and government wage subsidy schemes, or recently the setting of a low oil price to meet the needs of just a few oil-producing states, or the decline of a currency because a certain major state wants to boost its exports (an age-old technique!).
These are examples to alert you to the fact that buying cheap in the stock markets is not a simple task.
The ‘get what you pay for’ mantra may well be applicable when it comes to buying shares in the market. However, I believe that at certain times in a cycle there will be genuine bargains to be found! If any human quality is desirable when it comes to finding such bargains and profiting from them, it is patience. It is also useful to be comfortable being someone who does not follow the crowd.