In times of uncertainty, like today, our head of markets proposes an alternative investment approach.
If an investor is specifically looking for reasons not to invest, he or she will always find them.
Indeed, for one reason or another, it has been said that "now is the most difficult time to invest", in perpetuity!
At present, such reasons are in ample supply – geopolitical concerns, populism, punchy valuations, a lack of inflation, a volatile oil price and so on.
Add to this a situation where Quantitative Easing has yet to be unwound fully in the world’s largest economies, and interest rates perhaps need to rise at a faster rate than they currently are on the path to normalisation.
And from a UK perspective specifically, there are of course the remaining questions over the EU exit, which has left UK shares under general pressure since the initial referendum result in June 2016.
A heady mixture.
And yet, there are equally opposing and positive factors – a generally recovering economic recovery, dividend yields which tend to outpace both government bonds and certainly cash, strong corporate earnings, companies (both quoted and unquoted) awash with capital for investment, and equities remaining the investment destination of choice.
The availability of excess capital could be deployed in any number of ways – increased dividends, share buybacks, acquisitions, investment in staff and/or technology – all of which would be more beneficial to the wider economy than remaining unused on the company balance sheet.
Indeed, many of the reasons not to enter the market have sidelined investors – both retail and professional – with the result that in the year to date, they would have missed a 6.8% return on the FTSE 100 index – and this return does not include dividends, which should add another 4.5% or so annually.
In such times of uncertainty, an alternative investment approach is not to start from the “top down” as described above in economic and global terms, but to take a "bottom up" approach.
This approach is almost defensive in that it seeks to identify individual companies by looking at, inter alia, a strong and stable cashflow, diversification in terms of both geography and business lines, and an enduring franchise with pricing power and growth potential.
These companies in turn will tend to exhibit higher dividend returns which can then benefit from the wonders of compound interest when reinvested.
Perhaps the world's most famous exponent of the bottom up approach is Warren Buffett, a man who has always looked for companies which are surrounded by an "economic moat", ensuring a consistently high return on capital. This may be because there are high barriers to entry for other competitors to start up in the sector, because the company has predictable earnings or keep a strong balance sheet without too much borrowing – or all of the above.
Having identified such a company – "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years" – he concludes that "Our favourite holding period is forever."
Some of this wisdom was gleaned from Buffett's own mentor, another famous investor Benjamin Graham, who was of the opinion that "In the short run, the market is a voting machine but in the long run it is a weighing machine."
As such, opportunities remain, even at the market's slightly higher levels of valuations.
This mentality fits in with rest of the investment jigsaw – a longer term horizon, psychological detachment, an ability to look through the "noise" and how picking individual stocks might compare with an individual's attitude to risk and capital and/or income requirements.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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