Why a share price slump does not always mean buy

-- | 09/01/2019

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Dan Kemp: There did not seem to be much Christmas spirit in capital markets in December, with most share prices falling between 3 and 8 per cent over the month. In these situations, investors naturally look for stories to explain the falls, while market commentators seek to make headlines by making bold predictions about the year ahead.

We don’t have a crystal ball at Morningstar Investment Management and are naturally suspicious about stories that neatly fit recent market movements, as both approaches tend to encourage the behavioural biases that can lead to poor decisions. Instead, we focus on identifying assets that appear to be priced differently to a reasonable expectation of their long-term returns. As we look at the world through this valuation-driven lens, a few things become clear.

The first is that a discount is not the same as a bargain. Savvy shoppers venturing into the January sales focus on purchases they need that are priced unusually cheaply. A discount on the previous price does not necessarily mean that something is cheap or desirable. Don’t be that shopper that spends too much on something you don’t need. To put this in an investment context, US shares are certainly cheaper than they were but do not appear to us to offer good value.

Second, the best bargains appear when something becomes unpopular and the seller simply wants to get rid of it to make way for the latest fashions. There appear to be few assets less popular than UK shares at the moment, and while they could not be described as a bargain, they are certainly more attractive than most other asset classes as investors focus on the down side of Brexit rather than the long-term opportunities afforded by the underlying fundamentals of the companies.

Finally, remember that discounts are never a one-time event. Capital markets don't have closing-down sales. As a long-term investor, you never have to pay more than an asset is worth as you will have an opportunity to buy it at a more attractive price. To do so requires the ability to think independently and be prepared to pick up bargains that others overlook.

This report appeared on www.morningstar.com.au 2019 Morningstar Australasia Pty Limited

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