How to find investment bargains
How to find investment bargains
All shoppers love a bargain, but did you know the concept of “buy low, sell high” is also applicable when investing?
As a contrarian investment manager, Orbis Investments (Orbis) purposely seeks out stocks which are currently unloved, and therefore undervalued by the market, so can be bought at discount prices.
Sounds easy right? Wrong.
In order for this strategy to be applied successfully, the investment team has to be at ease with going against the crowd, which can feel extremely uncomfortable. More often than not, the team also has to be invested for the long haul, as it can take years for this type of strategy to pay off. This requires a lot of patience and confidence in the selected stocks, as businesses can continue to trend downwards and lose money before bouncing back up.
How much is a stock worth?
At any point in time, a company (based on the value of a single stock) will have an underlying intrinsic value – whether this is recognised by the market or not! This is determined through in-depth research and analysis of all the factors that make a business tick. However, no matter how much research Orbis analysts put in, some uncertainties will always remain. The way the group deals with this is to provide an assessment range of the value of a company, as opposed to a single figure. This provides more leeway should valuations move over time.
Finding the sweet spot
Orbis will only invest when the price of a business fits within a ‘margin of safety’. This is when the price of a share is cheaper than Orbis’ best estimate of its intrinsic value. This ensures that:
- If Orbis is right about the underlying value of a business, the rest of the market will eventually realise this and share prices of the purchased business will rise when the business climbs back to its true value
- Or, if it is wrong, Orbis can still achieve a reasonable rate of return and minimal capital loss on the stock
So what’s the catch?
Surely there must be something wrong with a company for its shares to be sold so cheaply? Although this is often the perception of the market, the thorough research of the Orbis analysts can determine whether this is true or not, or the extent that to which the market has over-reacted. Based on this research, a decision can then be made whether to invest or not.
Investing in unpopular shares does not come without its own challenges though, which many professional investment analysts can find difficult to overcome themselves. This isn’t helped by the fact that the value of these shares often drops further before it begins to rise again. However, in many cases these share prices do indeed climb back up, so although the waiting game is tough, the payoffs can be grand further down the track.
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