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(Runtime: 5:00. Read the audio transcript.)
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It can be tough explaining to clients why you’re ignoring a high-flying company in favour of one the market has soured on. But it’s behaviour a contrarian might easily grasp, says Chris Koltek, institutional client portfolio strategist with Portfolio Solutions Group.
He said the best way to explain value investing is by pointing out the limitations of herd mentality.
“The value investor is someone who has a contrarian view and can see the value in a company that the rest of the stock market hasn’t seen yet,” he said. “I think being contrarian is really the basis of value investing.”
Speaking on the Soundbites podcast this week, Koltek said value investors seek points of pessimism in the market, hoping for outsized financial reward. And when markets are turbulent, there is even greater potential for solid companies to be undervalued by skittish investors.
Truly understanding underlying value really pays off when an otherwise healthy company is undergoing short-term issues. That’s when the value investor strikes.
“The valuation of a company for value investors is typically where the heavy lifting comes in,” he said. “Having done their research and established an intrinsic value, the value investor has confidence in the long-term value of the company and the stock.”
Koltek said risk aversion in the current economic climate appears to be driving interest in value investing.
“Today’s higher-interest-rate environment really appears to be focusing investors more on earnings and free cash flows — the things value investors typically admire,” he said.
In addition to price appreciation, he said value stocks can provide an additional component of income return through steady dividends.
“This additional return provides a bit of a margin of safety and some risk mitigation for investors in uncertain times,” he said.
Koltek said value investing works well with other active management strategies, adding diversification and reducing short-term volatility.
“You can have a growth style leading in one market, at the same time as a value style is outperforming in another market,” he said. “So, there are times you want to own the shoe seller, and times you want to own the shoe repair shop.”
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.