Sometimes it is difficult to see the wood for the trees. Investment is no different. Periods come and go when a theme sweeps all before it and resistance is futile, yet it masks truisms that have tended to stand the test of time. Reversion to mean, effective diversification and value investing are such examples. Sir John Templeton was right to warn “The four most dangerous words in investing are: ‘This time it’s different’.” Believing that established investment principles and investor psychology have changed permanently can cost investors dear. The current focus on the large US technology stocks and growth generally is an example, yet an ill wind blows and value investing looks set to once again hold sway.
A changing world?
As oft suggested in these monthly columns, humility is an essential element of sound investment. Hubris can often lead to an investor’s downfall. Questioning one’s assumptions, being willing to accept and learn from errors and then move on, and a reverence for long-term cycles and principles are part and parcel of good portfolio management. No matter how good a company is, valuations still matter. Buying stocks when historically expensive downplays the fact that valuations when bought are a key determinant of future returns – particularly over the long term. For markets chime to the rhythm of long valuation cycles, over which ‘value’ has tended to prevail.