Embrace the Power of Value Investing

Good Morning Ladies and Gentlemen

”The key to successful investing is having everyone agree with you — LATER.”

Jim Grant

I would like to share one final thought regarding the numerous messages I have received in response to the “Political Views and Seductive Misconceptions” in last week’s “Stefan’s Weekly.” I firmly believe that in a democracy, free dialogue should not devolve into anarchy. Public discourse must adhere to recognised principles when addressing urgent and significant issues. There should be a legitimate mechanism, such as elections or voting, which embodies majority decisions, to arrive at a conclusion, even if it may not satisfy everyone. This requires respect for the thoughts of others and should not be a reason for rancour or hatred, and we must remain cautious about censoring human perspectives.

What is Value Investing?

Summarised in just a few words, value investing is not just a strategy but a profound philosophy seeking to uncover hidden market gems. Investors can seize opportunities that others overlook by focusing on a company’s intrinsic value rather than its current market price. This approach requires patience, discipline, and a deep understanding of financial fundamentals.

Unlocking the Secret: How Can You Identify a True Value Stock?

The essence of the matter is that valuation ratios differ significantly by sector. For instance, a P/E ratio ranging from 8 to 15 in the insurance sector may indicate an undervaluation, whereas in the technology sector, shares with a P/E ratio between 20 and 30 are often considered favourable. Successful value investors, therefore, employ a multifaceted approach: they compare key metrics like P/E (price/earnings) ratios, P/B (price/book) ratios, and dividend yields against industry averages, assess the company’s performance over recent years, and evaluate its future prospects.

Investing in Value Stocks: What’s Next?

According to the value investment principles, the fundamental objective of every value investor is to identify opportunities for entry at levels of undervaluation and to execute an exit strategy during periods of maximal overvaluation. Nonetheless, it is imperative to divest as soon as an equity ceases to be classified as a value stock.

What are the Risks?

A significant challenge associated with value stocks is the risk of encountering a value trap, where a seemingly cheap company is not genuinely undervalued. A company may exhibit an attractive valuation for valid reasons, such as structural issues within the sector, outdated business models, or ineffective management. Classic examples include newspaper publishers and retailers that have struggled due to digitalisation; their low valuations often reflect justified concerns about their future rather than true undervalued opportunities. Furthermore, many investors were misled for an extended period by Credit Suisse’s low price-to-book ratio, which plummeted to 0.06 prior to the bank’s downfall, appearing to indicate undervaluation.
Another complicating factor is timing. Even when fundamental analysis suggests a stock is undervalued, it can often take years for the market to acknowledge this discrepancy. This gap between recognition and realisation demands considerable patience from investors and can lead to increased opportunity costs. Consequently, many successful value investors combine quantitative metrics with qualitative assessments, such as evaluating management quality, competitive positioning, and industry trends. They also seek out catalysts that could prompt revaluation, including spin-offs, share buybacks, or strategic shifts.

Are Value Stocks Currently Attractive?

Value stocks have underperformed compared to growth stocks since 2007. However, after a brief resurgence in 2022 and 2023 during which value stocks outperformed, growth stocks have once again taken the lead. According to the US financial information service provider Morningstar, „value does not run the stock market,“ yet they regard value stocks as a promising strategy in capital markets. Currently, the opportunities to identify undervalued stocks are substantial. As reported by „cash.ch“, Swiss companies such as telecommunications provider Sunrise, food conglomerate Nestlé, and speciality chemicals firm Clariant have been highlighted as appealing options for value investors in recent months. However, it is advised that patience may be necessary.

Conclusion

If you are considering investing in value stocks, embrace the challenge of value investing to unlock the potential for exceptional returns while cultivating a deeper connection to the companies and assets you choose to invest in. Your journey to financial success starts with recognising the immense power contained within sound investment strategies. In the forthcoming edition of „Stefan’s Weekly,“ I will present a curated selection of crucial financial metrics aimed at identifying undervalued stocks.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li