Spot the ‘differents’

16th August 2011 by The Value Perspective

By Nick Kirrage.

‘This time it’s different’ is often put forward in an effort to dismiss the relevance of value investing today. Critics argue that value investing is no longer applicable in a world of high-frequency trades and macro-obsessed markets. Yet the thinking behind ‘this time it’s different’ has one of the worst track records of any investment philosophy.

At the turn of the millennium, some investors took the view that, this time, the internet made things different. Value investors may have more than a century of data on their side, they reasoned, but the internet did not sit within that history. And that was absolutely true, the internet did not – but railroads did and radio and television did too. Each was the internet of its time.

Today the ‘differents’ have two arguments. First, the industrialisation of China and India is bringing two billion people into the global market and that makes it different. Second, Western consumers have too much bank debt, no real wage growth and houses that are dropping  in value so, even if consumer stocks look cheap, this time it’s different as well.

Maybe both of those arguments will turn out to be true but there is a considerable weight of history that would suggest otherwise and, anyway, buying low and selling high has a lot in its favour both intuitively and academically – that is, as long as you buy on a low valuation and sell on a high valuation.

The data that underlines our thinking about the importance of valuation comes from the US market and now runs from 1880 all the way up to this year. Obviously that is an extremely long data set that takes in a huge variety of  macroeconomic environments – world wars, industrialisation, the Great Depression, economic booms, inflation, deflation, unemployment, full employment, high and low interest rates and so forth – and the picture is fairly constant. If you buy on low valuations, putting the economic crystal ball to one side, that is the starting point to making money.

At present, volatility is high and fear is rife. The economic outlook is cloudy at best – and poor at worst. Yet valuations in many parts of the market now discount much of the bad news and stand at extremely attractive levels. For investors who are able to ride out short-term volatility, we believe that the long-term opportunity in many consumer-related stocks, pharmaceutical companies and telecoms is, today, significant.

by Kevin Murphy
Schroder Specialist Value UK Equity team and co-manager of the Schroder Recovery Fund since 2006.

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