Sometimes it’s worth going back to basics. The terms value and growth are being bandied around a lot at the moment, and I think the investment industry sometimes forgets that to many people these words are just more jargon that is completely offputting for outsiders. Talking about value investing without explaining it is just another way to make people think investing isn’t for them.
Hopefully our explainer this week helps a little, but if you’ve not read it yet I can boil down value investing into two words for you: buy low.
Value investing is about not buying the popular stocks that are starting to seem a bit overpriced, but looking at the sale rail in the investment shop to see what has been overlooked by the rest of the market.
It sounds simple and it sounds sensible, but it’s harder than it looks. Because, let’s be honest, often the reason things are on sale is that they’re not very good – there’s a hole in the sleeve, the fabric is poor quality, or the technology is completely out of date. But there’s usually a bargain to be had for those willing to do the work.
Growth investing on the other hand is the equivalent of buying something in a store because you’re confident you can sell it on to someone else for a better price. It’s like those people who snap up 10 of the latest games console or tablet on the day they’re released. Sure they’re expensive but they’re popular and they’re in demand, and that means people will pay over-the-odds. Growth investing is buying shares not necessarily because you think the price is right, but because you believe it will keep rising regardless.
Neither investment strategy is right or wrong (well, arguably, buying 10 games consoles so you can profit from other people is not quite right) or best or worst. In fact, a healthy portfolio will likely contain a mixture of each type of investment.
Maybe you have a favourite style, maybe your portfolio errs towards one or the other – it doesn’t matter to me. But it does matter to me that you understand the jargon so you can make your own informed decisions. And remember, while one style may win out over the other in the short-term, things have a tendency of coming full circle in the end. Apparently even peach bathroom suites are coming back in fashion – now that’s a real contrarian bet.
Don't Spend, Spend, Spend
What would you do if you won the lottery? It’s always a fun game to play. I like to think of the holidays I would take (in normal times), the big ol’ house I would buy (and for some reason the ride-on lawnmower I would drive around the grounds), and the generous gifts I would make to friends and family.
But I also wonder how much of it I would actually do if I did happen to win. Having a sudden windfall of cash is a dream for many people, but it also opens up a world of financial planning problems. Because really, if you suddenly come into a pile of cash, one of your main goals is likely to be making it last for your lifetime. (After all, there’s no point blowing the lot on the first day and being back at square one). And in a world of ultra-low interest rates, where people are living longer than ever before, that’s not an easy task.
The proper answer, then, to the question “what would you do if you won the lottery?” is probably: hire a very good financial adviser. And while that’s not nearly as fun as buying a boat and going on a round-the-world cruise, it’s probably going to be the most rewarding over the long-term. And you can always buy a boat after you enlist the services of the IFA ...
Listening to the Oracle
There’s aren’t many AGMs that we get super excited about at Morningstar, but the annual Berkshire Hathaway shareholder meeting is one that our analysts watch eagle-eyed.
A year ago Warren Buffett and Charlie Munger hosted the AGM in the eye of the Covid-19 storm so it will be interesting how these legendary investors are feeling a year on. You can watch this video with our analyst Gregg Warren to find out what he’d like to hear from the investment duo. How have they been putting all that cash to work that they were hoarding on the balance sheet, and what’s the latest on succession planning, are two topics I’m particularly keen to hear about. These are unpredictable times and while I'm not personally planning any immediate changes to my portfolio, it never hurts to find out what the experts are thinking.
