Common investment myths debunked by Linda Eedes

When it comes to investing, a number of myths continue to endure that have the potential to negatively affect the decisions of ordinary South Africans.

Myth 1: Positive economic growth equals positive investment returns

Often, investors link positive economic growth to positive investment returns, which is not always the case. Investors should be wary of basing investment decisions too heavily on the plethora of economic data they are exposed to on a daily basis, such as GDP growth rates, inflation data, manufacturing and production numbers, various confidence indexes and rating agency and economist outlooks.

A recent study, which analyses 83 countries over a period of the 30 years, confirms that areas of highest growth do not necessarily generate the best investment returns. Rather, the report reveals that the best investment returns were generated from the countries that experienced lowest economic growth.

It is therefore not really about what happens in markets, it is about what happens relative to expectations. Stocks are often priced cheaply in regions where low economic growth is expected, and these low prices however often lead to good investment outcomes.

Investors also tend to think that poor economic returns lead to poor investments, which is certainly not the case. An example of this is RE:CM’s investment in Carrefour, the second largest retailer in the world after WalMart. We started investing in the company during 2012, at the heart of the Macro-economic recession in Europe. Carrefour is a high quality business and when we invested, it was trading at less than its property book alone. Since the initial investment in early 2012, the share price has increased by 35% in US Dollar terms.

Myth 2: Uncertainty should be avoided at all costs

Investors also often tend to avoid areas of near term uncertainty at all costs, which is not always best when making long-term investment decisions. A good example of this is Greece. A year ago, Greece faced a lot of uncertainty and everyone was unsure as to what would happen in the region. This led to investors shying away from the region as they were concerned about the impact of this uncertainty on short-term prices.

Because of the uncertainty and negativity surrounding Greece, RE:CM were able to invest in high quality businesses trading at exceptionally undervalued levels to invest in. RE:CM purchased high quality businesses such as Coca Cola Hellenic and Hellenic Exchanges at exceptionally low prices around the start of 2012. Both have performed exceptionally well and produced returns in excess of 40% in US dollars since then.

This confirms that sometimes, uncertainty brings about an opportunity to invest in high quality businesses at substantially reduced prices where the proverbial baby has been chucked out with the bath water.

Myth 3: A good company is always a good investment
A common myth amongst investors is that a good company is always a good investment. There is a mindset amongst most investors that if they purchase a good, solid company’s shares, it will without a doubt be a good investment over time. This is however not always the case.
A key example of this is the performance of the Microsoft share price. Microsoft has always been a good, high quality business. During the lead up to the technology boom, Microsoft was very popular with investors given the soaring share price.

However, when the tech bubble burst, the share however fell 63% from its peak. This is not because it was a bad company – in fact it was still delivering good fundamental results. But, at the top of the market, its popularity translated into impossibly high expectations and a price to earnings ratio that peaked at 84 times. Despite being a good company, it was a poor investment at that point simply because the price was too high.

Today, Microsoft is trading at a normalised price to earnings ratio of around 10, which is below the world average. Microsoft remains a good company but is now also a good investment at these levels.

It is therefore very important to place significance on the price relative to the value of the investment. By carefully selecting stocks of high quality at reduced prices, we believe that positive investment returns can be generated over time. Unfortunately, high quality businesses don’t become cheap when everything is going well.