Top Tips: How to achieve investment success in a stagnant market

Grant Meintjes, Head of Securities, PSG Wealth

In some countries, investors have been lucky enough to see stock markets recover fully since the 2008 financial crisis. Some even have the privilege of working with higher trading levels than before the crash. But in other countries, like South Africa for instance, markets have stagnated.

Despite the lack of momentum in returns on the local bourse, pockets of opportunity have presented themselves in certain sectors, offering investors some solid capital growth potential. Investors can capitalise on these opportunities by following just a few simple steps.

  1. Make educated guesses 

Despite volatility, the market continues to offer the opportunity to invest into companies that are trading at a discount to their peers or, alternatively, into sectors that are performing better than the rest of the market. Many investors elect to invest in companies, strategies and sectors based on recent performance. Such strategies could easily disappoint, as the company or sector could come to the end of its particular investment lifecycle, and investors could lose money. You need a robust investment strategy that can help you distinguish shares or sectors with potential to outperform, indicating which are still trading below their fair value.

  1. Do your homework 

The golden rule when it comes to investing is doing your homework before making a commitment. It is no different when it comes to focusing on a specific sector of the market. You need to spend the time and effort researching each share within the sector to pick the right one. When investors actively follow specific sectors instead of the market as a whole, they should try and pick value shares within each sector that will beat the return of the sector. Once you have found the share you want to invest in, your next port of call will be that share’s fundamentals: its price, and price to earnings ratio, dividend yield and its earnings per share.

  1. Beware of the perils in price 

Price is not always an accurate indication of a company’s intrinsic value – although it plays a key role in deciding when to buy or sell. Growing political instability in our market and the decisions of investors to move to safe-haven sectors such as the resources sector have, for example, caused the Anglo-American PLC share price to move from R63.00 on 4 January 2016 to R220.70 in December 2016. If you invested over this period, you could potentially have raked in a return of 250%. If you had bought the same share three years ago, it would have returned negative returns of around 30%. The aim should therefore be to buy quality shares at a discount to fair value.

  1. Maintain liquidity

Consider your liquidity constraints, as you could struggle to sell some shares or be forced to sell them below market value in times of extreme volatility. The guidance of an adviser could be invaluable in helping you unlock these market opportunities.

  1. Pick an approach and stick to it

Shares follow sentiment over the short-term and fundamentals over the long-term, so plan your investments with a margin of safety to ensure good growth potential. You should pay for what you know about the company and not for what you hope for.

Your investment goal should also differentiate between investing for capital growth over the long-term or investing in good value now.

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