We have discussed valuation and that time and time again it’s very evident that starting valuations are critical for longer run superior returns.

But Montier goes one further and notes that while it is a cliché that markets are driven by fear and greed, this is “disturbingly close to the truth”.

Investor sentiment swings like a pendulum, from irrational exuberance to the depths of despair.

This move in investor sentiment drives prices. This price action measured over a period of time – one month, 3 months, 12 months etc is what investors receive as an “investment return”.

Some studies have been performed to try and measure investor sentiment and then having measured it, to ascertain what groups of companies perform better than others when sentiment is high or low.

Baker and Wurgler looked at various factors to measure sentiment, including:

• Discount on closed end funds. When discounts widen, sentiment is low and vice versa.
• Turnover on the New York stock exchange
• The number of and average first day returns of IPO’s (initial listings)
• The equity share in new issues
• The dividend premium (relative price of dividend paying and non dividend paying shares)

In general they found that when sentiment was low, buying young, more volatile, unprofitable companies (i.e. Junk) generated the better returns.

When sentiment is high, it is better to buy more mature, low volatility, profitable firms (i.e. quality).

This investment methodology is in itself is contrarian -

GMO’s and James Montier’s view is that at present, high quality stocks appear to be one of the few fat pitches available. I.e. with sentiment having now improved and markets closer to fair value, they say that “quality stocks continue to register as distinctly cheap on our metrics.”

Some interesting points. If you would like to discuss how this may pertain to your investment portfolio, or if you are looking for an investment manager to advise on and manage your discretionary and retirement funds, contact Vincent on telephone number below or Vincent@seedinvestments.co.za

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966