Locally there are a lot of positives for investors in real assets, i.e. businesses, despite the fact that prices are no longer at bargain basement levels. At the same time risks are increasing in line with price appreciation. The paradox is that a combination of fully valued shares, together with low interest rates and an upbeat outlook, is not always favourable for investors.

Why is this? Investors are paying substantially full prices for shares with the view that strong forecast earnings growth will continue to support prices. Over the last 2 years earnings have generally surprised on the upside, with growth rates largely underestimated. Now we may be heading to the point where strong earnings growth is extrapolated too far, helping support prices, but setting investors up for negative earnings surprises.

As an investor, it is important to realise the distinction between the underlying economy (and specifically the company itself) and prices of investments. Share prices start to turn up in bad times and turn down in good times.

Right now, share prices are generally trading slightly above fair value – not cheap, but not massively expensive. As more and more good news is absorbed and factored into prices, so there is the real possibility that share prices appreciate substantially higher and beyond intrinsic value. In euphoric times, a lot of money can be made, but there is no question that the risks increase as value reduces. Investors will need to remain especially vigilant in order to protect capital.


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If you are looking for a trusted investment advisor, please don’t hesitate to contact me for a confidential discussion. E-mail me your contact details to ian@exsequor.co.za and I will mail you a copy of my Value Proposition.

Sincerely

Ian de Lange CA (SA)
November 2005
021 700 4800

Posted: 2005/11/01 16:19 View Archive

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