Those top tips for value investors to withstand market volatility are especially important now because many of them have never endured such an uncertain and perilous time in their lives. The COVID-19 pandemic caused the market to crash in March before investors regained enough confidence in the second quarter to produce an almost unprecedented bounce back.
Himayani Puri, a senior managing director and director of research at First Manhattan Company, gave her view as the manager of large investment portfolios and offered her top tips for value investors who may have much more humble holdings. Puri spoke about the way her firm approaches its investments during the current financial crisis at an event held by the CFA Society of New York as part of the Ben Graham VII Annual Conference on June 17 and June 18, 2020. The virtual conference, presented in partnership with Fordham University’s Gabelli Center for Global Security Analysis, focused on value investing.
Credit for the photograph belongs to Paul Dykewicz.
The global COVID-19 pandemic has proven to be multifaceted in its destruction and caused social, economic and political disruptions. Puri’s top tips for value investors are:
Phase 1: Triage — Top Tips for Value Investors
Puri referred to the first step towards smart investing during the pandemic as ‘triage.” In this stage, investors must evaluate assets that they currently own, and discern the best course of action to take with each stock. As the facts on the ground evolve along with the pandemic’s impact, it is crucial for investors to be constantly re-evaluating their stocks and to stay up to date with the performance of their investments.
During the triage phase, investors should examine the company’s earnings trajectory and other valuation metrics. It is important for investors to understand the impact that the pandemic is having on the stocks that they hold. However, Puri emphasized the importance of taking a long-term approach when evaluating current holdings. She encouraged investors to look at their current holdings with a three-year outlook, and not to make any rash decisions. Patience could prove fruitful, as suffering stocks may rebound well once the pandemic’s impact subsides.
Puri also explained the importance of remaining focused on structural winners and losers in the stock market. Well-established companies that operate in markets which are not largely impacted by the pandemic should give investors no need to panic. It is more necessary to assess holdings of companies that operate within heavily impacted sectors, such as an airline company.
Top Tips for Value Investors to Consider During the Triage Phase
- Differentiate between short and long-term impacts
The pandemic has created a myriad of consequences, and it is important to discern between short-term impacts that have come about only as a result of the pandemic versus long-term implications that were already in motion but were accelerated by the pandemic. For example, working from home and pantry stocking are two short-term impacts of the pandemic. On the other hand, the increase in the use of television and movie streaming services is an impact that was already in motion, but the pandemic certainly led to an escalation in the use of streaming services.
2. The Characteristics of Each Company
Puri also explained the importance of remaining focused on structural winners and losers in the stock market. Structurally advantaged companies, and companies with resilient business models should give investors no need to panic. Rather, it is more necessary to assess holdings of companies that have had their vulnerabilities exposed by the financial crisis.
Phase 2: Look at Potential New Investments — Top Tips for Value Investors
While the pandemic has largely been a negative event for the stock market, it also creates smart new investment opportunities for investors who can spot them. The collective drop in stock prices created opportune entry points. The financial crisis offered an opportunity for investors to upgrade their portfolio and receive relatively large returns, since the stocks are purchased at a lower-than-normal price.
Puri urged investors to search for companies that are well positioned for growth and consider whether right now may be a smart time to buy. While most people have been scared away from the stock market recently, investors who do their research and recognize the opportunity in front of them may receive large returns.
Phase 3: Update Your Portfolio Accordingly — Top Tips for Value Investors
Once investors have evaluated their current holdings, and considered potentially smart places to make new investments, all that is left to do is carry out the decisions.
The Bottom Line
Applying the strategies outlined above will not guarantee flawless value investing in the unprecedented landscape that exists in today’s stock market. However, these top tips for value investors can provide some guidance about how to proceed during these unpredictable times.