Having just returned from a holiday in Europe I am reminded of the concept of price vs. value. South African travellers need to brace themselves in respect of both price and value, but particularly value.
Our weak rand means that everything from a cup of coffee to a T-shirt is expensive; this is fine assuming that you have budgeted adequately. Travel is, after-all, an enriching experience, which is worth every cent. It is the concept of value that is the hardest to digest. I use the word digest for a reason, because the concept of value is no more evident than when eating out. A basic meal, which may include a jug of house wine, will set you back around forty to fifty euros for the night, which at current exchange rates is R 600 to R 750. It is not the price that leaves you with indigestion, but rather the comparison of what you could have enjoyed at home for the same value.
As human beings we are very good at spotting value, everybody loves a sale and most are happy to eat out on Monday nights for a special, however when it comes to investing we continually get it wrong. Our instinctive valuation skills seemingly fail us, acting in reverse, as fear and greed lead us to buy expensive assets on-top of the market and sell cheap assets at the bottom of the market for a loss.
Value investing is about determining the underlying intrinsic value of a business, which may vary materially from the current trading price depending on market sentiment. A good example would be the value of platinum shares. The intrinsic value of the mine would be determined by the amount of platinum reserves in the ground and reasonable assumptions around normalised earnings, whereas current market prices trade well below the intrinsic value of these businesses based on the recent strike action.
Unfortunately the average investor very seldom has the ability to overcome their instinctive behaviour to exploit mispricing opportunities. This is why I firmly believe in the value-add from active management and ongoing advice. Find yourself a good independent advisor and have them assist you in allocating your life savings to a combination of good value managers.
Mcomm, CFP®, HdipTax
T. 021-851 3746