What are your assets really worth?
On Brexit, what I learnt from a retired greyhound and valuing stocks
By Simon Angelo
As the year draws to a close, we're seeing some upswing in values after a heavy correction in the markets in October.
This brings me to an important question. With all the volatility of late, how do you know what your assets are really worth? How do you assess real value and future potential while putting aside short term market sentiment?
When we buy a stock, we're basically doing that because we think the current market price doesn't accurately reflect the company's real value or long term potential.
As value investors, one factor we look at is the book value of the company - ie. what are the assets on the balance sheet worth? Tangible assets like real estate often provide the most reliable support for that valuation.
Yet even real estate has fallen heavily this past year...
Sydney house prices are down 9.5%, and where I live here in Devonport, Auckland, median prices are down 16%. In fact property prices - both residential and commercial in Australasia and the UK look to have dipped more heavily than stocks. So what's happening and how do we navigate this when investing?
Some 10 years of low interest rates and cheap money have fueled asset price growth since the 2008 financial crisis, both across equities and property markets. Investors are now starting to question what many of these assets are really worth. That's led to jittery and more volatile markets, notwithstanding global uncertainties encompassing Europe, the US and China.
The markets are acting like an old drunk lawyer at a dinner party who knows he's had too many and is trying to be careful. I don't think he's going to crash, but he's starting to sober up. Rest assured though, he'll be back for more parties.
In the case of property, demand factors such as foreign buyers have been removed from the equation locally. Housing supply has grown while demand has steadied. Banks have tightened lending. Moreover, buyers have become much more wary. Declining housing markets weigh on investor confidence across the board.
When investing, it's important to consider the long term, real value of all these assets.
The long game and what I learnt from a retired greyhound
As a value investor you're usually chasing growth with income. You need to be sure that what you're investing in has real value and that value can grow while it is providing running yield (in the form of dividend income). This analysis gives you a sense of what the assets are really worth and could be worth.
A friend of mine in Jersey is involved with a charity called Rescue Dogs. She has a beautiful greyhound called Flint. He was rescued from a premature death after he refused to keep chasing the mechanical rabbit in greyhound races.
One day when visiting her house in the country, I asked Flint the greyhound why he no longer wanted to run. After all, he had been a great racer. He told me that he stopped running because he'd worked out the rabbit he'd been chasing all this time just wasn't real.
Too often in life we chase things that don't turn out to be real.
Investing is about measuring what is actually real and offers real prospects. You need to look at the real value of assets in terms of their book value and then how those assets are likely to be utilized in the market to generate income and growth. And you need to have a clear conviction on which direction the trend is going for that company in this market.
Right now, there's one major event impacting the value of our British stocks and the pound - Brexit.
Brexit has weighed on returns this month and pulled down the recovery otherwise seen in other global stocks. There had been a brief rebound with the talk of a deal. Now it appears Theresa May's proposed deal is not good enough for many MPs since expected freedoms have been watered down to get it through the EU. But will it get through the British Parliament on December 11?
Markets hate this sort of uncertainty and over the past week the FTSE and pound have been punished. Mark Carney, Governor of the Bank of England didn't help, coming out and saying that a no deal Brexit would be as bad as the 2008 financial crisis. I think he had similar sentiments during the actual brexit vote - which never came to pass after the leave decision.
Looking at the long game, we still see upside with Brexit since it has led to some very keenly priced British stocks. The assets are the same. The income is the same. But market sentiment has pulled down the price.
So where's the upside?
Ultimately Brexit should give the UK control over immigration and trade. It should be able to attract migrants, money and trade from and with much faster growing areas of the world than the EU. And that's worked well for other countries like Australia and New Zealand, although there have been growth pressures.
However, this is going to take a long time to play out and it's going to depend on some very skilled leadership. There remains the question as to whether May can get the right deal through the EU and her own Parliament.