21
Sep
2020

By George Hadjia

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Why value investing makes sense

While there are a number of strategies to make money in the stock market, the Montaka funds subscribe to a value investing philosophy. But why does this make sense, and why is it likely to lead to favourable investment returns over time?

Picture this scenario: you are walking through the supermarket doing the standard weekly grocery shop. You come across a 2-litre bottle of your favourite brand of soft drink for 70 per cent off, or just $1. You check the use by date; there’s ample time before the product expires. “Bargain!” you exclaim, before stuffing a few of these 2 litre bottles into your shopping trolley. What just happened was you recognised that something was selling for far below its actual worth. Much like how value investing works in the stock market, you bought something for less than it’s worth and can either consume the drink (i.e., consuming $3 worth of value), or attempt to sell the bottle for closer to its retail price and reap a profit. Either way, there is a net gain that you benefit from.

But what if you were traversing the same supermarket aisles and came across the same 2 litre bottle of soft drink selling for $10? “Daylight robbery! It’s criminal that they think they can sell it for that price!” might be one not unreasonable reaction. See, we are instinctively wired to be able to make snap judgments about value if it is extreme enough in either direction (i.e., the item is sufficiently undervalued or overvalued). It is for this reason that a value investing philosophy – buying the proverbial dollar for 50 cents – resonates with a lot of individuals. So if it’s this simple why isn’t investing in the stock market easy?

Much like how the intrinsic worth of the bottle of soft drink is different to different people, the intrinsic value of a business is unobservable and is unlikely to be distilled into a single number. In addition, companies are more complex and dynamic than a bottle of soft drink, adding to the difficulty in estimating the worth of a company. In this sense it is more challenging to estimate the likely value of a business and whether it is under-or over-valued. However, a value investing approach forces us to have a view on the value of a business which can be of value when markets become volatile.

Having conviction of the value of something you’re purchasing, based on solid analysis to determine what you think a stock is worth, can allow you to hold on when the market sells off. Without a yardstick to gauge whether something is cheap or expensive, it is easy to lose your nerve and succumb to the temptation of following the crowd. It is important for every stock you own to be able to give a range of what you think that business is worth, and why. If you fail to do this, it’s likely that you’re speculating rather than investing, and while you might profit in the good times, it might become difficult to stay on course when the tide eventually turns in the market.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
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Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
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Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
UNLISTED FROM $25,000

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

New Fund

Montaka Global Extension Fund (ASX: MKAX)

GLOBAL
An ASX-quoted managed fund, typically, the Fund seeks to hold 15 to 30 long positions and partially offsets these with 10 to 40 short positions, operating with 130% exposure to its long portfolio and 30% exposure to its short portfolio, resulting in a net market exposure of around 100%. Features a target distribution yield of 5% per annum.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted from $1million

Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.