Investing in ugly ducklings…not just for Christmas!

As professional investors, it’s our job to avoid investing in turkeys – stocks that look promising but turn out to be duds. One of the ways we do that is by ignoring the gloss and sparkle of popular stocks, instead seeking investments that look unfavourable on the outside. These are the unfashionable, the unloved – the ugly ducklings of the investment world.

There’s a time and a place for exuberance – Christmas being a great example. But often, exuberance crosses the line into irrationality. Investors can become swept up in the hype surrounding a particular sector, creating the conditions for an asset bubble. When everyone realises how great a company is, the best time to invest may well have passed. It becomes difficult to see the storm on the horizon when everyone is toasting past success.

Similarly, when a company has hit rock bottom, it can be hard to see that there will ever be good times again. Because investment markets are driven by cycles of emotion, rather than dispassionate calculation, stocks tend to be priced too highly in the good times and undervalued when times are bad.

This inefficiency is driven by human nature – people feel comfortable sticking with the crowd. But the herding instinct that ensured human survival in the past may not serve our best interests in financial markets. That’s why we seek to ignore these instincts when it comes to making investment decisions. Instead, we look for positive signs of change in the out-of-favour areas of the market. It’s there that we see a better balance of risk and reward.

We’ve written before about the perils of short-termism. We approach investing with patience and a willingness to stand apart from the crowd, while not being swayed by emotional considerations. And because we’re high-conviction investors, our best ideas can really count when the market turns. That’s when our ugly ducklings come into their own – and transform into swans.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this blog should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.