Value Investing Now: Uncovering Opportunities in Volatile Markets
David Herro of Harris Associates on his approach to equity investing and the potential benefits of market turbulence
In terms of specific sectors, Herro believes there may be value opportunities in European financials and industrials. Protracted political turbulence surrounding Brexit, domestic unrest in France, budget controversy in Italy, and the end of the European Central Bank's stimulus program have generated pessimism – but Herro remains optimistic. "Yes, the big picture looks a little spooky," he admits, "and the macro stuff has provided a very high degree of ‘feel bad' factor." Nonetheless, Herro maintains that in many cases "companies can still make a profit and the earnings of many companies are doing just fine. Yes, negative macro news can weigh on share prices – but this is exactly what provides opportunity for the value investor."
Herro acknowledges that market turbulence can be hard to stomach for many investors. "It can be painful watching prices drop," he concedes, "as investors – we don't like pain." However, his overall outlook on volatility is enthusiastic – and counterintuitive. "As an investor, volatility is actually your friend. Investors shouldn't knee-jerk react to it. You have to be able to weather it." According to Herro, it's dislocations in price and long-term value created by down markets that investors can take advantage of. "If someone sells a stock – irrespective of what's happening with the fundamentals of that business – that's a chance to buy a potential stream of income at a much better price."
Herro's value-based approach is rooted in what he describes as "healthy cash flow streams." He suggests that investors try to resist reactivity and focus instead on the long term. "Value isn't just the price you pay, it's what you get for what you pay. You have to endure periods of short-term underperformance to try and achieve long-term outperformance." He believes that downbeat headlines and what he describes as "political blur" rarely result in long-term value destruction.
Herro is also circumspect about attempts to anticipate or capture price swings over the short term. "To me – that's not even investing. A bottom-up, long-term investor looks to exploit market imperfections to earn return for shareholders. Any time the market is overly emotional, we can position ourselves to make money."
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Stocks are volatile and can decline significantly in response to broad market and economic conditions. Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time.