From the point of view of a value investor, the true risk in an investment is the risk of a (permanent) loss of capital. Price fluctuation does not mean capital loss, but only that the price of the investment has changed. As long as the actual intrinsic value of the investment does not deteriorate, this is not further bad.
One should therefore not worry about the price movement – these can rather represent a favorable buying opportunity. Only when the company loses market share or customers, new technologies make the company’s products or services useless – basically all events that lead to a significant and sustained decline in the value of the company. So how can the risk of a loss of capital for an investor be avoided or at least reduced?
- The value investor analyses very carefully. The better I know the company in which I want to invest, the lower my risk of permanent capital loss will be. This means constantly investing a lot of time and doing good research to find really attractive companies that are worth investing in. Months of intensive research are done before a qualitative company finally finds its way into the Estably portfolios. We want to understand the business model of the company, its history, the management and its strategic orientation, the industry and the competitors. Only then is it possible to understand the company, its potential and the risks involved in investing in it
- Pay less than you get in value. The concept of value investing also refers to the safety margin. Simply said, it means paying 50 cents for something that is worth 1 EUR.
Guide to the Markets Quarterly JP. Morgan Asset Management, MSCI, Thomson Reuters Datastream, J.P Morgan Asset Management as of December 2018