Making money in equities is simple. Buy low, sell high, and that’s pretty much all there is to it. But this slightly facetious view overlooks two fundamental questions: What is low? And what is high?
Right now, more investors are wondering what is “high”, after a three-month period in which the performance of the Australian sharemarket has been pretty solid. Knowing when to buy a share is only half of the equation. The other half is knowing when – and having the discipline – to sell.
A share price on its own is an indication of nothing more than the price the share last traded for. To assess whether a price is “low” or “high” you need what Roger Montgomery, founder of Montgomery Investment Management, describes as an “anchor”. That anchor, for many investors, is the intrinsic value of the company, and its whether it’s underpriced or overpriced. “
The most important thing that I can probably say is, don’t take your cues from price alone,” Montgomery says.
“Don’t let price determine your behaviour. It’s got to be price in relation to an anchor, and that anchor has to be value.”
Nathan Parkin, portfolio manager for Perpetual Investments’ ethical and socially responsible equity strategies, says a focus on the factors that determine the value of a company can help investors avoid the common mistakes of buying at the top of a market and selling when the price is depressed.
