FNArena’s Weekly Insights – November 22 2021

In this week’s Weekly Insights:

-The Secret Ingredient
-Conviction Calls
-Research To Download
-All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

The Secret Ingredient

Imagine two similar companies, competing in the same sector. One is hell-bent on doing the right thing, the other cares a lot less about the long-term picture and instead is obsessed with its share price in the short term.

To many an investor, the difference between these two investment options is rarely obvious and mostly simply a matter of personal preference. One year one is in fashion and performs better, the next year the competitor catches up and proves the doubters wrong.

This is where the art of investing shares one crucial similarity with the appreciation of visual art: stand too close and you might see a lot of details, but you’ll never enjoy the full beauty of the artist’s creation.

Let’s assume our two companies are equally profitable, which could be something like 25c out of every dollar in sales. The first company decides to invest for longer term benefit, while the second is happy to pay most of it out to happy shareholders.

Usually what happens in the share market is the second company is instantly rewarded while the first one sees its share price being punished for not spending its cash profits on pampering the shareholders. At least, that’s what first optics show us, with share prices heading south every time management at a listed company announces increased investment.

It’s a tough gig, being at the helm of a publicly listed company, but investors should not assume the share market prevents boards and managers from making long-term decisions; it’s just that tough questions will be asked, in particular for unlikely or unproven strategies.

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