The market's very different. It's much less about trying to value and buy individual companies based on their own criteria, and much more about trying to get a position in the market. You have to be very disciplined, and you have to be strong enough to back your judgement even when it could be quite painful.
Hello and welcome to a value view from the Merchants Trust. I'm John Cronin and in this episode I'm joined by Simon Gergel, lead manager of the Merchants Trust. Now markets today can feel noisier, faster and more reactive than ever. Passive flows, hedge funds, basket trades, momentum, all of that can make short-term price moves feel, well, pretty brutal. But for some, this kind of environment doesn't just create risk, it also brings opportunity. So, if markets are increasingly driven by short-term behaviour, where does that leave long-term value investing? Well, Simon, it's great to have you with us and it's a fascinating question.
Ah, John, it's great to be here today.
Well, let's jump in and let's just think about some of those, but let's go to the big picture first. What's changed? When you look back, what's changed from when you started managing money?
Yeah, well, I started in the late 1980s and in those days most of the investors in the market were either individual people or individual institutional investors buying individual companies one at a time. Today, the vast majority of trading is done on behalf of funds, often passive funds buying the whole index, or basket trades buying a basket of growth stocks or, you know, defence companies, or hedge funds putting enormous trades round very short-term trading news and trading predictions. So, the market's very different. It's much less about trying to value and buy individual companies based on their own criteria, and much more about trying to get a position in the market and giving us exposure to a certain factor or a certain view.
So, a lot's changed basically in that time.
Yeah, enormous amounts changed. I mean, the volume of trading is hugely more than it used to be, but there's a lot less attention on the individual companies, and much more on getting a position and exposure in the market.
Okay, Simon, so you talk about factors. What do you mean by that?
Well, it could be a factor like growth, companies with high growth, or quality, or value. So, these are different ways of investing and getting exposure to a style of business, or we call it a factor. So, an exposure to high growth companies, for example.
And you've also talked about momentum. You mean buying when things are already going up, and avoiding what's going down?
Yes, momentum really encompasses two different things. So, one is buying shares that are already going up, or selling those that are going down. And the second is buying companies where expectations are going up, so they're seeing upgrades to forecast. So, there's good news coming out, people are getting more excited, and predicting higher profits in the future. And those are very powerful drivers at the moment. There's a lot of money chasing momentum, either companies going up, share prices going up, or companies with good news and seeing earnings upgrades. And that's really quite powerful at the moment. And the reverse for companies seeing downgrades, or going down.
And on that, on the reverse, that's where it can get pretty uncomfortable in the short term, can't it? So, why do you see an opportunity there, rather than a headache?
Yeah, well, if you imagine, the more people focus on the short term, and what's going on today and next week, the less they're focusing on the long-term value. And those two things can be aligned, but very often they're not aligned. You can have a company that's going through a tough time today, and it might be worth a lot more in the long term, but we don't know when that long term's going to come through and the shares can get cheaper and cheaper and that could be very uncomfortable if you're sitting there with a position in a company you think is worth twice the share price and it comes out with a slightly disappointing trading update and the shares fall another 10%. That's an uncomfortable position to be in, but it's creating a bigger opportunity.
Okay, so what you're saying here is that the more impatient the market gets, the more chance there is there for patient investors.
I think that's right. I mean, another way of saying it is the more efficient the market is at absorbing new news in the short term, in a way the less efficient it becomes at thinking about the long term.
You've said in the past that markets can be pretty vicious in this environment. Those are strong words. What do you mean by that? What do you mean by vicious particularly?
Well, coming back to what I'm saying, if you own a company where you think the shares are very cheap and quite depressed and then they have some more bad news and the shares fall further. They can fall quite a long way, almost irrespective of how cheap they are. It really doesn't seem to make too much difference at the moment how cheap a share is. If it gets bad news, the shares almost always go down and sometimes quite a lot. So, taking a long-term view, trying to ride that out can be quite painful. So, it can feel quite vicious. And the flip side of it is if you've got a company that's doing well and in favour and it comes out with good news, often it can go up more than you think it should.
