Making the Best Investment Decisions

Making the Best Investment Decisions


Statistically, a football goalie has a better chance of stopping a penalty by standing in the middle of the goal box as opposed to leaping one side. But as James Montier says in his article ‘Beware the Action Man’, they feel the need to do something and they typically prefer to jump in a direction rather than stand still.

What does this have to do with investing? Valdon Theron, head of institutional business at Prudential Portfolio Managers, says all the information ignites our human desire to take action, the same way the goalie feels compelled to jump a certain way.

Theron warns that sometimes too much information can lure investors into a false sense of confidence and compel us to make more short-term decisions. “Consuming a vast quantity of information confuses investors, which in turn makes it increasingly difficult to focus on the fundamental information that determines the value of an asset,” says Theron.

Making the right investment decisions

“At Prudential we believe that the right information, in the right context, is still critical to making wiser investment decisions,” says Theron. He advises the following:

1) Determine which information is relevant.

Screening is critical to our process. We don’t waste our time on stocks that are clearly pricing in unobtainable future earnings.

2) Focus on financial statements as a starting point.

These statements provide a sound and practical method of getting to grips with the health of a business.

3) Understand the long-term return on capital that a business generates.

This is especially important if current returns are far below or above a business’ long-term sustainable returns, causing mispricing opportunities. We study long-term trends of these returns (as opposed to forecasting) and specifically the underlying drivers (“fundamentals”) of these returns, such as profit margins, asset turnover and a firm’s capital structure.

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