Lured by lower prices? Will you buy shares because it is cheaper than its peers?
A question that fundamentalists come across quite often. Why not buy the cheaper one of the lot? We fall prey to the lure of lower prices with a bias towards a company whose price quoting on the exchange than its peer group.
Also, lower valuation compared to its peers is not the prime criteria for investments and should not be. Peer valuation helps to understand valuation at the time of buying.
We have not seen companies which are exactly comparable. Apple-to-Apple comparison, in exact sense, is not possible because every company has their own Unique Identity i.e. their niche. And our efforts should be deployed to understand that niche part … and if we are convinced about the Business and its strength than peer valuation may work as a confirming factor.
In a Bull market you may find that many companies (particularly industry leaders) are far away from its peers in terms of valuation and it may tempt you to go for the next best option in the industry. We argue this thought, some companies are leaders due to certain differentiating advantages like scale, pricing power, efficiency, resource management and leadership. All these may not be available in next best opportunity and hence valuation gap is there.
So, what to do? We suggest, one should buy best company even if its expensive (remember buying of Coca Cola by W. Buffet) rather settling with next best option. And if you are not comfortable about the valuation best advice is to sit calmly on cash. There is no permanent Bull market and there is no permanent Bear market. But make sure you invest when pessimism is at its peak.
We at Care PMS are strong believer of investing in companies who are industry leaders in the segment that they operate. Further, we put lot of efforts to understand niche of our companies. Not only that — we have enough patience to see our investment ripe to its fullest. We have patience to sit on them in times of distress and irrationality in prices; and, also when commoners with no understanding of markets are involved into share market (euphoric times).
“Bad things aren’t obvious when times are good.”
– Warren Buffett