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Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Schroders portfolio manager Ray David urges investors to avoid the biggest mistake in investing.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which ASX share would you want to hold?
Ray David: I'd say Ramsay Health Care Ltd (ASX: RHC), just because we know in four years' time, demand for elective surgeries will be higher.
We know that demand for healthcare is only going to grow and the government's very supportive of that private healthcare segment of the market because effectively it's a tax subsidy for those that can afford it against those who can't.
And there's a big freehold property infrastructure property network there. If we are in a different environment where rates are lower, the value of that property only goes up.
So Ramsay would definitely fit that category if we were looking across the ASX because it's recession-proof, it's got growth, it's got high [barrier to] entry and the valuation is pretty attractive.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
RD: Our biggest headache we have is timing. Generally timing the top of a stock or the bottom, we can never get it right.
I'll give you an example. We shorted a company called City Chic Collective Ltd (ASX: CCX). We shorted the stock when it had a valuation over $1 billion and the market was really excited about the prospects of its online business that we saw as a commodity.
So we end up making 50% on the short. So we covered it around about $1.90 per share, because we started to think, okay, the valuation was starting to look pretty supportive. But often as always, the market can overreact both on the upside and the downside. And as you know, City Chic started to update the market around its inventory positions and outlook, stock fell to as low as, I think it might have been, 48 cents.
So we never get the bottom on the shorts and we never get the top on the longs. But the way we think about our investment framework is, if you have a valuation framework, you stick to that framework. It's a guide. If you remain disciplined to that process, you'll still be able to add a fair bit of return to your clients.
You're never going to get the bottom of the top. And if you try and time the market, most likely you're going to be wrong, because there's so many psychological factors driving share prices in addition to fundamentals where stocks are going to be going much higher than what you thought as we saw in the tech boom.
Buy now, pay later is another example where a company like Zip Co Ltd (ASX: ZIP) got to north of $6 billion of market value and today it's got a market value of less than $500 million.
So the market can be irrational and timing's very difficult, but the way to stay ahead of the market is for you to be rational and be disciplined and stick to your process. And our process is having a bit of valuation framework to help us make our decisions around when we enter and exit companies or stock positions.
