Conviction will always remain the biggest portfolio driver, especially in the toughest of times. In past cycles, the market repeatedly taught us the value of conviction shown in difficult times. What investors do in difficult times will decide how their portfolio performs in better times.
Tough times can be very testing, especially so for value investing. Portfolios remain weak for months together and show no signs of shifting gears. Even as select parts of the market remain in momentum mode, value investing remains in deep slumber. This can frustrate investors aligned to the principles of value investing. They can feel left out of all the market action happening around them. But when the market shifts focus, value has unfailingly made a strong comeback. This time will be no different.
This market offers tremendous value in higher quality bluechips even while the trend chasing goes on in lower quality growth stocks. The obsession to own growth is diluting portfolio quality and at the same time making portfolio valuations expensive. This could spell double-trouble in the future.
The alternative of buying quality blue-chips offering tremendous value could be the surprise trade nobody is currently interested in. Investors need to carefully evaluate the risk-reward in high quality value stocks and reconstruct their portfolios around them. This would be the ideal way to ring-fence portfolios from a breakdown in market momentum or a global event. Downside protection, if done diligently now, could very well be the driver of future upside.
