Are you looking at the right factors when you invest?

Portfolio manager says it's vital to learn about the company and sector rather than use numeric models

Are you looking at the right factors when you invest?

More investors need to look deeply into a company’s fundamentals rather than rely on numeric models if they really want to succeed, Guy Davis, managing director and portfolio manager of GCI Investors told Wealth Professional.

“I genuinely believe that far more people should be thinking about investment in the way that we do to avoid some of the biggest pitfalls,” he said, “because relying on numbers or screens or ratios misses so much of the picture.”

GCI has moved into the exchange-traded fund space, but is just running one strategy, so it does that well.

“We regard it as genuine investment, which means that everything we’re doing is about investing in a business. We’re not interested in trading stocks,” said Davis. “The market is simply there as the vehicle, which enables us to take positions in these companies. We’re very much of the view that the market doesn’t provide us with any information about underlying value. It just provides us with opportunities.”

GCI looks for the highest quality companies and pays less than it thinks they’re worth. It looks at factors that it can solidly determine, so it doesn’t have to forecast the future. It tries to understand the business and what it values, as well as its valuation and how the sector operates, so it has a greater degree of confidence in it.

“The fewer things that we have to forecast and estimate, the greater the likelihood is that we’ll be successful and the fewer mistakes we’ll be likely to make,” he said.

Davis said so much of understanding a business is subjective, which doesn’t come from reading accounts.

“You need to understand the industry in which it operates. You need to understand its competitors and the competitive dynamic about its products and how it competes,” he said. “You need to know the management that’s in charge of the company, how it incentivizes, and what it’s done previously. There are so many areas that are enormously subjective and quantitative.

“The investment industry loves numbers and ratios, and black and white answers. So, if you can plug everything into a model and it spits out a number, everybody loves that because you can put it on a spreadsheet and optimize the portfolio, and it’s all magic, and everything looks wonderful.

“But the problem is these are real companies, real businesses, and you can’t take a qualitative element and boil it down to a quantitative number. It doesn’t work. You end up missing things. That’s one of the reasons lots of people don’t do this: because you’re investing in a business, but you end up with a huge amount of grey area and so many in our industry don’t like gray areas. They don’t want risk to be a grey area.”