Approaching stocks needs to be all about following your brain and ignoring your heart, according to Perkins Investment Management CEO, Peter Q. Thompson.
The value arm of Janus Capital Group is unique in its approach to investing, focusing fundamentally on downside risk, a focus that paid off during the critical point of the global financial crisis, Thompson said.
“When we’re valuing an individual stock, we’re trying our best to quantify how wrong we can be. What’s unique about Perkins is we calculate a downside price for every single stock in the portfolio,” explained Thompson.
At Perkins, a ratio is developed using the downside price and the upside price to determine if stocks are good investments, aiming to have a dollar-and-a-half upside for every dollar on the downside. These numbers guide Perkins’ decisions.
“In 2008 we avoided virtually every one of the highly celebrated blow-ups, why? Because in that calculation, the denominator, the downside price was zero, so we couldn’t come up with a figure, we couldn’t come up with a ratio and so it that’s the case we’ll just move on. We’re not going to try and make excuses to make something work and fit it into the portfolio. The result of that is we had on a relative basis a very strong 2008 again versus the benchmark.”
Thompson doesn’t claim to have found a new approach; rather it’s the execution of what he says is a basic, fundamental approach that is different.
“Lots of people know how to value companies; lots of people know how to do financial statement analysis,” he said.
“It’s when emotion takes over and investors start falling in love with stocks and start making excuses for why something should fit, versus looking at the numbers here and now, and if you do base it on the numbers, [whether] it’s repeatable, and it’s where you do start separating skills from luck.”
It was during the GFC that Perkins’ strategy paid off and other managers fell into the “value trap”.
Value managers – historically hired as a “bedrock holding” in a portfolio – were slaughtered in 2008, suffering worse losses than the benchmark and far worse than their growth counterparts, said Thompson.
“People couldn’t understand why that was the case and I think much of that was due to this leveraged situation, managers going after those cigar butt types of companies and kind of overlooking the balance sheet. At the end of the day, when we’re focused on balance sheet strength and downside risk, it keeps you falling victim to that value trap,” Thompson said.