Asset valuation the critical factor to investing

Investors should strive to obtain an accurate value for assets they are considering purchasing and pay a price below that value irrespective of the asset class being assessed, the head of an investment management company said at the 2006 CPA Australia NSW congress.

Clime Asset Management managing director Roger Montgomery feels that unless this process is performed and performed well, investors will take on a different role in the market to the one they are intending to.

“If you don’t value assets before buying them, you aren’t an investor at all, but you are a speculator,” he warned.

“If you don’t know what an asset is worth before you buy it then the reality is É you are speculating that perhaps somebody else will come along and simply pay more than you did for the shares you just bought,” Montgomery added.

Unfortunately, he said many investors do not understand the concept of a true valuation of a company’s stocks, often using the incorrect rule of thumb that the value of any particular asset is what someone else will pay for it.

Montgomery believes that if investors know how to value business and understand business economics and how a business generates its performance, broad diversification strategies will become less relevant for them.

“If you put a bit of money into stocks and a bit of money into property and a bit of money into bonds and a bit of money into overseas shares and a bit of money into cash, you are guaranteed to generate a bit of a return,” he said.

“The reality is that most people don’t know how to value a business or an asset and therefore diversification does make sense,” he concluded.