Knowing what makes a company valuable helps you hang on to winners. Here’s how to help clients.

1. Separate company performance

External events can hinder the market performance of otherwise sound companies. A great company may not shoot the lights out in a bearish environment. So help clients separate what’s happening in the markets from the company’s prospects, Pavan Arora, CFA, director of PARK Private Wealth.

Talk about the company’s strengths—its profitability, return on equity, reinvestment rate, and dividend yield. Then, show them how similar past market conditions have dampened the company’s revenue, and how it bounced back each time. You can also demonstrate how positive business cycles affect earnings to show the importance of holding on.

2. Consider buying the company

Ask clients, “If money were no issue, would you buy the company outright?” says Valerie Wowryk, CFA, director, wealth management & portfolio manager, at Richardson GMP Limited.

That makes them think about the company separately from how its stock is faring. If the answer is yes, it shows they see the business’s long-term viability.


System 1 in action

Wowryk adds it doesn’t matter if you’re buying 100 shares of the company or 100% of it. You still want to invest in a company that has a great valuation, ideally at a slight discount to its fair market value. Tell clients to consider themselves partners of a business, not just shareholders, she says. “If you like the sustainable economic advantage, forget about the day-to-day fluctuations.”

3. Discuss the right metrics

Explain how the company performed in the last quarter, not just the stock or the markets, says Wowryk. Show there was a new product or business unit, or a change in management. Detail what’s moved the company closer to, or farther away from, a fair value. If review meetings are all about the stock price, says Wowryk, “how can you expect your clients to focus on anything else?”

Read more:
Invest in companies first >