Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 166

Investing conservatively vs conventionally: is there a difference?

In the 2015/2016 financial year, the average investor performed poorly, despite typically being invested conventionally. The All Ordinaries Accumulation Index masked the significantly worse performance of the top 20 stocks in the market – the S&P/ASX20 Accumulation Index returned negative 7.0% for the year (including dividends). This is noteworthy because of the market capitalisation dominance of those top 20 companies, which at the time of writing constituted over 51% of the All Ordinaries Index. The names are very familiar and dominate most retail investors’ portfolios, but many of the individual stocks did significantly worse than the index.

2015/2016 performance of largest 20 companies on ASX

Investing in large, familiar companies

These companies constitute the most conventional of stock holdings and it begs the question, just because someone is invested conventionally, does that mean that they are being conservative? Most investors who hold large positions in these companies believe that because they are household names they must also be the least risky stocks to hold. But the connection between company size or familiarity and risk is a tenuous one.

The most important determinant of investment risk is the price paid for the asset. A poor asset purchased well under liquidation value can still be a great investment, just as a great asset bought at too high a price can prove a lousy one.

In his book Common Stocks and Uncommon Profits, first published in 1958, famed investor Philip Fisher, said:

“Unfortunately, often there is so much confusion between acting conservatively and acting conventionally that for those truly determined to conserve their assets, this whole subject needs considerable untangling.”

He highlighted what he thought were the four important characteristics of conservative assets:

  • Superior operating performance, defined as being a ‘very low cost producer or operator in its field, [with] outstanding marketing and financial ability and a demonstrated above-average skill on the complex managerial problem of attaining worthwhile results from its research or technological organisation’.
  • Outstanding, high quality people, employees who are responsive to change and enjoy their workplace, and management who are disciplined in building long-range profits (and not solely focused on short-term results).
  • Inherent characteristics that demonstrate above-average profitability – ‘what can the company do that others would not be able to do about as well?’ – typically demonstrated by a superior return on invested assets and/or profit margin on sales.
  • The price paid for the investment.

Focus on the price paid

The fourth characteristic is often the most significant factor when determining the expected return on an investment. We focus on finding investments that are priced in a way where we expect an attractive total return with a sufficient margin of safety should business conditions or company circumstances prove to be worse than our initial expectation.

Most of the businesses we are attracted to have the following characteristics that are commonly sought after (as highlighted by the similarity between this list and Philip Fisher’s four dimensions):

  • a simple business model selling products and/or services we are familiar with
  • a sustainable competitive advantage
  • an attractive return on invested capital
  • significant cash flow generation
  • a strong balance sheet, and
  • competent, disciplined management.

Many of the large Australian businesses listed in the table above we would characterise as good businesses. But a good business bought at too high a price will still generally make a poor investment, especially from a risk-adjusted return perspective. Our view a year ago was that many of these businesses were priced well above our estimate of fair value. They may have appeared to be conservative investments, but in reality they were more conventional investments, and somewhat expensive conventional investments at that.

We are reminded of the Warren Buffett adage, “Price is what you pay, value is what you get.” Investors should ensure they receive more value than they pay for when purchasing securities. If they do so over time, investors should earn an adequate return on their capital.

 

Tim Carleton is Principal and Portfolio Manager at Auscap Asset Management, a boutique Australian equities-focussed long/short investment manager. This article is general information and does not consider the circumstances of any individual. A person should obtain the Product Disclosure Statement before deciding whether to acquire, or to continue to hold, units in any Auscap fund.

 

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.