Forget the risks, buy the value

Research director Greg Hoffman recently asked each of The Intelligent Investor's analysts to name the big risks on their mind. Protecting what's yours: Top risks for 2011 and Protecting what's yours, Part II were the articles published last week as a result.

I duly provided my risks, but it's not really the way I think about my own portfolio. As I said: 'To be honest, I rarely factor “big picture” risks into my stock selection decisions—not consciously anyway'. I prefer Peter Lynch's advice that 'If you spend more than 13 minutes per year trying to predict the economy, you have wasted 10 minutes'.

I don't think I'm ignorant of the many issues facing the global economy or markets (I hope). I enjoy reading what the bears have to say, and there's no doubt that Jim Grant, Jeremy Grantham, Michael Lewitt, Bill Gross and Kerr Neilson, to name some high profile bears, have enviable investment records.

But none of their gloom is preventing me from buying stocks. Quite the contrary. In my personal portfolio, I've already explained Why I'm now fully invested (although I'm still maintaining a relatively high cash weighting in the family retirement portfolio I manage).

As a resolutely 'bottom-up' investor, I'm currently seeing more value than during the 2005-2007 period (when my portfolio was typically around 30% in cash). I'm not suggesting the overall market is cheap, just that there is a broad selection of 'bombed-out' stocks.

Residential developers, retailers, financials and IT services are examples of sectors I've been picking over recently. For instance, Warehouse Group, the New Zealand general merchandise retailer, strikes me as potentially interesting (but is too illiquid for The Intelligent Investor to review or recommend). I've yet to do sufficient work to know whether to buy the stock personally (and it's jumped from its $2.60 low following a profit warning), but it's an example of what I'm considering.

To me, avoiding risk is mainly about avoiding potentially overpriced stocks. It's why I won't invest in resources companies or their service providers at the moment. You only need look at the ASX's upcoming floats list to see this is where the market froth is. The industrials, by contrast, have been underperforming and are therefore prospective for investment ideas.

Placing undue emphasis on 'big picture' risks like China, Europe, inflation or deflation can get in the way of identifying value. The danger, then, is that you become paralysed or ultra-conservative, missing the bargain buys that characterise difficult periods.

What do you think? Do you try to ignore the economic outlook when investing? If not, how do you take it into account? Is now a special case? How are you positioning your portfolio in the current climate?