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

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

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.