Sometimes an investment just doesn't smell right.
In last week's article I argued that value is overwhelmingly about the quantitative aspects of a share, with other stuff like the nature of the business being very much secondary.
Additionally, I mentioned that even the quantitative aspects don't need researching beyond a certain quite limited point, so as to prevent the investor entering overanalysis.
Overanalysing is not merely carrying out extensive numerical dissection of a share in the hope that it will improve selection. It's also a negative state of mind which can persuade the investor subconsciously that the share ought to be bought in order just to avoid wasting all that time spent investigating it. Less is more.
Not the numbers
This week I want to review that small amount of value share appraisal which is non numerical. Because unless you are doing this wholly mechanically, which you could but it is not my preferred value approach, there is a certain something, call it smell or personal prejudice towards certain businesses or whatever that does come into play sometimes.
One of the features of a value share that I dislike, mentioned last week, is where the business is largely overseas even though it is UK listed and there are now many such companies here.
That is made much worse where it is somewhere dodgy so that you can't trust the figures but even if in what we regard as a solid country, I am still wary. The US for example, as solid as they come from the point of view of a good business environment and regulated stock market, has long been a graveyard for UK companies.
This is a place that a long time ago I called Bongo Bongo Land, a mythical country somewhere outside of the M25, which, for reason alone that it is outside the M25 and therefore of territory with which I'm familiar, adds a layer of risk which I can do without in general.
I'm not saying I'd never consider such a share, in fact I have traded them in the past, but I'd be ultra cautious in such cases and were I to go in, would probably in compensation seek deeper value cred than otherwise.
The wrong smell
Another possible obstacle for me, difficult to define, is where I just don't like the business, smell if you like. For most value plays as I've said, the nature of the business does not matter. But very occasionally and it's hard to say why, it does.
Perhaps an example might help. I looked a while back at Home Retail (LSE: HOME). This is the company that runs the Argos catalogue shops and the Homebase DIY chain. It actually had a fair amount of value cred for a retailer.
But I hate Argos. I hate them enough to avoid the shares. I hate the whole concept -- the general atmosphere of the place, the fact that you can't see the goods before buying, the double queue where you wait to pay then wait to collect and so on. I fail to see why they exist at all compared with normal retailers. Possibly it used to be price, but that time's long gone. On the few occasions I've bought stuff in there, electrical goods, too often they were faulty and I had to return them. I try to be unsentimental with value plays but even I have my limits.
And I say all this whilst at the same time counselling investors not to be influenced by personal experience. There is a school of thought that actually encourages personal experience as one feature of assessing a share, though it is severely restricted to certain types of business. For example it is easy to sample retailers but not quite so easy to do the same with a manufacturer of nukes. But I am not a pupil in this school.
But it's odd, mere hatred is not enough to put me off a value play. I loathe the way insurance companies have too frequently and cynically failed investors with their various trashy products over the years but it don't stop me buying their shares. There's hatred and then there's hatred.
I find it difficult though to get this idea across to value players because it is often irrational and I'm not normally irrational in general, well, no more than anyone I guess. But sometimes I just think, I'm not investing in that, there's something that I just don't like about it even if I can't quite put my finger on it.
Maybe it's because I've been in business almost all my life and have advised a large number too, thereby forming a sort of gut instinct about things that I think might work and those that may not.
The more marginal the value criteria, the more weight I would put on disliking the business if that is the case. And in the opposite direction, the stronger the value criteria, the less weight I'd put on this aspect. What this means is that even Home Retail would appeal, if it was cheap enough on value filters.
But I can be wrong of course, like the record company who turned down the Beatles. That value play I bargepoled because I didn't like its business may well turn out to be a big winner. This has actually happened in the past and as I say, I try not to let this kind of thing influence me much.
It is all about the numbers in most cases, but very occasionally a little something else creeps in to affect my opinion.
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