Stephen Bland explains value shares to a novice.
Not perhaps as dumb a question as it might at first appear. Experienced investors will understand what it means, but over the years there have been numerous posts to the value board from people -- and I don't mean trolls -- suggesting shares that are not value in the sense we employ it there.
I was at a barbecue last weekend, and I experienced the usual icebreaker questions from people I didn't know of "what do you do?". I've regarded this question, to which one is expected to reply in kind after having given the required answer, as quite dull and have been tempted to invent stuff in the past. You know the kind of thing, "I'm an astronaut, but I've had to retire because the prolonged weightlessness has caused my brain to float down to my posterior" sort of response.
So these days, in a desperate attempt to combine a simulacrum of the truth with a helping of mystique, I say I'm a writer -- especially if I'm trying to impress a woman, though at my age there's admittedly little potential physical reward in so doing but old habits die hard. Don't laugh, it's better than saying I'm a chartered accountant, then have to observe the inevitable glazing over of their eyes and the looking over my shoulder at someone, anyone, more worthwhile speaking to than me, aka the party leper.
The trouble is once I say I'm a writer, I fall into my own trap I've dug when, interest perked, they naturally ask what I write. I'm too honest to tell complete porkies here about a Hollywood screenplay, the Great British Novel or a cutting-edge TV sitcom, so I mumble something about share investing and, not unexpectedly, I start to lose them at this stage.
Having discovered that I'm not the new Shakespeare, those that can still bear proximity to me then ask for some more information, probably more out of politeness than any real interest in what to most people is a boring subject. So I tell them in tones calculated to endow it with similar appeal to proper writing that it's about value share trading, and a related strategy of long-term high-yield share income investing.
Cher, and share alike
"What's value shares?" This from someone who thinks 'share' was a well-known but now ageing and less seen singer and actress... I tell them of what happens quite often in the likes of Tesco (LSE: TSCO), Sainsbury (LSE: SBRY) and Morrisons (LSE: MRW). For example, a few days ago they were selling packs of chocolate digestive biscuits for some price. Also, they had twin packs of the same product. Now normally and logically you would expect that the twin pack price would be somewhat lower than two individual packs. But no, in this case it was quite a bit cheaper to buy two singles than the double. I saw another example very recently with cans of tomato soup. The "bargain" four-can pack was significantly dearer than four same individual cans.
I don't know why this occurs, but I've seen it frequently with many different products in supermarkets. It is not a rare thing and therefore I assume not a mistake on their part, they know about it. But to locate these mispricings, you have to work out the unit cost and compare. I suspect a lot of shoppers don't do that. These are everyday examples of the meaning of value. We're talking of relatively small amounts of money here, but it was the principle I was attempting to illustrate.
Shares are like a box of chocolate biscuits...
As it goes with chocolate biscuits and soup, so it goes with shares. But not exactly, because the shares being compared are not -- unlike the above -- identical. However, the broad idea is the same, to try and get more bang for your buck by analysing situations, looking for those that offer more value than others.
This value is measured by common share analysis criteria, a lot of which are based on price and others on the internal figures of the company. The idea is that value investors think it should not be trading so low even though the market is saying that's all it's worth. It's mispriced in other words. But this is an art, not a science because there is room for opinion. That contrasts with my biscuits and soup, and so on, where there can be no argument about which is the better value.
And that's what I write about, I told her. Picking her up off the grass from where she had collapsed from terminal boredom, she returned the compliment by asking whether I knew the awful ingredients of chocolate digestives and the way they are obtained. Something about damaging the herds of Belgian yaks who had been overmilked to supply the chocolate production. A green bore, just about the only thing more numbing than financial stuff. My eyes glazed over, I started looking over her shoulder...
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> Stephen does not own any of the shares mentioned in this article. The Motley Fool owns shares in Tesco.