When it comes to blue chips, is less in-depth research the way to go?
OK, I'm going to say that instinct is superior to detailed knowledge here -- but only when looking at big cap companies.
There are lots of shrewd Fools who, quite rightly, concentrate on small caps as they have the potential to motor and are very often almost ignored by the market. "Elephants don't gallop" (unless they're leveraged beasts…) so the potential for really big returns in a relatively short space of time lies in spotting opportunities ahead of the rest of the investing world.
Going the extra mile
Consequently, those of us going the extra mile with our research have an almost unique opportunity to get under the skin of a company, and to identify those which are undervalued well ahead of the market.
I agree wholeheartedly with this approach and it's one I endeavour to take myself. BUT… with big caps, what's the point in trying to get one up on other investors? The opportunity doesn't really exist via careful analysis etc. The information is very much in the public domain and is analysed by everyone and their dog.
That isn't to say you shouldn't take full account of the various value tenets exhibited by even the biggest of companies. As many Fools have found over the years thanks to its founder, Stephen Bland, the "PYADic" approach to investing works very well indeed over time.
PYAD's principles
Companies displaying a price-to-earnings ratio of a maximum of two-thirds that of the market, a yield 50% above the market, assets in excess of the company's valuation (price/book value under one) and zero debt if possible -- with stacks of net cash – tend to outperform the market.
Investors following these criteria are unlikely to go too far wrong, particularly as the approach seeks companies with a market capitalisation in excess of £100m. What the approach advocates, though, is analysis lite.
In other words, ignore the details concerned with today's news -- the kind of thing that is analysed to death by those paid to do so -- but whose horizons are more appropriate for day trading. Instead, zooming out a little and looking at the absolute basics of value will help private investor reap market-beating returns over time.
As Stephen has said: "Strategic ignorance is the key factor in ... share selection. Less is more". Hear, hear.
Of course, the approach isn't foolproof; none ever are. Buying the banks on some seemingly good fundamentals during late 2007 and early 2008, for example, wouldn't have been a good idea in hindsight. But I would contest there are far more examples running in the other direction -- and the banks certainly weren't PYAD-ic.
Some examples
Remember Royal Dutch Shell's (LSE: RDSB) woes back in 2004 thanks to overstated reserves? The most sage of analysts were calling the shares a sell at the time given their superior knowledge and belief that there was worse to come – but what did history prove?
Similarly, back in October 2008, I thought BP (LSE: BP) looked too cheap at 389p as the world saw itself on the brink of economic disaster. Of course, it was never really going to happen. Stop driving cars? Are you mad!?
Now I know precious little about BP and that's entirely my point. My relative ignorance or "analysis lite" was a positive advantage. Fortunately, I bought in at sub £4 and got out again at well over £6, just over a year later, trousering a 50% profit and two big dividend payments courtesy of the UK's largest company, over which a veritable army of analysts crawl daily.
Head on the block
Putting my head on the block, I imagine the story around major banks will be a similar one for the patient investors taking a fond look back at their purchases of 2009-10 in a few years' time, as will that for investors in Aviva (LSE: AV) at less than £4 today.
And my in-depth reasons for this? Don't ask -- it's down to a few fundamentals and a little analysis lite.
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