Stephen Bland advises value investors to forget about the price of their shares.
My next couple of weeks' articles will be HYPerintensive. The next will be the second selection for HYP4 and after that the quarterly review of the three complete high yield portfolios up to the end of September. A load of number crunching so it's another attack of the verbals this week following last week's job. Also, I've had quite a spate of value trading selections in recent weeks too, so I don't think readers can complain about my failing to write about specific value possibilities. Anyway today's piece is about some of my views on the price of shares, principally for value players but some of it applies to some extent to HYPers too. It's all stuff I've written about before but it may be informative for some, particularly beginners, to revisit it.
So here is the principal bit:
Price does not matter, forget about it.
Film buffs may recall the excellent mafia picture Donnie Brasco from the nineties wherein the great Johnny Depp as the eponymous character, in one particularly inventive scene demonstrates to a non mob person a whole range of different ways to mouth the words "forget about it", which is a popular expression of his mob associates. The point is that each slightly differently nuanced way of uttering the same words conveys a different meaning - to the mob guys anyway. Regrettably I can't get speech nuances across in a written article and I aint no Johnny Depp. Mind you one lady remarked to me recently that with a good thick paper bag over my head I bear him a distinct resemblance.
All too often I see messages about shares, value or HYP, regarding the price having risen recently and that therefore, despite attractive fundamentals, the share should be avoided until such time as the price falls. The investor has decided the share is a good play, but then having investigated recent price action reverses the decision even though the fundamentals which attracted them to it are the same as before they observed the price action.
Does this make sense? Not to me.
My view is that a share is attractive, or not, at its present price, from which flows most of the value fundamentals. The timing mechanism for the purchase therefore is not price, or what happened to that price in recent months, it is simply the current values of the usual ratios, coupled with any non price dependent ratios such as debt.
As if to contradict myself, because I don't wish to come across as totally sane and well adjusted, I have written in the past that for value plays a bit of relative price weakness over the last six or twelve months is welcome. It shows the market's healthy damnation of the share. However that is only a very marginal point, a strong recent price rise or high relative strength would never stop me from going into an attractive value share.
Linked closely to my advice to ignore price movements is the related counsel to ignore your purchase price once in. In the same way that price action pre purchase should be disregarded, price action post purchase should too.
Thus the test of when to sell your value play is not how the price has moved. It is how the fundamentals have moved. So selling a value play is the mirror image of buying it. Are the ratios now too high in your judgement,? If so, sell and do so whatever has happened to the price, up or down on purchase.
A related concept to cutting out price from your decisions is that of price targets for watch list shares, value or HYP. For example, you see a share which at say 100p would have fundamentals that meet your filters. At present it is 120p and thus too far outside your limits. You say to yourself at 100 I'd buy it. The price falls on unchanged fundamentals down to say 105. Should you then buy it? Probably yes, especially for an HYP where because you are not looking for short-term capital gains but long-term income with the secondary desire of gains, it makes little difference at 105 against 100. But even for a short-term value play where you might be hoping for a fat rise, the 5p difference is probably of little relevance really.
The catch of course is that taken to extreme this advice makes no sense. To say if it's worth 100 then it's worth 105, implies that if it's worth 105 then it's worth 110 and so on. You have to draw the line somewhere above which you won't buy the share but what I'm advocating is fuzzy thinking, a deliberate vagueness. Don't be too precise in target price setting. If the share comes within a close range, then if it's a really good one you risk missing out on it by being too pedantic about exact price targets whereas in practice a small percentage here or there on the price is not going to make any serious difference to your return on capital for value, or yield for HYP.
So in conclusion, try to cut price from your thinking. Forget about it.
