VALUE INVESTING
What A Year!

By Stephen Bland (TMFPyad)
December 24, 1999

I thought readers may be interested in my progress. Messages are posted often on the value board asking how I have done over the years. I haven't kept detailed records, and unfortunately have failed to take my own advice on every occasion and reinvest all proceeds, due to having had other needs for the money.

However I have indicated how I've done in detail since about September 1998 and mentioned this last in my article entitled Anatomy Class Three – The Fairview Story, published towards the end of September. In that article I said that I was up about 131% in the eleven months or so to August.

Shortly after getting out of Fairview, I went in with the lot into London Pacific Group (LSE: LPG), as I wrote on the board. My buying price was about 335. The shares have fluctuated dramatically, initially falling below my price and below 300. They have since recovered powerfully and as I write, stand at 545. A gain of some 60% or so, although it is not realised yet. One reason for the huge fluctuations is that few shares are in the market. Thus it takes only fairly small trades to have an excessive effect on the share price.

Anyway for the sake of showing performance here, that makes the cumulative gain since September 1998, on paper, some 209% in about fifteen months. But I prefer not to take account of this seriously until I am safely back in cash.

In the last few weeks I have also made a small side bet in Royal & SunAlliance (LSE: RSA) at 380, a company I perceived to be heavily oversold and possibly about to begin the upward path of the insurance cycle. Comment on the board has focused on the Y2K problem as possibly being the reason for the low rating. Whatever, I have seen this sort of thing before with insurance shares. There are always reasons why they are beaten down, why they should stay there. They never do, they recover. Royal's yield was over 6% at my price. It smelt good to me; whilst not being exactly a pyad share it was pretty close to it. Fat yield, trading over book, lowish P/E, bottom of the insurance cycle. Sort of a hybrid pyad/crisis play. I wouldn't have sunk my clichéd farm into it, just a bit on the side. Anyway so far it is up very slightly. I'm not particularly looking for super profits on this one, just a gentle bit of upside for some spare dough that was lying around.

1999 was a vintage year for my style of value; although I do not have records of all past years I guess it must be amongst my best ever. Many other areas of the market have done well and many have done miles better than me, specifically the tech/Internet shares sector of course. The difference is that value investing, done correctly, is repeatable. I somehow doubt that anyone except a few very skilled or lucky people will make money year after year out of tech/Internet shares or whatever the next fad becomes after that one fades. More likely there will be some seriously burnt fingers at some stage and no, I don't know when.

In my last article I commented that to turn £10,000 into £1m in ten years requires an annual return of 58.5%. Inevitably, I suppose, a reader challenged me to actually do just that. I declined stating that I don't want to be under an obligation to publicise all my trades, and other reasons to do with the Fool not being a tipsheet but an educational source. In any event since I have publicised everything since September 1998, I am miles ahead of the challenge that I have declined. But it would be very early days though.

Had I accepted, and if I was allowed to backdate this to the start of my published figures in September 1998, my notional £10,000 would now be worth on paper some £30,900. On paper because I am still in London Pacific. There would be eight years and nine months to go. The annualised return required to meet the target in that time has fallen to "only" about 48%. Easier than 58.5% but still a huge target return. Way out of reach of almost any investor. This is higher than nearly any of the well known ultra-successful people like Warren Buffett.

In response to various requests from readers, some time back I did some very crude calculations and came up with a figure over more than twenty years, of some 50% annual return. To be honest it surprised me a bit. I would have guessed nearer 33%. Somewhat oddly for an accountant, I don't have an obsession with recording and retaining all my bits of paper, at least not much longer than the seven years or so required for tax purposes. This does not mean though, just to stress the point, that future returns will be at this level. I cannot know at all what future returns will hold. I may even get wiped out through a series of bum deals.

I do not usually have a target return. I don't like to set targets because there is a danger of becoming obsessed by them with the risk of thereby hanging on too long to a share that has been rising, just because you want it to hit some pre-set return. I prefer to fly by the seat of my pants, waiting until I feel it is right to exit because too little of the original deep value remains thus putting the share excessively into the risk territory where I prefer not to venture.

I must at this point inject some words of warning. The '99 returns are far greater than I would have expected. They are not typical. I cannot make 200% a year every year – I wish! Another remarkable thing has been the speed of turnround in some cases. Historically I have often held a pyad share for up to two years before it did the business for me. The average, off the top of my head, is probably around nine months. It is rare for this to occur in a couple of months. So I don't want anyone to think that '99 is typical and that as a result value investing is all about making large rapid profits. In fact it is about making large profits but nowhere near as large as this. And the time scale would generally be much longer.

So I don't want those that do not possess the necessary qualities of patience and dedication entering this style expecting quick, fat returns. Not because I have anything against such investors, but because they are very likely to be severely disappointed in the sort of approach really required to win at this game. They are also likely to lose money, giving up too early in the cycle or panicking if the shares fall, which often happens at first. Even pyad does not time you in at the exact bottom, nobody can do that.

This is my last article, of any sort, for 1999. I considered writing something entirely off topic, some sort of attempt at humour like I tried with my other articles. I considered it. Then I thought, no, value is too precious to me to be substituted by some mad story. It is far more important, to me, than taxes or the BTF. This is about making serious money, as far as I am concerned one of the most worthy human endeavours open to any ordinary individual. And to enjoy yourself doing it.

The challenge is to take a few grand of start capital and turn it into real money in a reasonable time frame and with as little risk as possible, so that you won't be too old to make use of it unless you start when you are already too old to make use of it. And also to have fun doing so. I appreciate that putting a lot of effort into share selection is not everyone's idea of fun of course and if you don't enjoy it you are probably best keeping away from value because you may not be sufficiently interested to make it work. Know your own personality first because this is not an easy road; don't be misled by '99s roaring success. It is a lonely and difficult journey. Perhaps with the aid of the Fool it is a little less lonely. But still difficult.

You can never achieve the sort of results I believe are possible from value shares with tracker or similar broad portfolio style approaches. You may do alright compared with cash and that's fine. But I personally wanted much more from the market. To do this I realised that I would have to put in a lot of work. Just like running a business. And it would have to be some relatively little used method because that suits my temperament, going against the crowd. That added the fun bit to it.

There are other successful styles, I am not saying this is the only one that might make money, but it's the one that suits me. I don't really want it to become popular because by definition a popular share cannot exhibit value, not by my measure anyway. If it were to become popular I would have to search elsewhere for something contrarian.

I doubt it will though, it is too boring for most investors. Even the types of companies selected are usually boring. What I and a few others have long known though is that as far as making money is concerned, boring is beautiful because it tends to have much lower risk. Housebuilding, insurance, packaging and the rest of my recent investments are not sexy, not to the novice investor who may be temporarily making money in some Internet share. To me though they – the boring ones – are centrefolds. As far as shares go I will nearly always take the frumpy lady in sensible shoes over the flashy model. I prefer fur coat and knickers. Only in shares mind.

To conclude, I have no idea what prospects 2000 holds for value and pyad in particular, except that I would be surprised if it was as good as 1999. I am not making any New Year forecasts because as far as any particular shares are concerned the date is irrelevant. When the shares appear, they appear. Until then, as always, I stay away unless as now, I happen to be in one at the moment.

I wish all the value players a good Christmas and a rewarding New Year.

Related Links

• Anatomy Class Three – The Fairview Story
  
• Value Shares message board