VALUE INVESTING
Love

By Stephen Bland (TMFPyad)
January 28, 2000

My dictionary defines this emotion as "an intense feeling of deep affection or fondness for a person or thing." Sounds right to me. There are other definitions in the book. "A nil score in some games" for example. And then there are the derivations. "Make love" for example, a detailed exposition of which I suspect is not required here by our readers from me, these days replaced frequently by a shorter, one-word expression, the meaning of which has become blurred due to its repeated alternative use as a term of abuse or just general malaise at the world.

It's nice though. You would really have to be a terminally miserable bastard to deny it. Especially those early weeks and months of a new relationship perhaps, when you can hardly get her or him out of your mind. A corny saying but I guess true in the main: everyone wants to be loved and wants someone to love. And what of unrequited love? Maybe it's just infatuation but who cares about words, it hurts just the same.

When I was in school, a couple of millennia ago, in the final year, the sixth form and I was around 17/18, there was this girl in my class that I thought was absolutely wonderful. Attractive, very clever and so on. But being rather reticent I never had the nerve to ask her out. But I fancied her so much that it interfered with my school work as the class bookmaker. Anyway the last day ever of school came along, we were all leaving to go our own ways and the whole day was just one long riot. We ended up in a local playing field sitting on the swings and messing about generally and gradually everyone started to leave. And she came up to me and kissed me. It blew me apart.

I didn't see her again for some thirty years until a couple of years ago there was a reunion and we met. I told her the story. She remembered me but not the kiss, what kiss? So she gave me another one there and then. But it wasn't the same any more. And Yvonne if you're reading this, I know you won't mind me mentioning it.

So much for the romantic interlude. What of value shares?

This article was prompted by one of our regular value board readers who had made an apparently successful short term crisis play in a share, then confessed to the vile crime of liking the product made by this company. I had to admire his candour. No fifth amendment plea about refusing to talk on the grounds of self incrimination. He may have been trying to wind me up: that's quite easy to do, as everyone knows. A couple of days earlier another value reader made similar noises about another share, the much discussed Somerfield (LSE: SOF). These messages, to me, were like going on to the ethical shares board and announcing that all readers there should buy Bloggs Atomic Bombs shares because they are environmentally friendly, so perverse were they to a value fanatic.

This week, then, I wanted to write a diatribe against the practice of falling in love with shares. It could equally be of interest to growth or any other style of share investing, for the very simple reason that love is blind and that is where the fatal trap is set.

Love is said to be blind because when you are in love, you don't see, don't want to see or just don't care about the faults in the object of your attention, which may be clear to others. Your feelings overwhelm your judgement. The rational side of your brain is trashed by the emotional side. This may be good or bad when it comes to people, but it is irredeemably bad when it comes to investment.

Like human love, share love will cause you to hang on too long to a hopeless situation. Staying in a falling share despite a profits warning because you know about widgets, people will always buy widgets, and therefore it must recover. Equally, staying in a rapidly rising share beyond the point where the value has evaporated because again people will always need widgets and your company of course makes the best ones.

I've said before in this series that as a value player you need to be very unemotional about shares. Inhuman, antihuman if you like, doing mostly the opposite of what the rest of the pack do. This psychology angle is quite important to successful value investing and it is not easy. It requires you to forcibly become elated when others are depressed and vice versa. It requires you in addition to surgically excise from yourself that most human of emotions that we all seem to need – love.

Another of our readers was discussing housebuilders recently and could not see why the shares were languishing after some powerful gains a year and a bit more or so ago. This despite some pretty attractive value features still present in one or two of the shares in the sector. I myself had two good winners amongst housebuilders during their sharp bull phase in late 1998 and early 1999, as I've mentioned before. My approach had led me into these shares when few were interested. It led me out when more investors became interested, driving up the price. I believe our reader also did well in that sector at the time. However, I had finished with housebuilders in 1999 when those I bought had risen strongly, upon which I sold, finding no others had the complete set of criteria I seek. I am not interested in sectors anyway. But our reader was still in and could not see why the strong outperformance shown earlier was not continuing. I think he had fallen in love with the particular share he mentioned.

What are the symptoms of share love? Well, a tendency to overanalyse is quite common. This habit causes the effect of excessive proximity, a nasty condition that results in the investor writing huge, long analyses of the company with extrapolations of EPS into the next millennium as he tries to get in too close, destroying his objectivity in the process. By knowing everything about the company, or thinking he does because an outsider never really can, then publicising it in incredibly detailed investment analysis, the equivalent of a love letter, the investor/analyst risks talking himself into an affair with the share based on emotional rather than genuinely analytical views, despite the fact that superficially the report will look highly objective. Not always, of course, I'm exaggerating to make the point, but you can sometimes see an inverse relationship between share price performance and the length of analysis written about the company extolling its virtues.

As far as I'm concerned, the concise analyses presented by the Investors Chronicle in their company results pages are often all I need. If you cut out the IC's own opinion on the shares, in which I have no interest, then their whole report including a little table of historical figures is a wonderful lesson in how to convey the full flavour of a value share in as little space as possible. It is a great piece of financial reporting. Many of my most successful investments have come from these pages. But I groan if someone writes a lengthy piece somewhere about some company, nearly always of course with the object of recommending it as a buy. Few would bother to do this on a share they did not fancy already. There is just too much information, a lot of work is required to produce such a thing and the writer has already fallen in love beforehand but feels he ought to justify this by the length of the article. But really it is not on fundamentals that the writer is positive on the share, but because he has let his emotions get the better of him. The analysis is just the attempted rationalisation of the irrational view.

Other symptoms include a refusal to face facts, attempting to argue positively about a fall in some way that justifies hanging on, rather than dumping the share. I am not saying that a falling share must be sold just because it has fallen. Many successful investments of mine have fallen before rising. That happens. The question is why? Is it just market noise or is it a fundamental change in the company such as a profits warning? Love symptoms would indicate hanging on, past the point where objectivity dictates that the share must be sold.

So finally one of my mantras, oft repeated, and with which I love to annoy people who just hate my little sayings.

Never fall in love with shares, they won't love you back.

Comments on the value board please.

Related Links

• Value Investing – Sector Woes