VALUE INVESTING
Don't Take it Personally

By Stephen Bland (TMFPyad)
February 18, 2000

I was a little surprised to see some of the emotional reaction over last week's article in which I revealed that I had exited from London Pacific (LSE:LPG) at around 800. The reactions from readers were mainly negative, suggesting that I had dumped too soon, and the tone of one or two appeared to feel that I had personally insulted them by my actions. It's only money, guys. One reader wondered whether I might not be tempted to hang on to a share that appeared to have taken off in the style of Internet plays. The short answer was no. So was the long one.

The great bulk of my money is in value shares, although I do have a few other investments. As far as value is concerned I stick fairly rigidly to my personal rules. The rules themselves have a certain flexibility and I may sometimes be prepared to bend some of them for an outstanding case, and there is always the personal non-numerical view involved too, the smell. But within their limits I stick to them.

The result is that I may miss several things.

Firstly, I may not buy a share at all that goes on to be a great performer, simply because whilst being very cheap, it did not meet all my criteria adequately or I simply found it somewhat malodorous. This has happened many times in the past and I have no doubt it will continue to do so in the future.

Secondly, I may sell a share too soon, at least in other people's judgement.

And thirdly, I may lose money on a share that appears to have everything going for it by my criteria but which simply does not work out for reasons I did not, or more likely could not, foresee. It happens.

The second point is the one that concerned some readers as far as LPG is concerned.

I have written many times that shares that have been good to me have often gone down before taking off. This did in fact happen with LPG, and at one stage I was down around 20%. But I stuck with it, deciding the fall was mere noise and that therefore my original buy decision remained valid.

What I am saying is that although my deep value style aims to catch shares which are about to rise whilst they are still very cheap, it cannot call the exact bottom. Nobody can do that, except occsionally and by luck. It does not matter because if I am right, the shares are so undervalued that they have a large potential rise ahead of them at my buying price, even if they fall further after buying.

Similarly nobody can call the exact top of an upswing in a share, except again by luck. Just as with buying when I don't wait once I have decided to go in because the share is attractive, with selling I don't wait to get out once I have made the decision to dump. I don't wait to see if it is going higher; there is a point at which a share loses my interest and then I want out, immediately. That point is where I perceive the share to have moved into a higher risk area than is acceptable to me.

Because I usually have so much riding on just one share, I am not prepared to take risks above what I see as a level acceptable to my particular style. Few people follow my approach of going in with everything into just one, or a very few, situations at a time, and for those value investors with wider portfolios a higher level of risk may well be appropriate. But the substantial bet on one play that I undertake makes me extremely wary of going outside of certain limits.

So when I decide to sell, it could be simply because enough of the fundamental price-based ratios have moved out of my favoured range. Too much of the deep value has gone, as indicated by price to earnings (P/E), price to book value (P/BV) and yield. That is usually the most common reason, I guess. But in some cases it is not that simple. LPG was one such example. As I've written, I don't have predetermined target percentage gains or anything like that in most cases. I play it by ear, flying by the seat of my pants, just to mix metaphors.

As I wrote before, LPG rose powerfully, not in my view for value reasons but due to its involvement with venture capital and tech or Internet flotations. As I've said before, who cares why a share rises? Just ride it. So I rode it, up to a point. But for me the smell was going against it. Yield had shrunk below acceptable levels, but I could have lived with that. The results are out soon; maybe they would increase the dividend anyway. P/E still seemed very low, whichever way you looked at it. P/BV was difficult to value but unofficial views put it still as very favourable and the company still had cash as far as I could ascertain. Overall, on the bare figures, it still looked a fair bet. So why dump?

For the same reasons it had risen so strongly. The tech/Internet venture capital side. I believed that if sentiment turned against the sector then LPG might collapse even faster than it had risen. When a sector goes out of favour it does so far faster than any rise, just as bear markets are massively more powerful than bulls by the standard of the rate of change over time. A share that has risen by 100% over a few months in a heavily bought sector like tech/net, could fall 50% back to its start point in days quite easily. And then some. Expect falls of 80%, no problem, if the sector ever cracks.

And because the rise in LPG was non value based, in my opinion, it was time, for me at least, to kiss them goodbye after making a decent profit.

Some readers seemed somewhat affronted by this, taking it rather personally. But I just write about what I do because that's what I do round here. It's only my financial autobiography really, not advice to other people about what they should do. Few will follow my style anyway because they are not suited to the risks involved and that is good. Nobody should go into anything with which they are not comfortable and confident.

The truth is I don't really give a damn about shares. They're just bits of paper, poker chips, chess pieces, a means to an end. I love investing as a concept, game if you like, and have devised an approach which I hope tilts the odds my way a little, but individual shares mean nothing at all. Just temporary places to park my money whilst, I hope, it increases. Consequently I could not care less what happens to LPG and all the rest of them once I am out. If it takes off after my exit, well that's just my tough luck and good for the guys who stayed in. If it collapses then that's my good luck.

Never look back. And never fall in love. And never analyse it to death, which can often mask an irrational love that was there in the first place by trying to give it credibility with too many numbers. That may seem odd for an accountant to say, but then I'm an odd accountant.

I have defined entry and exit points, although as I say the exit point is not usually known by me in advance. Like the old joke about an elephant; hard to describe, but I know it when I see it. That bit of the share's performance is all that I am interested in. The range between those two critical points.

For me, without this disciplined approach my performance would suffer. I don't believe that I would make more money by hanging on past the point at which I no longer feel comfortable with the share and am happy to leave something for the next guy, essential to avoid losing money. I say this because of experience over many years in defining and refining the approach. Too many have gone wrong because I overstayed my welcome. Sure, I miss some that go on rising. But I also miss those that fall back, and there have been a lot more of the latter than the former.

Comments on the value board, please.