VALUE INVESTING
Professional Opinion

By Stephen Bland (TMFPyad)
May 26, 2000

A discussion has taken place on the value board about a small drug company, Maelor (LSE: MLR). The initial poster put this up on several boards, I understand, unsure of where he would get the best comment. Needless to say the value board provided it, because, well, that's what we do there. We analyse, probably better than any other board because it is totally impartial, lightly, and with not too much depth because it is counterproductive. Very technical posts ensued from clearly very knowledgeable medics, not our usual readers, discussing the merits of the products under development and how these compared with existing stuff on the market and so on.

I hardly understood the terms being used, my vocabulary being limited to words with a couple of syllables, tops. I do love some of them though. How can a word freak like me not like such a wonderful expression as Ankylosing Spondylitis? Doesn't matter what it means, it just rolls off the tongue like a great song. Judging a profession by its jargon makes doctors number one by miles, closely followed by the foul lawyers whose sole purpose on earth, in total contrast to the medics, is to mess up peoples' lives, with the wonderful accountants a poor third.

My initial reaction was the usual boorish one of scaring people off by suggesting that this kind of thing does not belong on the value board, as it is not a value share on fundamentals, the true meaning of value. And cluttering the board up with non-value shares merely makes it harder for readers to get to the stuff that should be there. I held back, though, to see how it would develop. Could a share be described as a value share, even on the proper definition used by the value players, if it had undervalued assets, the primary one consisting of a breakthrough in some kind of dope with enormous potential as yet unrealised in the share price?

I was sorely tempted to make a few cynical comments because this sort of share is more usually discussed on growth or tech type boards. It has a lot in common with the kind of shares that have some new software or hardware or genetic drug. The kind that sometimes soar to mad heights, drawing in the mug punters at the top, then collapse, losing them all a load of money. Techs, biotechs and the like. There's been enough of those around lately. Great for traders, but 99.9% of small investors don't possess trader skills and so lose out.

So out of respect for medics, I let the thread spool itself out. Interestingly none of the regulars commented upon the company not being a proper value share either.

Having heard the arguments, I still don't think Maelor is a value share, and here's why.

I am enormously sceptical about the valuations placed on new technology, biotech and the like by well meaning individuals who are professionals in their fields. That is the heart of the problem. I don't trust a techie's opinion on the merits of techs. I don't trust a medic's opinion on biotech from the point of view of whether the shares are any good.

I don't trust a lawyer's opinion. Well, I don't trust a lawyer's opinion on what day of the week it is. If it's Thursday, he will, for a fee, try and convince you it's Friday. If he's skilful enough he will succeed.

The reason for my scepticism over this is that they probably don't possess much in the way of financial or risk analysis skills. They merely see the wonderful technology, but cannot see the business value. There are exceptions of course, I am generalising. But mostly, I feel I am right. Too often the wonderful new technology fails, because it turns out to be flawed, or someone comes along with something better and so on. With drugs, it may well be that some new development has amazing potential. From a medical point of view it may be a tremendous achievement. But how often have we heard this, only to discover later that all went wrong?

Look at all the hype on our boards over tech shares. A very large proportion of the positive messages will be from techies who believe in the product. But belief in a product is no way to buy shares. Belief in shares for financial reasons is the way to buy shares. Almost irrespective of what the company actually does.

A client of mine, a techie, a lady earning very serious money, a great expert in her field and so knowledgeable that she makes me weep, was recently raving about something called Cisco to me. Buy!

Who? When I was a kid, the Cisco Kid was on telly. Great series. Cowboys. This guy could shoot the diamond out of the Ace of Diamonds at a hundred yards. Even though the Colt double action revolver of the era typified in the series was so inaccurate that it couldn't hit the side of a barn at one yard, even with the Kid at the trigger. But why let the facts get in the way of a good story? I loved it. I played the Cisco Kid with my mates. Until I discovered Doctors and Nurses. I used to have a friend then called Phyllis. Kind of ages me, eh? But friends say I don't look too bad for a sixty-nine-year-old. I have never, ever, since met a lady called Phyllis and sometimes think I must have dreamt her up. But my mum says she really existed. Anyway apparently the Cisco she – my client, not Phyllis – was talking about is some Yank outfit. So was the Cisco Kid. Why should I buy? Because whatever it is they make, everybody has to have one. What do they make? I fail to understand but it's some kind of electronic dooberry. That's it? That's your investment rationale? Yeah.

Now she may be right, I have no idea, but Cisco ain't no value share. And that's almost the only kind of share in which I am ever interested. Turning to Maelor, I studied the thread hard to see if maybe, just maybe there might be something in it for me. I knew the share was not of course the usual value play. But I'm prepared to listen when there is money at stake, the potential making of in decent wodgy amounts, not nickel and dime plays. Nothing convinced me that I should change my ways. The share may well be a great investment but that is not my point. It is not a value share and I am totally unconvinced by the arguments put up by experts about the value of research and development, from a value investor's point of view.

The share is consequently, in my view, just another tech/biotech style play, like so many others that have come and gone. Some to make fabulous rewards for those who know when to trade them, most not of course.

Potentially, a great investor could emerge from someone like a knowledgeable techie or medic who in addition to their professional ability possessed outstanding stockpicking skills. But these talents seem to be mutually exclusive. Almost to the extent of being counterintuitive, in that someone like this raving about a share is much more likely than not to get it wrong, through the ancient investment failing of falling in love via an intense overfamiliarity with the product.

In conclusion, I respect greatly the views of our medical contributors on Maelor. But guys, I hope you'll understand that I'll stick to actually acting on your views only when I have a pain in the arse or somewhere and you advise me on it. Then I am putty in your hands. But when it comes to having a pain where it really matters, in the wallet, I am somewhat sceptical of your Hippocratic abilities.

By the way don't think that accountants, with their intrinsically financial backgrounds, generally make great investors. Mostly this is not the case, with some notable exceptions. Jim Slater for instance is a chartered accountant. But as a generality the limits of an accountant's investment skills extend to taking out a personal pension scheme. Not risk-takers you see, and blinded by tax relief. You can sell an accountant any old wossname, as long as it attracts tax relief. And they in turn are great sellers of "tax efficient" investments to their clients. Trouble is, they're too often not wallet efficient.

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