VALUE INVESTING
Do Your Shares Drop After You've Bought?

By Stephen Bland (TMFPyad)
June 2, 2000

So do mine sometimes, and those of other value investors. But I would guess far less often, and by a smaller amount than many other strategies or varieties of investor.

"Everything I buy seems to go down." You hear this comment frequently from all sorts of investors, from those that buy just on tips or because a share has been in the news a lot, like the techs of a few months ago, to investors following careful strategies based on some reasoned approach which they believe will work. In fact it is often said with an air of jokey resignation, as though it somehow follows that just because a person has bought, the share is almost certain to fall.

One shouldn't perhaps be surprised if the tip or fashion following investor sees a fall just after buying. They are likely to be buying in a boom and around the top by definition, regardless of the underlying qualities of the share, just because everyone else is doing so. At its extreme it becomes shoeshine syndrome, but apart from mad periods like we have seen recently, this kind of thing goes on all the time, even in more placid markets. For example, quite apart from the tech boom, many people, probably beginners and inexperienced in the market, were buying Vodafone AirTouch (LSE: VOD) just around the time of the merger with Mannesmann, in the belief that this must be a good thing. But in practice, the bidder in a successful acquisition will very often fall back quite sharply once the bid is achieved. Just the old market psychology at work. The anticipation being greater than the event.

But that's beginners or those who don't really want to study shares and psychology. Not too surprising if their shares fall back at first.

However it is the more seasoned investor to whom this happens that it hurts more. Why is it though such a common experience even amongst the experienced or clear strategy players?

Incidentally, before I come to that, I discovered recently the proper origin of the American "shoeshine" expression. It dates from the 1929 Wall Street Crash, which I knew. I had though thought, erroneously, that it was based on the idea that since even shoeshine boys, not exactly known for their investing skills, were buying shares, this was a clear indication that the market had gone too high. It's almost that, but not quite. It's worse. Apparently the well known investor at the time, Bernard Baruch, commented that he had received a tip from a shoeshine boy, thus triggering in him the belief that the market was overvalued.

Funnily enough a few weeks ago something very similar happened to me when a client, knowing nothing whatsoever about shares at all, a simple guy but having a good business sense, rang me on his mobile with a hot tip. In fact so hot was it, that he wanted me to arrange the purchase for him so desperate was he, and he couldn't get to a computer to reach his online broker because he was stuck on top of Big Ben or somewhere. Now this guy had actually made a few quid out of tips during the tech boom during the period when almost anything performed well. He was shrewd enough to sell when he had made a decent profit, so of course he always ignored my cautions about trading on tips since they had worked for him, so far. I refused to do the trade for him and he eventually bought the next day. Needless to say the shares collapsed in the reverse tech boom, and he lost all the profits he had accumulated over the last year or so and more.

Back to why shares often seem to fall immediately after purchase, and why this happens to experienced investors as well as others.

First of all there may be an element of illusion in it. People may be remembering only the times when this happened whilst perhaps having less recollection years later of the times when a purchase was followed by a rise. In theory I guess it should be 50/50 over a large number of purchases, assuming the share is as likely to go up as down. In practice though few individuals will make sufficiently large numbers of share buys over time for the rises/falls figure to follow the statistically likely pattern.

Selective memory apart though, is there possibly something in the belief?

Dunno for sure but if there is, I suspect it is because there is some psychological reasoning that attracts investors to shares that are popular, not fad followers for it is obvious in their case, but those using a clear strategy. And if a share has become popular, it may have enjoyed a bit of rise recently due to the popularity, and consequently may be heading for a short term fall. I'm not saying that it isn't a good long term buy. If the investor's strategy is correct then he will be proved right. I am just concerned here with the short term fall that many investors complain about following purchase.

Shares come into the financial news for a variety of reasons. Common examples are: results announcements; major company news such as a bid, sell off or profits warning; some problem with the directors and so on. If the announcements are positive, then the shares may rise. Like it or not, upon reading this it gets stored into your mind. You may research the company, triggered by the press reports, and like what you find. So might many other people. The shares rise more and you go in because apart from the news which planted the seed, you like the company because it fits your strategy. But because we are dealing with a market, after a number of investors have gone in, the short term operators trying to capitalise on the news announcement will sell out to realise their profit, thus driving the price down.

You will have bought possibly around the top of the short term upward movement generated by the news, even though you really bought on more serious considerations for the long term, not purely as a result of the news. But the seed was planted by the news. Consequently the shares go down after a short time and you moan. As I say, this does not mean the share will not go on to be a star long run.

Coming on to value shares, I would be looking at the opposite of the above. Ideally a share that has not been in the news recently at all, or if it has, then perhaps for negative reasons, a potential crisis play. I don't want anyone to know about my share until after I have bought. It's my little secret. Daft perhaps but I never claimed to be a sane, normal investor following the rule book with a portfolio and spread of risks and all that stuff.

I don't want much recent positive press or broker comment if I can help it. I would not reject a share merely because there was such comment around if it otherwise fitted my criteria, but I like it ideally to be undiscovered as far as possible. Thus if you accept my reasons above as to why shares often seem to go down after purchase, it can be seen why this is somewhat less likely with value shares. But it still happens. I can't eliminate it. Even the deepest value cannot arrange to get you in at the exact bottom of a price movement. However it helps hugely.

What I then want of course, after buying, is as much of this comment as possible, to assist in outing the value in the quickest way. After a time if the share is successful, then all positive comment becomes negative in my mind. Odd perhaps to the uninitiated but this is the product of the contrarian approach. The sale smell feature, or one angle of it. Evaporating value is a more numerical sell indicator. But widescale press and tipster activity are valuable intuitive sale signs. Good old psychology, human nature again, call it what you will. The point is that these things have a habit of becoming more common as a share nears its peak, as far as losing value goes, not necessarily its peak by non value standards, but I have no interest in the latter.

This happens simply because the press and tipsters are often mere followers of fashion, rather than the leaders one might suppose them to be. And following fashion, as far as the stock market is concerned, is the last place on earth that I want to be. The amount of news about a share is in almost inverse ratio to its qualities sometimes.

One of our regulars asked recently on the value discussion board whether it might be getting too popular, judged by the number of messages that had appeared whilst he had been away. In other words, was value becoming fashionable? "No" is the short answer. There are thousands of investors out there. Value appeals to only a few who have the discipline to follow it, and in addition find it appealing. You have to like what you do to be good at it. Most investors would not like this approach at all. Which suits us just fine. I'd have to switch strategies if value became so popular such that pyad shares ceased to exist. And I don't fancy changing at my age.

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