VALUE INVESTING
How're We Doing?

By Stephen Bland (TMFPyad)
August 11, 2000

I thought this week that I would have a quick review of the nine shares that I have analysed in this series over the last few months. Remember that whilst I would classify all of them as strong value plays, none of them were the very rare, very deep value shares in which I personally invest most of the time. Despite that, they all had attractive features from a value viewpoint, which I felt made it worthwhile bringing them to readers' attention.

My real point is to demonstrate that value investing, in its various shades, is I believe probably the most consistently successful approach to making money in the stock market. It does though require some work, a good understanding of fundamental analysis and a certain financial personality. Do not underestimate the latter; it is important that an investor possesses the right psyche for this. I would characterise the primary features as patience, total discipline to the tenets of the creed and the ability to believe you are right about the company, in the face of whatever anyone else may be saying: brokers, press, bulletin boards, friends, anybody. Call it unshakeable faith in yourself perhaps, almost akin to religious belief.

Here then are the dates, price at the time of writing the article and price now – the dates link to the original articles.

                       Date    Price then    Price now   Change %

SVB Holdings            12/05       82           124         +51
Allders                 09/06       93            99          +6
Garban                  15/06      210           230         +10
Prism Rail              23/06      435           610         +40
Delta                   30/06      137           122         -11
John Laing              07/07      234           262         +12
Amec                    14/07      189           246         +30
Alliance & Leicester    27/07      456           511         +12
Royal & Sun             04/08      430           448          +4

There would have been costs and spreads of course, but against that, dividends would be payable in due course. Remember that because they are value shares, most of them have decent yields.

Only Delta (LSE: DLTA) has lost money. Royal & Sun Alliance (LSE: RSA) and Allders (LSE: ADS) have not done much but they are slightly positive. Slightly more positive still are Garban (LSE: GBN), Laing (LSE: LNGO) and Alliance & Leicester (LSE: AL.).

The top performer, SVB (LSE: SVB), a Lloyds insurance investor, has rocketed, as far as I am aware only because of a market rerating; the classic value turn round that can take a few weeks, as here, or often much longer.

In second place, Prism Rail (LSE: PIM) has received a bid, the possibilities of which always come with the territory of value investing. I advocate that value players never make bid talk a purchase feature. It has a nasty habit of failing to materialise when it arises from market rumour. But the way I see it, the very factors that make a value share attractive to an investor can also attract bidders, on occasion. So a good value share has better than usual chances of being taken out by a bid anyway. Just don't build it in to your fundamental appraisal of a share.

Third placed is Amec (LSE: AMEC), the construction company. Again the rise is due to a value turn round.

Finally, a look at how a portfolio of these might have performed. Only notional, but taking, say, £1,000 in each share the start money would be £9,000. The total value would now be £10,548, an increase of 17% over an average period of a couple of months or so. As I say, I haven't allowed for costs and spreads. Knock off the £548 if you like to allow for this and you still have a gain of £1,000 or 11% in that time; and on top of that the dividends will roll in if the shares continued to be held, thus covering those expenses and maybe more, depending on the holding period.

In practice, if this was a real money value portfolio of mine, I probably would have kissed goodbye to SVB and Prism by now, thus raising around £2,900 for the next play. The former has had its essential undervaluation realised by the market and the latter by the bid. It is essential to keep discipline and sell when the value has outed. Don't hang on hoping for further rises. Not if you regard yourself as a true value player, anyway. Go cash and never look back. Look forward to the next play.

Where Next?

• Value Investing discussion board

Previous articles

• SVB Holdings
• Allders
• Garban
• Prism Rail
• Delta
• John Laing
• Amec
• Alliance & Leicester
• Royal & Sun Alliance