VALUE INVESTING
Foreign Value

By Stephen Bland (TMFPyad)
October 20, 2000

Occasionally people post foreign value share ideas on the value discussion board. Usually US shares, but we have had the odd Euro stock mentioned as well.

This raises the question of whether the value approach would work in foreign markets at all. I am in no doubt that it would. In fact one of the leading writers on value and contrarian methods is David Dreman, an American who follows the American markets.

I have written often in various contexts that market movements are primarily the result of that most ancient of phenomena, human nature. Since foreign countries – well, some of them anyway – are populated by creatures like us that are human, it follows that the mindset is common. Investors everywhere are driven by the same emotions, whether in Britain or elsewhere. Regulation varies greatly, from the so-called emerging markets of places like Russia or South American countries, to the large well-established markets of the US, UK, Japan, some parts of Europe and so on, but despite the huge differences in the quality of the markets, investors themselves are similar.

Another one of my favourite themes is that of perception. It is my opinion that the location and realisation of value shares in stock markets is based more on taking advantage of market perception than of any concept of "real" value. The only real value is the prevailing share price; an interesting subject that has been debated a lot on the board. A share is undervalued, using fundamentals as the indicator, because the market has permitted that undervalue to exist. It shouldn't in theory, but because things are not perfect it does. It has opined at that moment that the value, as dictated by the current price, is lower than the value investor's own perception based on an analysis of the fundamentals. The investor cannot, though, profit from what he sees as an incorrect perception by the market until the market decides that it should change its perception of the share by according it a higher price. It may never happen, or the investor's patience may wear out waiting, but that is the risk involved. Incidentally, one reason I like high yield is to give some sort of return if you have to hang around for a bit; quite a common occurrence.

Returning to my theme of foreign shares: my problem with them, even though I am certain that value would work in the US for example, as demonstrated by Dreman, is that I have no feel for the shares because I don't live there or follow their markets. I can't "smell" them, if you like, because I know very little about them. Consequently I can't easily gauge the market's perception and whether it is likely to change in my favour, even if the share is undervalued on the usual criteria.

If someone says to me, for example: "M&S is not far off book by now, any lower and it will be an asset play," or: "ICI is too highly geared to be an attractive value share," I instinctively know what these shares are, simply because they are well-known and through following the markets for years I have acquired a certain view of them. But if someone were to tell me that even well-known US shares like Ford (NYSE: F), or The Gap (NYSE: GPS), or 3M (NYSE: MMM) were attractive, I could look up the fundamentals – possibly even easier to find than for UK shares – but I would not have the feel. The process would become too mechanical for me. It might still work, but it is not how I like to play the game.

In fact, someone actually did mention Ford on the board some time ago, and on the figures mentioned it looked good. But I would not buy, however attractive, because of my lack of local knowledge. Ford does not talk to me like a British share might.

So I have never invested so far in a foreign value share. I am not saying I never would, but I would have to devote a lot of time that I don't have right now into developing some knowledge that would enable me to take a view on the market's perception; not just on the fundamentals, which anybody can look up.

I don't know why, but on the US Fool value investing is very quiet. This is particularly surprising in view of the eminence of David Dreman, who apart from his books writes a regular column in Forbes magazine and has done for years. The US Fool have fragmented the approach, with separate boards for Low P/E investing, Turnarounds and so on, but even taking them together, it still seems to attract far less interest, relative to the number of readers, than our own value board. In fact the latter is probably by now the top or second of all the strategy boards on the UK Fool in terms of message numbers. I think only mechanical investing has more, but I suspect value may well overtake that in due course as it has been attracting an increasing number of new readers lately.

If this low interest in value on the US Fool is characteristic of US investors generally, it could mean that there are rich pickings available over there for value players simply because there are more shares in their markets and fewer people, relatively, looking for value. But personally, before I would be willing to stick a load of money into this idea, I would have to find a way of absorbing some US financial culture first and fast. But there could come a time, if I tired of the UK market and if I had some of that time.

Where Next?

• Value Investing discussion board
• US Fool boards: Low P/E Stocks | Turnarounds