VALUE INVESTING
What a Year!

By Stephen Bland (TMFPyad)
December 22, 2000

At the end of 1999 I wrote my final value article for that year with this title. I said this because it had been an absolutely vintage year for me personally, ranking amongst my all time greats even over the very long time I have been investing in value shares. 2000 has been as good or even better so I am retaining the title for this year.

1999 excelled because my realised investment performance in the eleven months to August 1999, when I sold my holding in Fairview (LSE: FRV), was a cumulative gain of 131% in the eleven months that I have been writing about value here. Following the Fairview play, within a short time I had reinvested the lot into London Pacific (LSE: LPG) at about 335p a share. By the end of that year I was still in this share and the price then stood at 545p. So I was showing a decent paper profit of about 62% on LPG.

In addition to LPG I had made a small side bet near the end of the year in Royal & Sun Alliance (LSE: RSA) at 380p which I saw as very cheap, though not perhaps a full pyad share. Even if it had been, though, I was wholly immersed in LPG which I still saw as having a lot of mileage left in it despite the handsome gain I was already showing. I considered briefly trading LPG for RSA but decided against it.

So my closing situation at the end of 1999 was total investment in LPG showing a good paper profit, plus a little on the side in RSA showing nothing. My cumulative realised gain since September 1998 was 131%.

That is how I entered 2000.

Early on in the year RSA fell quite a lot. There had been no change in the fundamentals so this fall was just noise. Consequently for me RSA was a screaming buy even more than my first trade, so I decided to average down. I bought a further number of shares, equal to my original purchase number, at around 330p thus averaging the buy price of my holding at 355p. At this point it started to look a little more serious than just a bit of pocket money, though still a side bet by my usual standards of going in with the lot into one share. The share fell further and bottomed at around 300 or a little below. No matter, value shares often fall after purchase, I can never get it exactly right, nobody can. But the adrenaline was flowing. I was at the steel nads stage, as so often happens with value shares. Self doubt creeps in. Had I got it wrong somehow? No! Believe. Hang on, I've made wrong calls before. Well, that's the risk you take. I hung in.

Had the fundamentals changed for the worse I would have been out of there instantly. But there was nothing. Dull press reports and negative noises on the bulletin boards encouraged me. This was going to be one of the great contrarian value plays although I did not know at the time just how great.

Meanwhile LPG was charging up like crazy fuelled by the tech boom. Incidentally, this was another share that had fallen a bit after I went in. Anyway, used as I am to booms, having seen them repeatedly in the past, I could see the mug punter rush. LPG is fundamentally an insurance company, but it had invested in a number of tech company venture capital situations. Its powerful rise was based on this alone.

In early February 2000 I finally closed out LPG at about 800p for a profit of 139% in around six months. LPG was a pure pyad play, the real thing, and it delivered the goods more than I could have foreseen as it turned out. I bought it as an undervalued insurance business. I sold it as a mug-puntered tech play. I was back in cash – always nice to come home – apart from the side bet in RSA.

LPG was my only sale in 2000. The realised profits of 139% on the share, when added to the cumulative 131% at the end of the previous value play, Fairview, brought the running gain to 452% in seventeen months from September 1998 when I started writing about my stuff here to February 2000. I am not including anything here from all the many years before that.

Following the sale of LPG, I stayed in cash plus RSA until very recently. RSA has gone on to do the business in fine style and as I write, the price is around 560p. On top of this I have had dividends of 25p so giving me a total paper return of some 64% so far. Note that the FTSE 100 index has actually fallen so far this year by 10% or so. "Boring" RSA has gone totally against the trend and then some. A great example of how value players must ignore markets and macro comment. Focus, concentration, these are the winning requirements, not vague talk about markets or the economy and so on in which some people like to indulge.

Note that I am perfectly happy to stay in cash for long periods. I play the game only when I believe the odds are in my favour, as much as that is possible with equities. I don't feel the need to weaken my approach so as to be in shares all the time. This would reduce my winners, create more losers, trash long-term returns.

Within the last few days, I have taken a stake in South African gold miner, Anglogold (www.anglogold.com) at around £18 in London, which is the sterling equivalent of their rand price on the Johannesburg exchange. They can be bought as ADRs in New York as well. These are traded in US dollars and represent half of one full share. Thus two ADRs on the NYSE are equivalent to one share in London, or Jo'burg.

This company is by far the largest gold mining company in the world, running mines in South Africa as well as Australia and many other areas. Its P/E is similar to its yield; both are around 8. Excellent value credentials. Note, though, that earnings per share and dividends fluctuate dramatically with a share like this and are nowhere near as predictable as those of other industrials. It is not exactly what you might call a classic widows and orphans value share and it is not a pyad share. However, I see it as the least risky of the gold mining sector, which is a pretty risky sector anyway. Minimise the downside. Well, relatively. In fact Anglogold has significant downside even though it is at a year's low.

Note that gold shares are really a play on the gold price: moreover a highly geared play, because they move by far greater percentages than bullion which currently trades at about $270 per oz. This price has hardly changed for many years.

So I close this far in 2000 with cumulative realised gains of 452% since September 1998, a paper profit on RSA of 64% and a very recent holding in Anglogold at a cost of about £18 with no significant movement yet.

What A Year 2000 turned out to be. As for 2001, who knows? I don't make predictions.

Where Next?

• Value Investing discussion board
• What's a pyad share?