VALUE INVESTING
What Is Value?

By Stephen Bland (TMFPyad)
February 2, 2001

So ran the title of a recent message on the value board from a colleague of mine, TMFJimmyC who has recently taken over the management of the Rule Shaker portfolio.

A word that can mean many things to many different people, in general. Even if we narrow the range of definitions down to those used by investors in shares, it still has quite a few shades of meaning. And if we narrow it down still further to its use by writers on the Motley Fool we are still left with a number of explanations that vary with the approach of the particular commentator using it at the time.

The problem though is merely semantic, rather than of practical investment application. My dictionary has several definitions but the one that most closely fits the way it is used in investing is as follows:

"The worth of something compared to the price paid or asked for it."

Perfect.

The problem though is, as I said, semantic, in that the word has both a general meaning and a specific one. A similar situation prevails in many situations where a word has a usage special to a particular group of people whilst also having a general meaning to those outside the group, which although related to the specialised meaning, will lack the specific, scientific meaning attributed to it by the group. Common interest groups of people have jargon words that mean something to them in order that they can communicate easily, without having to explain themselves to each other all the time.

For example to physicists, the word "mass" has a clear, unequivocal meaning. To anyone outside this group the word has various, general and non-mathematical meanings. Another example could be the word "goodwill." To accountants like me the word has a clear quantifiable meaning within the discipline of accountancy. But it has also a general meaning which although related to the accountants' definition of the word, is much more vague and non-quantifiable.

So with investing, who owns the word "value?" Well, nobody, really. But as far as the value board on the Motley Fool is concerned the word has only one definition. My early value series of articles where I defined my personal style of investing explains without confusion, I hope, what I mean by the word. A huge number of messages on the value board, perhaps the most popular of all non-company investment boards, indicate what we mean there by value. It is perfectly clear.

In case anybody is still in any doubt, on the value board we mean shares with fundamentals at significant discounts to the market or sector. There are shades of this which vary with the individual investor but as a shorthand definition I think that says it.

Now ideally, as Jim suggested, there ought to be different words to distinguish the very different styles that all claim to use value. Jim is now using it on the Rule Shaker portfolio to define shares that are judged on the basis of predicting earnings per share many years into the future and comparing that with the current price and deciding that they may appear to possess value, even though the P/E may be, say, an astronomical 200. Such a "value" basis is just about as far away as it is possible to get with investing from that of the value board. Yet unfortunately the same word is being utilised to describe these two diametrically opposed ways of looking at a share.

But "value" I guess, like pulchritude, is in the eye of the beholder. Where I disagree with Jim's use of the word is in his suggestion that we should change the board's name to try and avoid this confusion over the investment meaning of the word. If different words are to be used and only one style be "allowed" to describe itself as value, I would have thought that the value board definition is a far more commonly understood version of what constitutes a "value" share than the high P/E concept being promoted as the Rule Shaker approach.

If you asked a number of experienced investors what they understood by value shares, I believe they would respond with some version of the value board style rather than any other. Just my feeling, I have no proof of this.

All investors try and find "value" of course. Back to semantics, because there I am using the word in its general meaning. But only a few try and find specific "value" in the sense of the value board. In this latter definition I am using the word in its jargon sense as understood by the common interest group of value players.

I have been around the markets a long time. Value shares have always meant to me, and many people I have known, the discounted fundamentals approach. It is unfortunate I guess that it is used to describe other styles, but only for beginners perhaps. Anyone seriously interested in equity investment must find a style that suits them, is successful for them, and stick with it. Its name is not really important. Only that it makes money.

Where Next?

Value Investing discussion board