VALUE INVESTING
The Women from the Girls

By Stephen Bland (TMFPyad)
March 23, 2001

My title refers to the sorting out that this market is going to do to investors. Value, of course, comes into season now as more and more choice presents itself. I always prefer a big capitalisation value play to a smaller one, other things being equal, and the collapse will bring some great blue chips into play. Not necessarily pyad shares because nearly all big caps are in debt, but nevertheless some terrific shares, FTSE 100 and 250 types, already look good and will look better if the fall continues.

Big caps are preferable in my view because they add a further downside minimisation criterion to the usual value features. A serious bear market is no time to be looking at tinpot value shares. Quality matters much more when the market is falling. Why go for the added risk of small caps when there are plenty of big cap plays around?

One point I think may be relevant here. As always with value investing, try to ignore macro talk about the market and the economy, of which -- because of the large falls -- there will be a lot more around than usual. I've often said that there is too much information around by a factor of a million in any event, but in times of rapid movement like now the output of the investment bullshit industry, already more than sufficient to drown the novice small investor under the weight of its prodigious output, goes into overdrive. Many of our own boards are sagging under the colossal tonnage of advice, unfortunately some of it from those who know not whereof they speak, but it isn't out of their mouths.

So, focus on your mark. Has it got all or most of your particular set of value criteria, including "outers", overt or covert? Do you like the name? Then consider making your play. Think about the company in isolation assuming there was no bear market. Does it make sense? Is it attractive? You have to believe. And you have to be prepared for it to go lower. You cannot call the bottom. If your beliefs were right you will make money, whatever the market. If they are not, you will lose. That will happen either because your analysis was flawed or because, as occurs inevitably on occasion, the fundamentals change for the worse; a profit warning perhaps. It's still your own fault, even so. The only small consolation is that a good value share coming out with a negative earnings surprise will be hit far less than a highly rated share.

Will the market go much lower? I don't have a clue whether it will or not, nor does anybody else. And I don't care because markets don't interest me, other than as an amused bystander watching the ancient theatre of human nature repeat its interminable play yet again. I've seen it several times already. A kind of existential version of The Mousetrap.

Some of the funniest talk comes from round number artists: those who suggest that the FTSE 100 at 6,000 or 5,500 is some sort of magic "support" level such that if it falls below the round number then the wossname will really hit the fan. In fact it makes no difference whether it goes below 5,500 or 5,678. It is just as likely to fall below a non-round number as a round one, or rise above it. Humans, though, have this intense desire to believe there is some sort of order out there. There is, but not the kind most think. It is by betting against this sort of belief, utterly reliable as good old human nature always has been, that you can score. Which is what value or contrarian investing is all about.

So what I am personally doing at the moment? Well, I have two shares at present. A huge portfolio by my standards.

I went into Scottish & Newcastle (LSE: SCTN) not long ago and shortly before that Anglogold (NYSE: AU). This was some time before the market started falling heavily. Both are showing modest profits at present quite irrespective of the falling market though of course this could reverse at any point. Equally, I may dump them at any point as well. Both offer decent yields, neither are pyad shares. Anglogold's dividend, though, is unreliable and will fluctuate with profits, highly unstable as the latter are which you might expect with a gold miner. S&N has a pretty reliable dividend.

Beware though. Single-product mining shares in particular are only for those who understand completely what they are doing and can live with the risks. Consequently I advise that most investors steer clear, especially novices. This is strictly a big girls' toy. The main driver with single product miners is not P/E -- forget that -- it is the price of their commodity. They are a highly geared play on that; emotional gearing rather than a direct arithmetical link between earnings per share, reserves in the ground and the commodity price. And that emotional gearing is immense, hence the attraction.

But that's me. I advise more normal players to keep an eye on the big caps in the UK market for value. S&N is one such of course, a real hidden outer play, the most exciting value play of the lot. All value shares are boring, by the standards of non value players, but for us, boring is beautiful. With overt outers, usually strongly rising EPS, you are as sure as anything is sure in the market that you will win unless, as sometimes happens, the forecast goes wrong. But with a hidden outer, you are really in a minority of one against the market. I love that more than any other situation.

The author holds shares in Anglogold and Scottish & Newcastle.

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