VALUE INVESTING
Quite Contrary

By Stephen Bland (TMFPyad)
May 25, 2001

Everyone is a contrarian now.

A logical paradox, perhaps. Like the O-Level Logic exam paper, question four, which asked the kids being examined to deal with this: "Is question four a logical question?"

And no I did not do O-Level Logic myself, I recall the story being recounted to me by a guy I met whilst working in a warehouse loading and unloading trucks one summer several centuries ago. Probably apocryphal anyway: one of those urban myths. The pay was pre-decimalisation and I recall that it was five shillings and eleven pence three farthings per hour, about 30p in the dumb modern currency we were later compelled to adopt. Can you believe that? Even for someone of my (unfortunately, advanced) years, this was not that long ago that the farthing even existed any more; it had long since been withdrawn. Yet this miserable company would not pay the six bob an hour.

Fad chasers are queuing up to search for value shares. One can hardly look at any publication, in paper or electronic media, without seeing some reference to the style or related concepts like high yield portfolios. I read recently that in the US many funds are changing their names to suggest a value slant to their approach, where previously the name may have been indicative of some tech or growth considerations. Pure marketing, of course, it being easier to sell a fund right now whose name gives investors the idea that it is pursuing value strategies, even if it is the same fund. Obviously, this is because of the great success in general of value shares over the last couple of years, and fund investors in general are known to be fad chasers not fad setters.

If you ask fund managers why new specialist funds are launched so cynically at the top of booms -- witness the outbreak of new tech funds after such shares had already risen to around their heights -- they will tell you that they can't get them off the ground at times when the fund's theme is not currently popular. They are well aware that it may be the wrong moment, but a fund needs a certain critical mass to be profitable and this may not be achievable unless the specialisation is flavour of the month. Exactly the wrong time, of course, but that is when Joe Q Public prefers to invest.

And now, good old infinitely reliable Joe Q is a contrarian, a value player. None of this is new of course and we all know that fads always go wrong in the end; the clichéd "bubble", a word I am beginning to hate, so excessively has it been used recently in the tech collapse.

Can you have a bubble in value shares? Interesting point. They are not a sector like techs but a style. More paradox, because one of the primary features of a value share is low P/E. If low P/E shares become popular their P/Es rise. If everyone charges into low P/E there will be no low P/E. Hang on, though: at any time in the market there will always be a range of P/Es. You could rank all the shares on ascending P/E and find an enormous difference between the lowest and highest. So relatively speaking there will always be low P/E shares, even if not in absolute terms.

So what is going on here as a result of the popularity of value? Can everyone be a contrarian? The answer is that while low P/E and the other classic fundamental value indicators still exist, simply because they are relative to the market and must in consequence always exist, the quality is harder to find. Because most shares on cheap fundamentals are not good value plays -- they never were -- it follows that if a lot of people become interested in the style instead of just the three of us that up to a couple of years ago were doing it, the more frequent filtering makes it harder to find good shares. Too many people are looking, making it increasingly difficult to find plays that I would consider worthwhile.

So what is the answer? Another bubble? Perhaps, but that is somewhat uncharitable given that those who will then abandon value as a fashion may go on to lose money in the fad. I guess there is no answer for someone like me, so deeply embedded in the style that I cannot easily change my investment personality to adopt another approach. In practice this means that I can have a very long wait between big plays. There may just be a benefit, though, in that if I can find a good one, it might well "out" quicker because of the current high level of interest in such stuff.