VALUE INVESTING
I'm No Fool

By Stephen Bland (TMFPyad)
July 6, 2001

Again, there are no shares about which I thought it worthwhile to write here today, so some more general thoughts on value investing instead. I think I have written before on the subject of whether value is Foolish and concluded that it is not, at least the way I and many others play it. Of course this depends upon what is meant by Foolish investing; I am defining that as long term buy and hold, generally of blue chip shares rather than small caps. This approach has been stressed in our books and on the websites both here and in the US.

More recently I detect the appearance of a "yesbut" codicil to this concept. What I mean is that if you define the original Foolish approach as literal long term buy and hold, that is, you do not monitor the shares but merely sit on them forever ignoring all fluctuations for any reason, then I perceive that this has been watered down by the "yesbut" people, who will now say that the investor should take some action from time to time.

This could be for various reasons, such as a share growing very fast to become a substantial proportion of the total invested, or the opposite where a share has fallen on hard times that are perceived to be more permanent than temporary, and so on. Personally I disagree with this and believe that long term should be literal long term in most cases, because I doubt the ability of the great majority of investors who invest a lump sum in this way to make the call about whether a share should continue to be held or not.

So as far as long-term investing is concerned, I am probably more Foolish than most others in believing this to be quite literal. My High Yield Portfolio is an example of this, designed to be held forever with no dabbling and in doing so provide a growing income to the investor. I have seen this approach work many times in real life and can look back at people I know who have done just this and reaped the benefits.

Usually they are the type who have no interest in the market and by virtue of this do very well by doing nothing. Perhaps long-term investors who seek success might learn from this by buying their portfolio then immediately disconnecting themselves from anything to do with the stock market, taking up angling or something instead to fill in the time they would otherwise have spent constantly studying the financial press and bulletin boards.

But value is frequently short-term, by which I mean anything up to a short period of years which will vary with the investor and with how the share is progressing. It is the antithesis of eternity investing. My usual maximum holding period is around two years though that is not a fixed limit, and there is no minimum. Many of my investments have been held for only a few months. The derogatory implications of this as "trading" in the mind of some remind me of the sort of laughable British snobbery that existed perhaps up to the start of the second world war, where inherited money was considered "class" and anyone that made their money from a trade was thought by many to be somehow inferior.

This kind of perverted financial thinking is actually reinforced by our capital gains tax system which rewards longer term holders against shorter term plays. I see no reason for this at all and it strikes me as an attempt at a phoney and ludicrous morality lesson from the government that short term is bad and long is good.

Apart from the short holding periods, I tend to invest only in one or a very few shares, something I advise others against, but again this is hardly Foolish. Most dedicated value players should, and do, hold several shares in order to spread the risk. David Dreman, the author of many value books and articles whose ideas are very close to mine in many respects, suggests very large portfolios of twenty and more shares which I personally think rather too large even for conservative types.

My conclusion has to remain that as far as my own personal investing goes, I am no Fool. Yet I am also as Foolish as they come in another way because at the same time I push the concept of dabble-free high yield eternity portfolios of blue chip shares for those investors whose character suits this approach because I believe it is likely to produce good results in the long term.

I think it is called split financial personality disorder.

If I ever give up value, I will go straight into my High Yield Portfolio. From no-Fool to Fool overnight.