VALUE INVESTING
Waiting Eagerly for a New Fad

By Stephen Bland (TMFPyad)
July 13, 2001

Again I find that there are no value shares about which I am inclined to comment. The trouble with forcing yourself to mention a share every week is that the quality inevitably has to suffer because there simply are not that many decent plays around, so I am not going to mention any shares any more that do not appeal to me sufficiently to justify bashing my keyboard.

That does not mean writing up only those shares that I might buy, they are far too rare, but I want to refrain in future from mentioning a company that I feel might be too risky even though it has some value characteristics.  That doesn't mean of course that any share I do choose to evaluate here is a better investment than before. My articles are not tips and nobody should invest in them solely because they are featured here. They are just ideas into which people might wish to look further. I am not a tipster and I do not wish to be seen as such.

The consequence is that I will be writing more non-company-specific articles on strategy points and the like, both on direct value investing and on my high yield portfolio ideas which on TMF now comes within our general value area.

Good value shares have become very rare as a result of the popularity of the approach, which itself is a contradiction in terms. It doesn't make sense for value to be popular because value was always about doing the opposite of most other investors. So if more and more are doing the opposite, which is the mainstream? A nice paradox and one that has taxed us sometimes on the value board. Paradoxes apart, the effect of this scarcity and popularity upon some value investors is that they may weaken their fundamental selection criteria in order to find suitable plays and thus increase the risks. Not a temptation to which I personally am likely to succumb, rather cash in the bank until the right one comes along -- though I do make the odd side bet from time to time in non-pyad shares that take my fancy.

I guess the reason for the recent popularity of value in all its many shades, from my ultra-deep style to shallower versions is not too hard to fathom. As many have observed it is probably a flight to traditional methods of share evaluation based on fundamentals after the huge losses suffered by large numbers of investors in the tech fad collapse. And if it is true that there is a lot of hot money in value right now, then it will flow away as easily as it came in as soon as another fad develops. In a sense value has itself become a bit of a fad, though not one that compares with the real thing.

There are always low P/E shares around of course, at any moment in the market you can rank all shares by this measure and there will be high ones and low ones as well as a load of shares with no E at all. Amongst these low P/E shares and maybe some of the loss-makers lurk the value shares. But because so many people are engaged on this hunt right now we have the rather odd situation that despite a fair drop in the market over the last year and more, which should increase the supply of possibilities, I am finding fewer interesting shares than a while back when the market stood at this level before its rise to well over 6,000 on the FTSE 100. In other words the quality of these low P/E shares is worse in general.

In fact before my most recent play in which I am presently fully engaged, I had one of my longest periods out of the market due to a paucity of the right stuff and this even though the market had given up 1,000 points during this time. There had been a couple of excellent side bets, but nothing into which I felt the desire to go fully.

As far as I am concerned, then, I look forward to the next fad into which, unfortunately, a load of people will invest, more and more as it progresses, the earliest players perhaps having the sense to get out a profit and the latest ones, the majority, the mug punters, as usual losing their shirts. It never changes.

In fact if one is skilled enough in knowing the signals there is money to be made from these fads though it is not my field. One little trick if you are not canny enough to get in right at the start is to watch for the first warning comments about a developing fad in the press etc. telling people not to go in because they will lose and so on. At that point, if you are minded to go in for this stuff, bet heavily because there will be a huge mileage left in it. I have observed repeatedly that the first warnings issued by commentators and other pundits are always way too early. A great buy signal for skilled fad operators. Just make sure you get out in time, though. Unfortunately most fad players are hopelessly unskilled.

But whatever, the next fad will probably shift the focus of a lot of investors who are not true value players away from value thus increasing the availability of decent plays. I might have a long wait though, I see no sign yet of the next fad; it's too soon after the last one.

More: How to Avoid the Next Fad