VALUE INVESTING
Don't Give In

By Stephen Bland (TMFPyad)
July 20, 2001

A rather special occasion this, for me anyway, because it marks my hundredth value article for the Motley Fool. For a laugh I have checked back to article number one, written in August 1999. Normally I don't like looking back through stuff I have written. It is often embarrassing, for various reasons. With investment articles it is always possible that some suggestions were proffered which in the light of subsequent events proved to be outrageously inaccurate.

There is also the possibility of embarrassment at the language used if one is prone to using clichés. Yesterday's clichés when read some time later can be toe-curlingly cringeworthy. For example did I ever use "it does what it says on the tin", which keeps appearing all over the place now? I dunno, but not in article number one in any event. When writing I always try to take an anti-cliché pill before I start but despite this, these little pests can creep up on the subconscious and hit the page before you know it. The anti-cliché pills don't always do what it says on the tin.

Anyway, in number one I attempted a definition of a value share:

"A value share is one that is selling unreasonably cheaper than other shares of a peer group on the basis of some investment criteria."

Does this embarrass me now? No, I continue to think that is a fair description.

I wrote also of the KISS principle – Keep It Simple Stupid. This is very much part of the value approach and I said that I am suspicious of complex investment schemes that claim to make money in the market.

Does this embarrass me now? No, I continue to think that is a fair comment.

And I wrote also of how people love to categorise things. This serves a useful purpose in that it enables those of like mind to communicate easily with each other on the topic. But with value the term is used by many investors to mean different styles, many of which have no relation at all to the kind of value shares in which I am interested, namely the cheap fundamentals kind. Others use the word to describe a share that appears to be selling below its fair, true or intrinsic value, which they determine by some maths based on the present value of future cash flows, for example; a hopeless way of valuing shares in my opinion because it requires a view of many years into the future. Thus, unfortunately in my view, the word value has become devalued.

For this reason I thought of calling it something else when I started writing here, such as "gribble" for example, but somehow that didn't have quite the same ring to it. So value it remained, despite the confusion.

Apart from descriptions, I don't believe a share has a "true" value in any case. All it is worth is its market price at any point. If you set a target of a true value derived from whatever method you are using, you are likely to lose sight of the target – namely the making of money. For what if the market never agrees with your true value? How true is it then?

Actually there are two potential points in a share's life when true value emerges and both occur when the share terminates. Firstly if it goes bust. There is your true value – zero. Secondly if it is taken over. The exit price is the true value. But absent these situations all you have is a constantly fluctuating market that you hope in time will deliver a decent rise. For me, though, I never know how much if any this rise will be, I have no idea when I will get out and I have no idea what the "true" value might be. I don't want to even attempt to know because it is futile and has negative wallet impact. Better to fly by the seat of my pants and just dump it when it looks right to do so, that being when sufficient of the original value criteria have evaporated such that the deepest part of the value trough has been eradicated. If the share keeps on rising then let the next guy have that, for to continue to hold it would be to hold a share which is a deep value share no longer. That involves extra risk which is something I can quite happily do without.

Back to my title theme, "Don't Give In," by which I mean if you have a set of value rules that you have found to work repeatedly for you, then stick with them and try not to yield to the temptation of weakening them if you cannot find suitable investments. I have been out of the market with the bulk of my money for around a year on occasions and this happened recently, although there were occasional side bets.

Some investors though lack the rigour, the discipline, to stick to their rules even though these have worked in the past. They may get bored or believe that it is somehow wrong to be out of the market for prolonged periods. Even I get these feelings but I find a cold shower works wonders on such occasions. For me the whole thing is just a moving train upon which I bum a ride occasionally when it is going sufficiently fast in a particular direction that suits me, for a time. But I'm going to jump it long before the conductor comes round to check tickets. I ain't gonna pay, well not most times. Inevitably this will happen on the odd trip.

How's that for a cliché? At least it's my own one I think. I recall using it on the value board way back.