VALUE INVESTING
TA? No Ta

By Stephen Bland (TMFPyad)
August 31, 2001

I still see too much attention being paid by value investors around the Fool to technical matters that more properly belong to chart artists. Some readers will, if they have been skilful enough to pick a good value share that has shown a decent gain, consider selling purely because of the rise in price: a purely technical view that ignores fundamentals and consequently is anti-value.

I advocate that value investors leave charting to chartists. It makes no sense whatsoever to me to consider selling a value share just because it has risen, or equally just because it has fallen. The test of whether you continue to hold should be based on questioning if the value has been outed to your satisfaction or not, whatever has happened to the price. That satisfaction point will vary from one investor to another.

If you buy a share on a particular P/E and it rises substantially, yet earnings per share also rises by a similar percentage and the forecasts continue to look very attractive, then why would you sell? I don't get it. The fact is that on a P/E basis the share still possesses similar value to that at which you originally went in, so there is no reason to sell. A sharp rise in the price is virtually irrelevant, except that it's nice to have of course. What went before as far as price movement goes is of no concern, or shouldn't be to a value investor. I appreciate obviously that other fundamental ratios like yield or Price/Book may have weakened on the back of a sharp price rise and it would be correct as a value player to consider these factors in a sell decision, but not the price rise alone.

As I understand it, chartism involves trying to outguess everyone else in the market based on historical price movement patterns which suggest that future price movements are predictable in many cases because of human nature. Now I do believe that human nature is very reliable and that the psychology of investing is important. But the almighty difference between chartism and fundamentalist value investing is that the latter is using the reliability of human investment nature by betting against it, whilst the former is doing the exact opposite, gambling on a continuation of the human nature driving a price in a particular direction. It follows that these two concepts make no sense together and it follows further that people selling successful value shares purely for the technical reason that they have gone up, and not for fundamental reasons, are likely to take a hit to their returns.

I think the problem, even for those that don't consider themselves chartists in the remotest sense, is some vague feeling that a share that has already put in a great rise must run out of steam like some sort of divine retribution for having had the cheek to rise in the first place. Value investors should try to eradicate this latent chartism that lurks within the hidden emotional recesses of the psyche, because it is pure superstition. For a value player the test of whether or not the share has any steam left is not some squiggles on a chart but the fundamentals, including the usual ancillary stuff like directorspeak, forecasts and so on. Your interpretation of those fundamentals is up to you, but that in my view is the test.

In a similar vein I recall discussing a recent investment of mine with another reader who commented around the time that I went in that the share had already had a good rise in recent months and that consequently it might not be such a good idea. Such comment misses the point of value investing. I have no interest in what has gone before. The only interest I have is in whether the share presents itself to me now as an attractive value play. The only thing that will subsequently make me dump it, up or down, is when it no longer presents itself to me in that way. Thus the share is repeatedly tested for the presence of sufficient value characteristics to justify either a hold or sell decision.

So my conclusion here for value players is that previous price movements in a share are no guide to whether you should buy it if you don't already own it, or sell it if you already do. Concerns of that nature will tend to weaken your returns.