VALUE INVESTING
Cash Is King

By Stephen Bland (TMFPyad)
October 12, 2001

I am now back to cash after closing out my holdings in Scottish & Newcastle (LSE: SCTN) and Inchcape(LSE: INCH) over recent weeks. I know that some people have a bit of difficulty regarding when to sell value shares so I thought it might help if I show my reasoning here.

On S&N, which was only a small side bet, I made around 20% over eight months, including divis. Not my greatest play ever but not bad considering that the market had fallen quite a bit since I bought. S&N was thus going against the trend.

What prompted me to sell was that last Friday's Investors Chronicle tipped the share as a buy. This is in general is a classic sell signal. Not every time but there were other circumstances which led up to this, namely that everyone and his brother had for some time now been pushing S&N as a defensive share, often an income play. You could hardly open the financial pages of even the most unlikely publication without seeing the company being tipped. Once a share is tipped in the "Earwig Breeders Gazette" readers will know that this for me is something that points the way to the exit sign. The more prevalent the tipping, the more nervous I become. The final straw then was the IC last week eulogising about S&N, which translated for me as "dump it quick, now."

Inchcape was a big one, a farm bet. Again going heavily against the market trend, it made me around 38% in about seven months including divis. The sell signal here was the start of the company actually buying up businesses instead of selling them to raise cash. They announced the takeover a few weeks ago of Bates, a BMW dealer. It was only around £20m or so, not a lot of money for Inch but it was the attitude switch that triggered a sell decision in my mind. I pondered the matter for a while I will admit, because the share still looked mighty attractive on P/E and yield grounds. It had broken through a price to book level of 1 at around 420p, or so I estimated. At over 500p it was well out of that territory. After thinking about it for at least ten seconds I reached for the phone and dumped it.

Both S&N and Inch illustrate one of the attractive features of value plays, in that they very often do the business whatever the prevailing market conditions. That is why I always suggest that value players ignore the market when making their choices. It is pointless in my view to try and predict the market trend when buying a value share. All that matters is that you have analysed correctly the situation regarding that share and that share alone. If you have, it will work, it may take time but it will work. And if you have got it wrong, which sometimes happens, it is unlikely to be because of what may be happening in the market as a whole.

Isn't cash wonderful? Probably the greatest invention of the human race, just ahead of the motorcycle and the stapler, it can do anything for you. Buy you health, happiness, love, justice as well as more obviously material possessions. More rewarding and faithful than any dog or human being, I can't find superlatives powerful enough to describe what the possession of this stuff means. Or the misery that the lack of it produces.

I sometimes feel when I go cash like now, as the rush of getting out of a good play at a decent profit hits me, like I am returning home to some kind of perpetually forgiving and faithful wife, ever ready to welcome me home every time I tire of messing around with mere shares. "It didn't mean anything dear, really, just a 195 night stand." So she forgives me but we both know that I'll be at it again the next time a suitable share is prepared let me have my way with it. Essentially because since I am exceptionally fussy about that into which I am willing to stick my wad, this minimises the chances of my bringing home any financially transmitted diseases.

The author has a beneficial interest in cash.