VALUE INVESTING
A Dog Is Just For Christmas

By Stephen Bland (TMFPyad)
December 14, 2001

Contrary to the popular animal protection slogan, when it comes to the stock market a dog is just for Christmas.

Falling in love with that warm, furry, cuddly value share of which you thought so much when you sank some or all your wad into it, following which it turns into a dog and starts messing on the carpet, financially speaking, is taking emotional feelings towards man's best friend too far. Time to boot it out into the street and allow man's real best friend – money – to share your home instead, something far more rewarding than any dog of a share.

I'll never understand those lengthy justifications that you can read on company message boards where readers talk themselves, and others they hope, into all the reasons under the sun except the real one as to why the share they have is so good. Then they get 400 recs from other equally deluded readers for the fine analysis. The real reason being of course that they have fallen in love and then search for reasons to justify holding. As a general rule, the longer a message about the qualities of a particular share, the less attention it merits.

It's known to value investors as overanalysing and arises because the investor is not really seeking to analyse the qualities of the share from a truly independent viewpoint, he is merely coming up with a load of positive reasons to justify to himself why the share is so attractive whilst playing down the serious negative ones. Incidentally one killer feature of these messages is the use of first name or nickname terms by a reader, who almost certainly does not know the individual personally, for the managing director or perhaps a major investor etc. Run a mile from the share if you ever see a lot of messages about a  company using this style. This is even worse than love, it is utter infatuation but more, it conveys a spurious cosiness that apart from being nauseous, is possibly a bigger kiss of death than a buy rec. in the IC.

Note the anti-scientific nature of such analysis. In science if anyone proposes a theory, then to test it he will not so much look for reasons why it works, but will try to find every reason or situation why it does not. Same with me, if I find a potential value play, the first thing I ask is well, how likely is it to go wrong, not how likely is it to go right. The share first has to pass negativity tests.  That doesn't mean that you are so negative on everything that you never buy any shares at all, it means that negative comes before positive and not the other way round.

As most value players realise, all you really need to judge a share is a few fundamentals, some sort of forecast, quick check on the nomenology of the company name and off you go, in or out. Once you have learned this, then most times you will be right. Lengthy analysis will not improve your hit rate, it will more likely make it worse.

It is no accident that for analysts' reports on companies can be so verbose that you need a fork lift truck to move them, whilst at the same time we all know how incorrect the bottom line recommendation can turn out to be. The poor guys are expected to churn out these ponderous publications and perhaps it would not be appreciated by their masters if they did their whole appreciation of a share in one or two paragraphs.

A similar rule holds with the private investor. Somebody writing a very lengthy positive piece on a share has probably already decided beforehand that they like it, for emotional reasons rather than boring stuff like P/E, yield, P/TBV etc. Think about it, what writer is going to waste a load of time and space on something for which they don't already have some kind of strange feeling? Quite. The guy has already sold himself on it, maybe he is in love with the industry because he thinks it has a big future but as anyone reading my articles will be aware by now, my view is that experts are frequently the worst judges of the shares in their industry. Far better to be a complete non-expert like me to whom all shares are the same, I don't know anything about anything except fundamentals and I don't want to know, I don't want to get in too close.

It's Romeo and Juliet. Warring factions, that is the investor and the market, you can understand, ready to do battle merely by tradition. But if you get to know personally a member of the opposite side you can fall in love, discover that instead of the evil you expect that the share is quite human with employees and so on. Then before you know it, you worry about the redundancies, environmental considerations, the MD becomes the familiar "Freddy", you follow every trade in the shares, ascribing meaning to the deals, and then you are dead. If the share falls you will blame market makers or shorters or anything but yourself for making a bad play and the dog has become part of your household.

So try and keep your distance from your shares and once they have served their purpose, done the business for you, evict them from your portfolio. Even more importantly force yourself to evict them if they have not done the business and you believe the fundamentals have changed beyond value. A dog is only for Christmas.