VALUE INVESTING
Value Is Dead, Long Live Value

By Stephen Bland (TMFPyad)
December 21, 2001

As another year approaches its termination, never to be seen again, and as we all get a year older, one more year out of our total life time span expired, I have been thinking whether value has had its day and was merely a faddish strategy for a time but now perhaps like the year, gone forever or at least for the time being.

There have been a number of suggestions around TMF with this view. I myself have become a little nervous at the popularity of the approach here, paradoxically really because I helped to create it on the site and maybe my hitherto tame value monster is now turning on me. I didn't invent the approach of course, it is ancient, but as far as TMF is concerned, when I first came across the site in 1998 not long after it commenced in the UK there were only one or two boards and growth shares seemed to be the only style in which people were interested.

TMF has changed beyond recognition since then with a substantial readership and a plethora of boards even if you ignore the non financial ones. The value board is one of the most popular strategy boards and that is the bit that makes me nervous. On the company boards it is well known that in general those with the most messages often represent the worst performing shares. Those with hardly any postings at all are often terrific investments. This is the mugpunter effect, the herd instinct where people seem to have this urge to gravitate to where everybody else is hanging out, instead of doing the opposite. In the stock market popularity rarely equates with success except perhaps for a small bunch of skilled traders who know how to play this, which counts out the great majority of small investors.

On the same basis though, the value board is now the one attracting a lot of the messages compared with other strategies. Could it be that this is a contrary indicator? If you look at the messages there, in fact they are generated mostly by a fairly small band of knowledgeable regulars exchanging information or sometimes by interested beginners seeking some help and views, rather than by a large number of different people flocking there because it is faddish. So perhaps the sheer volume is not such a negative indicator after all or maybe I'm just trying to rationalise it to suit my own view that value is not dead.

I don't like crowds, never have. It goes totally against my whole being to do something just because everyone else is doing it. It is no accident that often the greatest value plays are those where the press and analysts are calling the share a sell, or even a hold, which in analyst speak is also a sell. Occasionally the crowd will be right, none of these ideas work all the time, but often a non value share which is very popular will eventually let you down whilst a share with good value fundamentals will eventually see you right in the main, whatever anyone else thinks.

You have to know you are right and you have to know that sometimes you will be wrong in being right.

Since fundamentals vary amongst shares, there are always cheaper shares whatever the level of the market and the starting point for value searches is always relative cheapness. A value share is defined above all by its selling very much cheaper than the market or sector. All you have to do is rank shares by P/E, yield, P/TB, net cash or whatever combination of fundies you like and find those that are the cheapest. Easy eh? The key question is though: what is their quality? Most cheap shares will not be attractive value shares, they will be cheap because they deserve to be cheap. We seek those occasional members of the cheap class that should not be there amongst the tat. The genius misplaced in the dunce class. The thousand dollar a night lay forced temporarily to ply her trade amongst the fifty bucks a pop street hookers. Excuse me as I get carried away to metaphor heaven, it being Christmas and all.

But the trouble is that by value becoming more popular, any likely candidates may well have been already picked up and thus leave no shares of suitable quality available. However, the real pyad share upon which I was willing to bet heavily has always been a very rare event even before value was popularised here and thus I have never traded much over all the years I have been doing this. Sometimes I have held only the one share for a couple of years and then waited quite a time for another. I don't have the need to trade constantly and such a need does not suit the value style. I am prepared to wait for the right share, the right moment and these still arise.

I don't really believe that value has had its day, whatever anyone says. There will always be cheap shares. And in my view it still remains that occasionally, perhaps very occasionally because that is all I need personally, amongst them will appear the big one with the occasional side bet into a not-quite-but-it'll-do.

More: Value Investing Home Page

The author is interested, potentially, in every single share listed on the market.