VALUE INVESTING
The Strongest Link

By Stephen Bland (TMFPyad)
January 18, 2002

I find television very educational. Every time my wife turns it on I go and read a book. Although I am wifeless at the moment (though there is the bird) I do have a TV. However I don't watch it that much and really only have one (a TV that is not a bird) because it's a good place upon which to put my lava lamp.

Anyway I turned it on the other night at random (the TV that is not the bird) and there was some quiz show on. Dunno who she was but it was hosted by an interesting looking lady clad all in black. It was called the Weakest Link. The idea is that a group of people answer money winning general knowledge questions in turn for a couple of minutes, with the money won accumulating for the whole group, and which gradually increases for each right answer and goes back to the start for each wrong answer. At the end of the round they vote one person off – the weakest link - and this continues for further rounds until one person is left who wins all the cash that has built up. Many of you will, I expect, have seen the show before so know it better than me in any case.

Now I observed that in general they vote off the person with the most wrong answers in each round for the reason that this person is most likely to hinder the accumulation of money. But it doesn't make any sense to me, although maybe I'm missing something. If I am then readers will correct me. But if I'm right then it seems to me that is the crowd way, not the value way, not the contrarian or strategic way.

I thought that the weakest players in each round should gang up on the most knowledgeable player and vote that person off. But they don't, in general they tended to vote off the weaker players. Eventually of course this means that all the weak players must lose but they actually connive in their own destruction instead of removing the cleverest ones and therefore allowing one of the weaker to win possibly. They might win less money than the cleverer ones but that is better than winning nothing. It's not always that obvious who is the weaker player but you get my drift. As I said though, maybe I've got it wrong somewhere. I think I was half reading a copy of Earwig Breeders Gazette at the same time looking for share tips.

Strategy, all important if you wish to be a successful investor, but not necessarily the strategy that is popular, one that works for you.

That apart, value readers may wish to have a look at a real tinpot this week – North Midland Construction (LSE: NMD). A civil engineering construction company, with a capitalisation of only £6m at 60p per share, this is at the micro end of the market. Based in Nottinghamshire, with a forecast P/E of about 6 on 31/12/01 earnings per share (eps) and a dividend yield of 6.7%, it trades at around 0.8 of tangible book value and has had net cash in all recent accounting periods. It appears to be controlled by directors and their families who own around 70%. A pyad share then on the fundies.

Directorspeak is reasonably optimistic, however eps for 2001 is expected to fall from 14.2p in 2000 to 9.7p with a recovery to 12.2p in 2002. There is though only one broker reporting, the house broker, so be careful. In common with the construction industry generally, historical eps is very erratic so to play short term value with these, you really need to get your timing right.

Funny thing about Nottinghamshire, it's also the home of that other attractive small cap pyad share, Hardys & Hansons (LSE: HDYS), must be something going on there. Aeons ago I once spent some time as an auditor in Newark, reputed then to have the highest unmarried birth rate in the country. Looking at Newark I wasn't surprised. Then a mate of mine, a fellow Londoner, met a girl on holiday who came from Mansfield. A real stunner. His bird that is, not Mansfield. He used to bomb up and down every weekend to see her in his mini – I mean his car not a skirt.

As always exercise extreme caution with very small companies, they have a number of additional risks that we have discussed many times, over and above the risks associated with any share or value share. And no this is not a tip, I wouldn't buy it.