VALUE INVESTING
The Price Is Wrong

By Stephen Bland (TMFPyad)
April 26, 2002

Many people seem to be obsessed with measuring repeatedly their investing performance to at least two decimal places, often over rather short term periods. I suggest strongly that value investors desist from this. Trying to figure out your performance all the time will tend to take your mind off actually getting that performance.

You are only really going to know how well you have done after several years, and this applies to both short-term value investing as we understand it on the value board and very long term as on the high yield board. I hardly know how I have really done over the years because my investment pot is not isolated and few will be in practice. Large amounts have gone in and out for various personal reasons, much more out than in, so that my total available now for investment is far less than if I had taken my own advice that I advocate for others, to reinvest everything constantly. It therefore would be very difficult to quantify the annual return over 20 or 30 years, though I know that it is not bad. Had I been anal about maintaining all the records of everything I guess I could figure it all out. However, I'm not a compulsive record keeper, unusually perhaps for an accountant. But then I am probably unlike most accountants.

Since investment is an art and not a science, excessively detailed measurements are unnecessary. A high yield portfolio investor needs to be aware that the current yield is around 4.6% or whatever, not that it is 4.654%. Similarly if you are making total returns from your value strategy of say around 20% per year over a few years, then suffice it to know that this is a very good achievement for a lowish risk approach. It doesn't matter whether it is 19.5% or 20.5% really, "about 20%" should be good enough for value players. With a return like that, you are beating nearly everyone else in the market anyway.

Hand in hand with a relaxed view of how much you are making, is the need with value to forget the price you paid for the shares. Simply re-evaluate the share regularly in the light of news on any fundamental changes and get out when the value has deteriorated sufficiently by your standards to signal the exit. Doesn't matter whether the share has gone up or down, just let the value talk to you. Don't set targets for either percentage gains or losses, or absolute prices etc. Value will take you in at the right time, and value will take you out at the right time – by your particular rules of the strategy. If this works for you as it does for me, stick with it.

The "right time" will differ from one value investor to the next, and definitely between value investors and non-value investors. The former will usually get out too soon by some other peoples' standards but equally will tend to get in proportionately earlier thus extracting in general a much bigger profit per trade, but crucially at less risk and therefore with a lower incidence of losers. Minimise the risk/reward ratio remember?

So if you are a full value player, never hang on to a share for any reason after it has breached your fundamental sell signal criteria. Don't start falling in love, or believing that because it has had a sharp rise that it must go higher, or that if it has fallen then you may as well hang around for recovery. Tempting though it is, try not to look back and see if your sell decision proved to be wrong. Sometimes it will, sometimes it won't. We are all clever after the event. It doesn't matter, what matters is that you stick closely to the strategy in the knowledge that most times it will make money for you despite the odd loser. This will be evidence enough of the attractions of not staying in too long after a sell is showing.

It might appear attractive in hindsight if you could analyse your sell decision and try to ascertain whether you could devise a method of keeping you longer in winners and applying this to future trades. If you can do this then fine of course. I have tried to do so but the problem with all hindsight is that you end up data mining, fitting some reasoning that might have made sense after the event with old trades but which simply does not work often enough in future, so I have long stuck with my sell rules which in any case are not as rigid as the buy rules and vary from one share to another but always based on the changing fundamentals.

Break the link in your mind between cost price and selling price of the shares. You have a memory, shares don't. Amnesia can be beneficial.