VALUE INVESTING
Bottoms Up!

By Stephen Bland (TMFPyad)
June 28, 2002

I do not have the faintest idea whether we are near the bottom of this bear market. But following on from the point I made last week about the compulsion in people to explain everything, which leads to false reasoning, we have just had further falls caused, in the view of many commentators, by the problems at the US company Worldcom.

Think about it. In what way can the collapse in the share price of this company affect a UK share, or any other one in any country come to that, especially a share that has absolutely nothing to do with the telecoms business or with Worldcom itself?

It can't.

And yet on the day that we were told about the accounting trouble at that US company, markets fell round the world. Not just shares like perhaps banks that may actually lose out if they had debt due from Worldcom (Nasdaq: WCOM) but totally unrelated shares whose profits will not be affected in any way by this story.

Markets fall because people sell shares more than they are buying them. Although there are many reasons why there may be a preponderance of sellers at any time, it has absolutely nothing to do with the problems experienced by one US company. What it really has to with is that investors are in a bearish mood as happens occasionally and in that mood anything, completely illogically, serves to blacken the mood. In reality though there is absolutely no reason why Worldcom's problems should have anything to do with the prospects of a UK share like say Scottish & Newcastle, or most US shares, and the commentators are hopelessly wrong.

For high yield investors holding for the very long term who are not yet invested, the bear market will throw up a chance to buy shares and lock into their better starting yields forever. If a share was considered a good prospect for a high yield portfolio at say 4.5% then it is even more attractive at 6.0%. This assumes your long term view of the company is unchanged. Do not permit short term gloom to affect this. Many investors have very short memories and it is easy to believe that the same share is somehow a worse bet now, because of the mood, then it was when it was higher. The reverse is almost certainly the case and in fact it is much more attractive. But it can be hard to think like that, the contrarian view.

This doesn't mean that the shares won't go lower, any investor takes that risk of course. But it means without a doubt that particularly for long-term income investors, the lower their target shares go the more attractive they are. However, the right time to buy high yield shares is always now. It was now when the market was higher and it is now today and it will be now next week as well.

I recall after September 11 last year when markets, again illogically, fell sharply and I was advocating strongly that investors ready to move should use the opportunity to buy high yield shares for the long term, that many could not understand this. Some naïve readers thought that these types of share after the fall were somehow less attractive when it has to be the case that a fall makes a share more attractive to a high yield investor looking for the really long term hold.

A relative had been holding a share called Domino's Pizza (LSE: DOM), a small company, prior to September 11. This is not a value share, but has been a good growth story so far. They only deliver pizzas, having no restaurants. Such shares must be traded to make money, sold when all looks rosy in a contrarian way, because all growth stories fail eventually as we've seen recently with Pizza Express (LSE: PIZ). If you keep hanging on you will hit the fall, making the fatal error that assumes past growth will continue, allowing "recent events syndrome" to be more important than longer term history. Thus you have to sell early whilst all the comment is still projecting wonderful growth into the long term future. Being a contrarian works with growth shares too.

Anyway, the shares fell sharply along with the market on that date. He immediately wanted to buy more, realising that the events of that day had nothing to do with a business involved in delivering pizzas in the UK. Were the people who order pizza delivery going to cut back because of September 11? Why should they? A good example of the illogical cause and effect that sometimes rules markets. Sure enough the shares recovered well.

Don't permit yourself to become a victim of this illogical thinking. Ignore comment about why the market has fallen or for how much longer it will go on and all that hot air. The reasons are incorrect and nobody knows how much longer so why give it any credence? Markets rise, sometimes they fall, that is all there is to it. One thing I can say with near certainty is that when you start hearing that we are at or near the bottom, then we probably have a long way down still to go, so wrong are the pundits usually. Then when you get near solidarity that the market has a long way down to go, we are probably around the bottom.