VALUE INVESTING
Delusions Of The Future

By Stephen Bland (TMFPyad)
December 20, 2002

This will be my last value article for 2002. It's been a poor year for investors generally but there you go, share investors have to be able to live with this. It doesn't surprise me, very little does any more. Almost anything can happen with shares. I recall all those articles and ads promoting tracker funds showing that there were very few occasions when the market had fallen over a five year period. That may be true, but the inference was that such an event couldn't really happen. Nevertheless, here we are.

Now you will see tracker admirers telling us about 10 or 20 year periods since they have been let down by the five year term. These funds may do well over such terms, I hope they do particularly for those using them to repay mortgages or in pension plans, but it is the blind belief inadequately tempered with caution that disturbs me and is usually the preserve of those with very limited market experience. Well, my market experience tells me that if you wish to buy equity funds for the long term then high yield equity funds are likely to be more attractive. I look for those with consistently good past performance. This approach is a bit like the High Yield Portfolio (HYP) except that the selections are out of your hands plus you have to pay charges. The value approach to funds if you like for those you do not wish to pick individual shares for themselves.

Year ends don't really have much significance for me though they seem to for many other commentators. All those dumb pointless predictions about where the FTSE 100 will be by the end of 2003 as if anybody has even the remotest clue. If you look back at this sort of nonsense last year you will find a load of predictions some of which may even have come approximately true. Pure luck of course. Ignore totally any such forecasts when making investment decisions. Value players don't care much for markets anyway, only individual shares. And even those who might care about markets should ignore such prediction. It is worthless. The right time to invest long term, whether in an HYP, a high yield fund or a tracker is now. It was now yesterday, it is now now and it will be now tomorrow.

A great deal of the advice on long-term hold investing suggests that the investor might gain some sort of advantage by considering various matters other than mere fundamentals. Some of the things I have seen in this regard refer to demographic trends, high barriers to entry, circles of competence, buying what you know and so on. There is a lot of advice out there for those seeking some indication of the long-term future for shares but I personally have little faith in such methods designed to improve your predictive skills.

Mankind has always attempted to predict the future. It may be the third or fourth oldest profession after the first, tax collecting and perhaps money lending. Even now, in these days of enlightenment, astrology and similar garbage seem to be important to many people judging by the proliferation of such stuff. Huge numbers of people are employed in the prediction industry, not just at the loony fringe but people like economists, statisticians, analysts and so on.

I propose that none of this is of the slightest benefit for long term share successful share investing and suggest to such investors that they go radical on this. Clear your mind of delusions of the future. Instead start with the idea that you know nothing about it and refuse to attempt to do so because it is too unknown. Under such circumstances what shares do you buy?

Well, you need to start with a sector spread, precisely because you know nothing of the future. Remember that you have decided that you cannot know what businesses may work better than others so you need to invest in a diversified selection of them. Although I have my own personal prejudices on this, it doesn't follow that others should have too. Unless you have reason to possess great confidence in your share picking abilities, far better to invest simply in a general sector spread and avoid the risk that you may be wrong in your bias. Then consider that to do well out of the market you have try and locate that part of it which you have reason to believe will deliver above average growth with reinvested dividends. I believe that it is the value part, meaning low P/E and high yield. There are other features that you might like to consider too such as debt, market cap and so on.

My view is that a loose value shares portfolio is likely to outperform the market as a whole over the long term. No guarantees though, you have to take the risk that it won't pan out that way. But I don't see it as a huge market risk. Once you have made the decision to invest directly in equities long term, perhaps as an alternative to a personal pension for example, then a portfolio of decent high yield value shares, even in the unlikely event that it underperforms a tracker over the long term, is probably not going to underperform by much.

Short term value plays are all very well and it is what I love but it is always going to be a minority sport. Perhaps the greater need for share strategy advice for most investors is for the long termer. The investor with a lump sum or regular contributions who desires to build this up and has decided that equities are the way to go.

Have a good Christmas and no, I am not making any predictions for the New Year.