VALUE INVESTING
High Noon

By Stephen Bland (TMFPyad)
January 10, 2003

This week's article covers a psychological point but one I have written on before regarding the solitary mind state necessary to be a successful value or contrarian investor. These two styles are not always the same by the way, though they often will be. Successful growth share investors for example may find themselves going against the market, contrarian fashion, by locating likely shares early on before too many people realise the potential for very rapid expansion. They then sell when everyone else jumps on board avoiding the crash which so frequently accompanies such shares.

In the film High Noon, a western and an old favourite of mine, the basic story is the usual simplistic one of good versus evil. However, apart from that, the main point of the story is not merely the clash of these forces but the fact that the town marshal hero, in his fight against a gang out to get him, is deserted by the craven townsfolk whose help he seeks. Ultimately he has take on the bad guys by himself and although he has the chance to leave town, he decides to make his solitary stand. There's more to it than that involving a good sub plot about the marshal's wife who is a Quaker and thus completely against violence, and his former girlfriend, but essentially it is about one good guy standing alone for something in which he believes.

At this point I was going to insert a joke about my being such wimp at school that I used to get beaten up by Quakers. But thought better of it because it might spoil the serious mood of my High Noon theme for this week.

Value investing is a solitary occupation. By definition you are doing something that most other investors are not. Frequently many brokers and press commentators will advise actively against a share which you are buying. Indeed if sufficiently common, such comment can be a contrarian indicator in some circumstances. It can be difficult to go in when the mood is against a share. You have to believe that you are right, whatever the forces ranged against you.

I've always been a contrarian sort of person in many aspects of life, not just with shares. Paradoxically perhaps, although I had often thought differently to many of the people with whom I grew up and worked, I started out in shares by being the opposite of a contrarian. A contrarian contrarian, a mug who just followed tips and lost money. I recall that I was so dumb at the time, I must have been about 18 or so, that I bought some shares in a Rhodesian asbestos mine because they were tipped in a tabloid Sunday newspaper. Rhodesia has long since ceased to exist as such and asbestos is no longer what you would call a desirable commodity. And yes, I eventually sold at a loss of course. I forget how much but it would have meant quite a bit to me at the time when I was earning peanuts as a chartered accountancy student and had no wealthy background in contrast to many of my colleagues.

I got the message that I was doing something seriously wrong. I still loved the market despite such early disasters and was determined to find a better way. It didn't take me long to come to the conclusion that following others generally didn't work. Many of the people with whom I worked as a student accountant were share dabblers, bad ones, playing poor hunches and tips they'd heard. One chap, an inherited wealth public school type, was not just a bad market player but gambled away large sums on horses as well. Although he had money and I didn't we got on very well. I had started to develop my ideas and I found a share which looked good value and persuaded him to back it seriously in return for a piece of the action if it scored. It was called English China Clays. He bought, putting a stop profit order on it with his broker though I didn't know that then.

The company's results were imminent and on that day we rushed out to get the Evening Standard for the share prices (no internet then) to find that it had taken off. "Sell" I said and he revealed that his stop order meant that had happened automatically as it breached the preset price and he duly bunged me a cheque for my end of the deal.

As far as I recall that was the first share upon which I made any money but the point was that it had worked because of my own efforts in locating my early primitive version of value. It doesn't mean all value shares work of course. I've had losses as well but it convinced me that as a short-term strategy this was the way to go. Like the marshal in High Noon, it didn't matter what anyone else thought because what "they" thought was too frequently exactly the wrong way to go.

The feeling of financial loneliness still hangs around though. These days I find it comforting in a way and less scary than it felt many years ago. Doing what many others do, for me, is the worse option.