VALUE INVESTING
My Share Has No Nose

By Stephen Bland (TMFPyad)
June 6, 2003

I went along on Wednesday night to the latest of our London Fool monthly socials. I hadn't been to one of these meetings for many months but, as it turned out, I was glad I made it. I went in by motorcycle, primarily because it gives me an excuse not to drink alcohol and buy rounds of drinks. This preserves my reputation for near legendary parsimony.

I met two long time readers, whom I know quite well through our message boards, but had never met personally. It is always interesting to meet someone with whom you have had lengthy discussions, even if those discussions sometimes had become quite aggressive, because in my experience people are much friendlier and often completely different in real life to the personas projected in messages.

Except for me of course. I am a miserable old curmudgeon on the boards and am exactly the same in real life. If I was happy, I wouldn't be happy.

Amongst other events during the evening, I ended up making a bet with one of our more well-known readers about Dixons (LSE: DXNS). He was telling me how the kinds of items they sell can be bought far cheaper online and that therefore they were finished in the long run. Dixons is in my second high yield portfolio, which I launched a couple of months ago. To be told they would be finished, bust, in the eternity for which my HYPs are designed was not something I particularly wanted to hear.

And anyway haven't I heard before, around three or four years ago. All the so-called "old economy" would be ruined by the wonderful new era of the dot com. The whole conversation felt like a perfect déjà vu experience, if only I knew what déjà vu meant. I wish I had paid more attention to German lessons in school.

Incidentally you never hear the expressions "old" or "new" economy any more. I wonder why.

Before going completely down the pan, he forecast that in three years their share price would halve and that was the bet I accepted. That on 4 June 2006 Dixons' share price would close no higher than 55p with me believing it would be higher. Well, I am known to go out on a limb after half a glass of Coke.

Another reader I met asked me to write something about "smell". Okay.

My dog's got no nose.
How does it smell?
Awful.

An ancient music hall gag. But you know what they say about jokes. There are no old jokes, only old people because for every new born person, every joke is new.

Smell is the unquantifiable part of value. We all know how to measure P/E, Yield, Assets and Debt, to consider eps forecasts and whatever other numerical data appeals to value investors. That apart, value investors generally have very little interest in the company's activities, its management or any of the other prolix guff that seems to interest mainstream non-value style equity investors. Keep your analysis simple and keep it short. You don't need to know much about the industry, indeed such knowledge is more likely to be counter-productive than beneficial.

But, and there's always a but, some sort of general feeling about what might work and what may not can come in useful. I have certain prejudices both in favour of and against certain types of share even if they present deep value characteristics. Similarly some sectors that are very cyclical, such as house builders for example, might be a better bet at certain times than others. Obviously such instincts cannot be perfect but on balance, though I can't know for sure, they have probably assisted more often than not over the last thirty years.

It is why I probably wouldn't buy a tinpot oil exploration share claiming to have struck gold, or even oil, in some osbcure location halfway across the world. It doesn't matter how successful it may have been subsequently. The market is littered with shares I've missed. The key point is that enough of them were disasters to know that I am right, for me.

At present I have three shares in my portfolio - Lloyds TSB (LSE: LLOY), Royal & SunAlliance (LSE: RSA) and Anglo Pacific (LSE: APF). An enormous number by my usual standards. One share is more than enough for me most times. I bet the farm on the first two towards the end of last year. Lloyds is down and Royal is up. Taken together I am showing a modest profit, a bit better than that with the dividends received so far. These were crisis plays not pyad shares. With a bit of dividend money, I made a very small play in Anglo. This was a side bet and my first venture into small caps for many years.

How do these smell? Well, as I've said repeatedly, financial shares are geared to the market during major moves up or down. Lloyds is still yielding a huge 7% or so and Royal is still way below book value. These were the two principal crisis features for me. They were unfairly depressed and oversold at the time. To me, they stuck out. But fundamentals apart they feel, and smell, right. It is hard to put into words but, for me, these shares cannot fail. I'm not interested in what anyone else says, not one word of all the bull on all the message boards in all the world. I have to believe I'm right even if I'm wrong.

As for Anglo, this is a very interesting case. Good fundamentals of course, in fact a pyad share, and it smells good too. There is a kind of kick-arse development air about it, which you can see often in turnaround situations like this. And mining is one of my positive prejudices under the right circumstances.

But, like the dog with no nose, there is always the possibility that all these smell awful.

In case you missed it above, in addition to a keen nose, the writer has shares in Lloyds TSB, Royal & SunAlliance and Anglo Pacific.