VALUE INVESTING
Value Investing Always Wins

By Stephen Bland (TMFPyad)
July 11, 2003

Will cheap shares with some sort of prospects - broadly defined as value shares -  always win? Yes.

I'm not saying that every such share will always make you money. It won't, simply because things go wrong sometimes. I'm saying that the strategy will always win, on balance, taking into account the odd individual loser.

But why should this be? Why should a strategy always work whatever the market climate and even when it becomes somewhat more popular? Logic suggests that if a strategy becomes popular then it becomes self-defeating. The answer is twofold.

Firstly, it never becomes that popular because value never seizes the imagination of small investors in the way that, for example, tech shares in the bubble did. You won't see headlines in the non-financial press proclaiming big scores by value shares in the way that was seen during the tech boom and all booms before that.

The whole value process, with its insistence upon a knowledge of fundamentals and the lengthy patience often required, is far too involved for the sort of investor that becomes interested in shares only when they become the subject of popular headlines and when they show large gains made in very short periods.

In fact, the knowledge of fundamentals required for value investing is not that great, especially for those who follow my idea of not overanalysing. But even this is too much for many people. Their eyes glaze over at the mere mention of fundamentals. Having said that, my eyes tend to glaze over at excessive fundamentalism. I've never understood how prolix presentations of companies aid the investment process. As far as I'm concerned, this is one occasion when too much knowledge is a dangerous thing.

I tried to follow one thread on the value board in the last few days where the discussion got into hair splitting about whether free cash flow should include bottomry amortisation or some such. The plot had been well and truly lost. As an accountant, it took me a long while to unlearn all that guff and understand how to get to the kernel of an investment with a few simple figures and a couple of sentences.

And secondly, by definition value represents shares which are unpopular with many investors, which is why they are cheap in the first place. Whatever the state of the market, there will always be shares that are cheaper than others. That doesn't mean they will all be attractive of course. Most cheap shares deserve to be. Depending on the individual investor's criteria, there will frequently be good value shares lurking amongst a list of shares considered cheap on fundamental grounds such as P/E, yield and P/TBV. This will always be so, no matter how much is written about value here and elsewhere.

You hear often the criticism of a strategy that says if it works so well, why broadcast it? Surely if you have something that works you should keep it to yourself, if only because the act of publicising it may ruin any success if enough people pick it up.

In theory this is true. In practice there are so many people on bulletin boards, in tipsheets or in the press who write about their styles and claim varying degrees of success, together with a plethora of books on successful investors and so on, that their influence is spread far too thinly to have much effect.

People don't automatically pick up on a strategy in large numbers, even if it appears to be successful for others. This is because they recognise that they simply don't have the personality for it, the appetite for risk, the appreciation of numbers or whatever traits are necessary. There are always a few who, lacking insight into their own characters, don't see this and go ahead anyway in the belief that it all looks so easy and end up losing. Generally though, I'd say most people understand their limitations.

So why do I write about value? I don't believe that writing about it will destroy it for the reasons I've given. If I really thought that, I would never have commenced writing about it in the first place. The truth is that I enjoy writing. If in addition some readers have benefited from this over the years then that adds immensely to the pleasure I receive from writing about it.