VALUE INVESTING
Value Investing Reaches 200

By Stephen Bland (TMFPyad)
July 18, 2003

I wrote my first value article for The Motley Fool (TMF) on Friday 13 August 1999. This one is the two hundredth, almost four years later. Value 1 was primarily about defining value investing in general rather than PYAD specifics and can be found in the TMF archives here.

An enormous amount of investment water has flowed under the bridge since then, the most dramatic and obvious events I suppose being the tech boom and its subsequent collapse, and the ongoing bear market. Both of these occurrences will have lost a lot of people a lot of money and possibly put some off the stock market for life. A lot of illusions about the suitability of the stock market as a way of making decent returns for private investors will probably have been shattered by these experiences.

During my time writing these articles, a lot of development regarding investment approaches has taken place within TMF. Back in those early Fool days, it seemed to me the risks of the stock market were seriously understated by many and the likelihood of making a great success from it was given the impression of being easy. Long-term theoretical high returns were highlighted and the skills of investors such as Warren Buffett mentioned regularly.

Needlessly high-risk concepts like using a tracker fund to repay the capital on an interest-only mortgage were promoted. A portfolio of tech and other shares was set up with the name of "Rule Shaker". Pure bull market bull. I think from memory it believed that certain shares that were already dear could be attractive just because people think they were too dear and may be wrong. An unintended irony of Orwellian proportion. I can't imagine a much dumber strategy than deliberately buying dear. Unsurprisingly, the only rule it shook was the one that says you should make money out of shares.

The peculiarity is that a lot of TMF content in those early times was actually pretty unFoolish in my view. I guess this was because savage, lengthy collapses seemed somehow academic to these optimistic opinion offerers, from a bygone age, the province of old farts like me. If bear markets were considered at all, they were merely supposed to be a downblip in a very long-term uptrend. Well I guess your long term depends on how long you've got but very long-term trends, over a century for example, in practice are of little use to investors whose practical investing lives are more likely to be 20-30 years tops.

All this exuberance was pure human nature, as anyone who follows the market for a time will soon learn. People are over-optimistic in rising markets and over-pessimistic in falling ones. To win, you have to get out of step with this, to go against the crowd, as all value investors know.

As my articles continued, techs collapsed, the bear market hit and a bit of a change came over TMF in general. It started to become more Foolish. The idea of using a tracker to repay a mortgage is now rarely mentioned, if at all. The daft Rule Shaker portfolio has gone. Trackers, although still promoted, are now given a much longer timescale than the five years previously thought to be a reliable time in which to start delivering. Now you have to think twenty years, given that the last ten have produced a return no higher than risk-free cash, and even then you have to be well aware that the chances of a decent return well above cash are risky. The general euphoria that you are near certain to win has disappeared, to be replaced by a far more cautious outlook.

Our sole remaining portfolio, the Qualiport, now uses a version of value principles to select shares. Perceived Buffettism, the original inspiration for this portfolio, has been dumped ignominiously as a failure. No more of that guessing-at-profits-decades-into-the-future-net-present-value nonsense, and all that earlier metaphorical rubbish about moats appears to have been consigned to the moat. It is no accident that since the Qualiport became a kind of value portfolio it has done much better than previously.

The whole TMF approach to shares has become subtly skewed by a valuisation of commentators' ideas as realism set in following the bear market.

Having said all that, value can have its failures too and I can recall writing here about Railtrack and Independent Insurance, both of which went bust, though I believe shareholders in the former eventually received some compensation. I don't think from memory that either of these were PYAD shares though. The absence of debt, as demanded by the PYAD rules, is a pretty strong barrier against failure since debt is the factor that ultimately destroys a company in trouble.

You can't win 'em all if you trade shares regularly. But you don't need to. You need only to win sufficiently more than you lose to make the game successful. To do this, the first step is to reduce as far as possible the chance of losing, minimise the downside, which I believe is the main advantage that value investing gives you over other styles.

A major development of my value series during the last four years and 200 articles, as I see it, was the High Yield Portfolio (HYP). I started an example portfolio to illustrate the concept in November 2000 and a second more recently in April 2003. These were designed for long-term income investors or those seeking capital accumulation by reinvesting dividends and in my version, no trading takes place, the shares simply being held forever. They were designed essentially for hands-off investors with virtually no monitoring of the shares being required. I believed from the start, and still do, that these HYPs used as growth vehicles with reinvested income will beat tracker funds over the long term.

So a long haul then. A lot has changed at TMF regarding share strategies over the 200-article life span to date. But in contrast, little has changed with my message on value. That is because nothing needs to change, it is as good now as it was in Value 1 and I have no reason to believe that the strategy will not continue to be as good in the future of the next 200.

More: All 200 Value Investing Articles