VALUE INVESTING
Dealing With Plunging Prices

By Stephen Bland (TMFPyad)
November 7, 2003

I had my motorcycle stolen a few days ago. I'd had the bike from new for only about six months and left it parked on the street all day by a hospital in central London. In the scheme of things, it's not a major incident and certainly when compared to the plight of the person I was visiting it counts as nothing. But it is still intensely annoying.

There is a special kind of sinking feeling you get somewhere around the navel on such occasions. Motorcycle riders, because they tend to be enthusiasts, frequently become attached to their machines in a far more intimate way than most car drivers – I do drive a car as well. It's a bit like coming home to find that your wife has left you suddenly, though I appreciate that for some that might be more a cause for celebration.

For a moment I was in two minds. It appeared to have been nicked but was there a slight chance that perhaps I had parked it somewhere else and forgotten, given that at my age I can hardly remember my own name of John Smith any more. But no. I had been visiting here regularly and nearly always used the same parking bay. There was another round the corner that I had used on a couple of occasions, so I legged round there quickly but nothing.

None of which has much to do with shares. Except that sinking feeling you might get when a value share you have bought plunges suddenly. This initial reaction is not dissimilar to the stolen vehicle symptom, although there is a major difference in that the vehicle is likely to be insured whilst a falling share is not. Despite my rabid loathing of insurance companies as a place to invest, they do have their uses – but purely as a place to insure.

What to do though if a value share you have bought turns round and bites you in the wallet? Do you have it put down?

Well, unlike bikers and their bikes, you have to avoid falling in love in the first place. So it starts with the reason for purchasing the share, long before it turns nasty on you. And unlike the cute dog in the pet shop window, a share and especially a value share, is just for Christmas and must be turned out on to the streets if anything goes wrong with it. And now I'm tired, dog tired, of the mutt metaphors.

This lack of attachment starts when purchasing. As a value player you are buying to sell and you are buying because the fundamentals are telling you that it is right to do so. Not because you like the share or buy its products. You may even find the actual company completely undesirable. I for example have traded insurance shares even though my opinion of them as businesses is somewhat lower than whale excrement.

Selling is the only reason you are buying. You definitely do not want to get involved with the desirability of the company's products, the character of the management or much of anything else other than the raw numbers and maybe a bit of contrarian press comment and smell. You buy as a value share and you sell as a non-value share by your particular criteria.

Remember that a fall in price does not of itself have to mean that there is something wrong with a share. Obviously it is undesirable yet it will happen on occasion to anyone who trades regularly. You need to ascertain the reasons for the fall, as far as you can. It could be for example that there is some general bad news that has hit the whole market or sector yet will not impinge at all on your share. Or it could be that something has indeed gone awry with it.

Whatever it is, you must distinguish noise from fundamental changes. Normally you will ride out the former, maybe even buy more, but sell on the latter. But don't let that sinking feeling govern your decision. Never panic but make your decisions quickly and act upon them. If you want to sell then sell, get out completely and move on. There should be no half measures with value.

Never forget that value is a trading strategy based on fundamentals. The word "trading" means just that, the share was bought with the intention of selling it and moreover, selling it when a certain set of circumstances occurs, the timing being delivered neatly by those figures we term the fundamentals.