VALUE INVESTING
2003 And All That Plus Something New

By Stephen Bland (TMFPyad)
January 9, 2004

Looking back to the first article I wrote in 2003, the traditional review of the past year, I noted that in 2002 I lost about 6% of my money. However, the market had fallen some 25% which made my loss seem modest. Not that in selecting value shares I pay any attention to what the market is doing. I concentrate only upon the perceived qualities of the share itself. I guess though that one needs some sort of benchmark to test whether the approach is successful or otherwise, not that I am in the slightest doubt that the value strategy will outperform the market very substantially over time.

I opened 2003 fully invested in two shares, unusually for me neither of which were pyad shares. These were Lloyds TSB (LSE: LLOY) and Royal & SunAlliance (LSE: RSA). My average buying prices were 538p and 108p.

What attracted me to Lloyds was the very high yield compared with other major banks, coupled with the belief that Lloyds was no different to them and hence did not deserve its cheaper rating. I still believe this to be true. I believed also that they probably would not cut their dividend and that even if they did, it may not harm the share price too much. It could possibly even boost it in that paradoxical way the market sometimes reacts to such news.

The company has not cut its dividend so far but despite this Lloyds fell heavily in the year, to a low point of around 300p at one stage. I would have bought more when it was very low but I was still fully invested. However, selling my stake in Royal & Sun released a decent chunk of cash, of which I invested about half in Lloyds at 418p in September. My average buying price for Lloyds, which I continue to hold, is now around 496p. With a closing price for 2003 of about 450p, I am therefore down some 9% or so on Lloyds on the year. Against this I received the dividends paid in 2003 on my first tranche which reduces the loss somewhat.

My other primary trade in the year was the disposal of Royal & Sun in September. What attracted me to this share back in 2002 was the fact that it was trading well below book value and had suffered a very lengthy stream of bad news of various kinds that was probably all played out by then. A contrarian play as well as an asset situation. The shares rose quite well, but following the announcement of a rights issue I decided that I did not wish to hold any longer and sold for a profit of some 23% including dividends received.

Although I had invested originally about half my funds in each of Royal & Sun and Lloyds, the price rise in the former and the fall in the latter meant that when I came to sell Royal & Sun it represented quite a bit more than half my total. Consequently I was more than half in cash following the sale. I then put about half of this cash into Lloyds as I mentioned above.

Back in May I found a small cap pyad share that appealed to me, Anglo Pacific (LSE: APF). A mining investment business with coal royalties in Australia as its main source of income. I am more willing these days to look at small caps again, having come full circle from investing in them frequently to restricting myself to large caps and now back to small caps again. I would not though bet the farm on such a share, I would spread my money across several. I still prefer larger caps over £100m, given the choice, but these hardly exist. It always has been the case that almost all pyad shares are small caps. I was fully invested at the time, but had a little spare cash from dividends so took a very small position, for me, in Anglo. My cost per share was about 36p. At the year end they closed at around 46p plus there had been a dividend paid leaving me with a profit of roughly 31%. I continue to hold as the prospects look quite good for 2004 though the 2003 results will not be that brilliant.

So I close the year with two holdings. Lloyds TSB which has most of my funds, and Anglo, which has a small part, and the rest in cash. If I value all this and compare it with the valuation a year ago, I find that I'm up approximately 18%. Not a vintage year but broadly in line with the UK market. For what it's worth, since I started writing on value for the Fool in September 1998 this brings my cumulative gains from value trading to some 693%, although as my regular readers will know I've been trading value shares for much longer than that.

Introducting Stephen Bland's Motley Fool UK Value Investor Newsletter

Finally a new development for me, the Motley Fool and our readers. We will shortly be launching a subscription newsletter, tipsheet if you like, concentrating exclusively on value shares. This will be the first such publication by TMF in this country, though our US colleagues already publish a number of newsletters. You will be seeing publicity for this on our home page and here in the weekly articles on value investing.

The main reasons are, frankly, business. I am not going to deny that both I and the Fool hope to make profits from this venture. However, in return, I know that we can deliver value on value to our readers. I think I have shown that with my contributions to this site over the years, almost from since the Fool began in the UK. In any case, I enjoy writing and I enjoy the knowledge that many small investors, judging by the feedback I have received over the years, have benefited where it counts, in the wallet, from turning to a value strategy.

In the next week or so, you'll start seeing promotions on the site for Stephen Bland's Motley Fool UK Value Investor. Pricing details will follow. This regular value shares column will continue. My best investment ideas however will be reserved for the Value Investor newsletter.