VALUE INVESTING
There's No Value In Round Numbers

By Stephen Bland (TMFPyad)
July 23, 2004

It's one of those round number moments again. This is the two hundred fiftieth article in my weekly value series for the Motley Fool.

What is it about round numbers that intrigues people? You often hear the financial chattering classes refer to purported "psychologically important" points in the FTSE100 whenever it approaches a round number, either on the way up or the way down. If, for example, the index stands at 4,950 you'll hear comment from the press or the naïve ingénues who frequent bulletin boards that "yeah, once it breaks the psychologically important 5,000 barrier there's no stopping it to at least 5,500". The idea being that more investors will buy if this barrier is breached, for no other reason than simply because it has been breached. But will they?

I don't buy markets or their practical equivalents – index tracker funds – so it doesn't bother me one way or the other. However, I've never really been convinced by the round numberists. I'm not sure that there is any difference between 5,000 or, say, 4,638, such that more investors will pile into a market that has just broken upward through a round number. Or vice versa on the way down.

But it's not only indices, though that perhaps is where this concept is most often put forward. You can hear similar sentiments expressed about individual share prices too on occasion. And individual share prices are something in which I am interested. But I still don't buy the round number idea. With value shares, I sell when sufficient value on my judgement has evaporated. I don't care what the share price is. For example if I am in a share priced at 495, I am not going to hang on for the round number 500 purely because it is a round number or some half-baked chartist thinks that if it breaks 500 it will take off. If my criteria say sell at that point, I sell.

I don't have target selling prices, round or unround. Value is a dynamic concept the way I play it, requiring that the share's value criteria be monitored regularly, testing for how much remains, either due to price changes or when new fundamental information is released. When I buy the share I don't know, when I am going to sell it. I don't want to become fixated on some target price which may never materialise and especially not on some round number for reason only that it is round.

So I advise that investors ignore the round number concept in the market. I don't believe that it tells you anything.

Incidentally, it is interesting to contrast the certain amount of popularity with the round number idea in the stock market with it in retailing. There we have the opposite, with a very large number of shops exercising a strong aversion to poor old round numbers.

As we all know it is very common to see items for sale with 99p in the price, so that they are one penny below the next pound increment. It annoys me but when I have taken it up with retailers on several occasions they always claim that it is a psychological aid to selling. It gives some customers the false idea that the price is more like just the pound part of the ticket, rather than nearer to the next pound up and thus appearing cheaper than it is. Does anyone really think, even subconsciously, that say £4.99 is more like four quid than five? Hard to believe.

It's not only small ticket items either. Things as expensive as cars or property are frequently priced this way too. I have seen a house for £499,999 but who would think of that as anything other than £500,000?

I reminds me of the time aeons ago when I took a vacation job in a warehouse. The pay was five and eleven pence three farthings per hour. And this was at a time when the farthing no longer existed as a coin, cos I ain't that old. This figure is one farthing below six bob an hour, 30p in real money. Why not make it an even six bob? I never found out. Such are the strange ways of people.

For value investing share ideas, try a 30-day free trial to our Value Investor newsletter.