VALUE INVESTING
What To Expect From Value

By Stephen Bland (TMFPyad)
September 3, 2004

I've been asked many times what sort of long-term results investors might expect from trading value shares. It is a question particularly favoured, for obvious reasons, by beginners and also by those who have lost money through a lack of disciplined investing and who are searching for a strategy. At least such people appreciate that there is a need for some sort of disciplined approach if long-term success is to be attained.

There's no clear answer to this. For some years I was achieving an impossible-to-sustain average of very roughly 50% or so per annum, although this was starting from a small base. Clearly though such a return could not continue for too long. Incidentally, I never worked out an exact figure, complicated as it was by monies added to and withdrawn from my investment funds over the years. Anyway, too much measuring always seems counterproductive to me and people who do it are unlikely to be too successful at investing I suspect.

In recent times my returns have been much lower, thus reducing my long-term average return considerably. I always knew this would happen of course. You can't go on doing 50% a year forever without owning the universe, so it had to be temporary in some way. To be honest, I don't even know what my very long-term average is anymore, due to my lack of desire to measure it regularly and the extent of money movements in and out over thirty odd years. But at a very crude guess, it is perhaps around the 20-25% a year level, with which I'm happy.

People should note that the volatility of returns is considerable. The deviation in some years from those averages can be substantial so that the above figures disguise both great years and duff years (including some with losses) as well as the average years. My style of investing in just one or a small number of shares at a time is bound to be highly volatile and is not one I commend to other value investors. It is far less risky and possibly just as successful in the long run to have a portfolio of suitable shares.

I say that it is possibly just as successful, maybe more so, because of the loss situation. With just one share, a loss can be a major hit. With a portfolio of say 8-10 value shares, any particular loss will be less of a hit. Although in a good year the gains may be lower with a larger portfolio, on balance the effect of those gains may well outweigh the effect of the losses compared with a portfolio of fewer shares. I just went with the single-share portfolio, betting the farm, because I guess I just liked to run close to the edge, particularly when I was much younger, though I did it a lot when I was older too. As I say though, I cannot advocate this for others and it may well be that the portfolio approach produces as good or even better long-term results anyway. It definitely reduces risk, and this is a critical point with value whose whole thesis is built round reducing investment risk.

During my early days as an investor, it seemed to me that few people were interested in value, though this could have been mainly in my mind because there was no easy way to communicate with lots of other investors via the Internet as you can now. So my feeling was of operating in a near vacuum, particularly with the extra deep value pyad approach. There had to be a number of people at it of course, after all I didn't invent value investing and I learned a lot of my basic principles from others who themselves didn't invent it either. You could sometimes read articles on various aspects of value, like the merits of low P/E and so on, in the Investors Chronicle and they also demonstrated repeated success with long-term high yield portfolio strategies so obviously there were other value investors out there too. I was always keen to read about such things, as people are when they discover articles that reinforce their own belief systems even if they're wrong!

But value wasn't wrong and although it might be harder to unearth likely shares with undiscovered merits these days due to the greater availability of information, I continue to believe that value is a superior trading strategy to all others, and in its high yield portfolio incarnation, a superior long-term hold strategy to all others.

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