VALUE INVESTING
Strategic Ignorance

By Stephen Bland (TMFPyad)
October 22, 2004

Does the detailed nature of the business matter for a value share?

No. Not in my view anyway.

A lot of analysts' reports on companies and general press comment, even private investors' comments on message boards, often go into great detail about the business activities and markets of the share and so on. Sometimes this may be accompanied by impressive looking statistics regarding future growth rates for the economy and the widget market in general and the particular widgets produced by the company in question.

I believe that such information gets in the way of the real information. For a value investor all you really want to know about are the fundamental numbers in whatever combination rings your bell. For me it's usually the four pyad filters and a bit of additional stuff that I believe helps such as having valuable assets and very short term rising eps forecasts if possible.

Since I know nothing about the industry in which the company operates, and I don't want to know either, any detailed treatise on such matters is of little interest to me. And as far as forecasts go, even one year's eps for a given share is necessarily highly risky. Ponderous consideration of whole industries and whole economies stretching way into the future is useless because the chances are that it will be very wrong anyway.

Value investing is a short-term strategy by which I mean anything from a day up to two or three years perhaps, I don't set a precise time limit. With this strategy, short-term market psychology is likely to be the greater force than vague macro economic factors.

It is better to travel hopefully than arrive. Who said that? I just did.

And so it is with value shares. In most cases you don't want to hang around long enough to find out whether your depressed share ever makes it or not as a business success because reality has a nasty habit of kicking you up the behind. All you really want is for enough people to believe that the share will recover for it to do so, that is, to the point where value has been sufficiently outed for you to kiss it a not-so-fond goodbye. The latter emotion because you have resisted the temptation to fall in love with it I hope.

Short-term value shares are like relationships. Concentrate on the fundamental attractions, don't commit, don't get too involved, don't start over analysing, keep it on as superficial a level as possible that allows to maintain it whilst always keeping one eye firmly on the exit door. This may lead to you becoming cross eyed perhaps but better that than being blind to what is happening to the share because you believe in some bigger story that may never materialise.

All of this means that you can almost buy a deep value share on the fundamental numbers alone. Which is nice because it makes the process much simpler for investors. It can sometimes be hard for beginners to appreciate this. They tend to desire far too much information. I expect I did at one time too. It took me some time to discover that less is more, to get it down to the bare bones of a few facts that give a value picture of a share that is sufficient to convince me to invest often large sums of money.

The key, both with short-term value and long-term high yield shares, is to develop what I have termed "strategic ignorance." This is where you not only admit that you know little about the economy, the industry, the business, but more than that, you don't want to know. You revel in the fact that you know nothing, you make a virtue out of it because you believe that it actually aids successful share picking.

You will find often that industry experts are poor share pickers. Why is this? It should be the opposite in theory. The answer is that they practice the reverse of strategic ignorance. They know too much about their particular area.

Remember, the last thing you want to know about your shares is to know about your shares.

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