VALUE INVESTING
Value's No Joke

By Stephen Bland (TMFPyad)
October 29, 2004

Two goldfish are in a tank. One turns to the other and asks "do you know how to drive this thing?"

What does this have to do with value shares?

Nothing.

Well, only very indirectly. I suggest that those who follow the value style of investing should actually enjoy what they are doing, have a bit of a laugh with it if possible. It shouldn't be a chore, it should be pleasurable. As an added bonus, people tend to be more successful at things they enjoy doing, the two feed off each other. If you find the whole thing a pain, you are much more likely to give up, fail to see it through given the lengthy patience that is frequently required.

Assuming you are familiar with the basics of the style, the fun starts with the actual search for suitable shares. These days the initial trawl can be done mechanically across the whole market using one of the share filtering programs that are available, narrowing the choices down to a list of ostensibly suitable shares. You might like to allow a margin of latitude in your filters so as to produce those which almost meet your criteria, as well as those which satisfy your requirements fully. The former can then go on a watch list so they can be monitored for future price falls which may then turn them into full candidates.

You then need to follow up those currently doing the business by reference to accounts and recent news, which will further reduce the selections to a few which you are prepared to buy right now. Sometimes you might not find any at all. This depends on the limits of your filters. Mine are usually very tight but other value players set their own levels.

Still having fun? Good, because so far it hasn't cost you a penny but now it's wallet time. Go in, but you will need to enjoy the ride, need to accept that sometimes you will lose but that you hope to win much more than you lose over time.

I have to admit that you need to be able to enjoy something of the emotions that a gambler feels, there is a streak of the gambling approach in short-term value trading as there is in any short-term style. The difference I believe is that value shares are not a game of pure chance, you hope to influence the outcome by choosing shares with better odds than most. Nevertheless, investing in value shares does require that you take considerable risks though this can be mitigated by holding a portfolio. They can and do go wrong on occasion and you have to be able to roll with the punches and come back for more because, at the simplest level, you like it, black eyes and all.

Yes we do it to make money but in my experience with many successful people who started with nothing, the most successful are those that get a kick out of what they do. In other words, though this may sound a bit peculiar to some, such people are not in business or investing primarily to make money, they are in it because they thoroughly enjoy the challenge. The enjoyment is the primary motivator, not the cash. This is why successful entrepreneurs rarely retire even though they have more than enough money, it is the pleasure of the challenge that keeps them going, just as it was in the early days when they had nothing.

Consider my search for tips to go in the Value Investor newsletter. As a very recent example I found a somewhat different share in the October edition for the high yield portfolio. My tenth selection, De La Rue (LSE: DLAR) then at about 302p, is not in the FTSE100 and is the first share in the portfolio to go outside this index. It is becoming increasingly difficult to find suitable high yield shares once all the obvious big cap candidates have been chosen, bearing in mind that sector diversification is essential. Precisely because it has become more difficult, I enjoy the challenge of locating the right share.

I wouldn't be here otherwise.

Stephen reserves his best value investing tips for the Value Investor newsletter. To enjoy a free 30-day trial, with access to past editions, click here.