VALUE INVESTING
Value Wins .... In The End

By Stephen Bland (TMFPyad)
December 3, 2004

How long should you hold a deep value or pyad share?

As long as it takes is the answer. That is, as long as it takes for the value to out.

And during that time, which may be years, you may experience a bit of a rough ride on occasion. Your shares may fall despite there being no bad news on the fundamentals. They may go nowhere whilst the broader market puts in a handsome rise.

No investor should adopt the value strategy unless they are prepared for all this. Some may have bought in on the basis of the occasional share that has revealed a very quick return. If that is the case, they are likely to be disappointed eventually with value. Portfolios of value shares will only demonstrate their real capability after several years when the really big gains are revealed. Not all the shares of course, there is bound to be the odd duff holding, but there is little doubt that overall, value wins and wins seriously in the end, beating most other approaches. The key words though are "in the end."

I cannot stress too much that value takes time and without the patience to be able to sit it out, you really should not be in the game at all because you will be disappointed. You have to be prepared to hold your value portfolio for some years, monitoring the holdings regularly.

It can be painful. The market may be rising strongly but many value shares will at first not participate in this movement because often they are small neglected companies to which few pay attention, particularly if all the action is in big caps for the moment. So you have to believe that sooner or later value will work and that when it does, it will deliver seriously good returns.

This takes a large dollop of faith as well as patience. It is easy to become a value atheist if your faith is being shaken by a rising general market whilst you harbour a static portfolio. You may read the press at the end of the year trumpeting gains by the market, sometimes pretty good, and you may well have underperformed. If you are a weaker player, you may well give up on value altogether.

You would be wrong. Value above all is one strategy in which the reasons why it works are obvious. Buy something unreasonably cheap and you probably have a bargain which will likely rise as others begin to see it that way too. Its logic is unassailable. Its drawback is in the often lengthy time that it can take for this to happen.

New investors often ask why, if a strategy is so obvious and successful, doesn't everyone who likes to trade shares follow it? The reason that most small investors of a trading inclination don't do so is that they simply don't have the stomach, the perseverance for it. Value is not a fast buck approach. It is a big buck but a slowish buck approach.

Look at professional value investors. They are prepared to sit on a wide range of shares for years. Patience and perseverance through sometimes adverse circumstances are the qualities needed.

In my Value Investor newsletter there are several shares picked earlier in the year which for a time did nothing or fell, then delivered later. For example, pub group Mitchells & Butlers (LSE: MAB), in which I have a stake. The newsletter buy price was 254p back in March this year. Now it stands at 308p, still below net tangible assets of 331p, and has recently announced good annual results with decent like for like sales increases, a dividend rise of 18% and a major share buyback programme. Yet for a while after its selection it just hung around or fell a little. Those without the necessary longer term perspective might easily have become disillusioned with the share.

Some have gone on to do the business almost immediately. For example, Maynard's excellent choice of FW Thorpe (LSE: TFW) is now up some 41% since being picked in April. But this is not typical of value shares. I know, I have been investing in them for over thirty years. Most will try your patience to the limits. In the end, provided you have what it takes to stick with it, you will be very handsomely rewarded by a value portfolio. But weaken and become disillusioned because your portfolio hasn't doubled overnight and you will fail at the strategy.

A value player believes he has it right whatever anyone else thinks and hangs on until proven right, or inevitably but only very occasionally, wrong. Mere noise price movements or time elapsing matter little.

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Stephen owns shares in Mitchells & Butlers.