VALUE INVESTING
The Verdict On Value Investor

By Stephen Bland (TMFPyad)
December 10, 2004

The twelfth edition of Value Investor will be published later this month, which brings us to end of our first year of publication. A convenient point to review the success or otherwise of the selections made in the year by Maynard and me.

Looking at the value trading selections first, as distinct from the separate high yield portfolio (HYP) section, I'll start with the bad news as I don't want anyone suggesting we're trying to play this down. Of the thirty selections in the eleven months to date, we have disposed of five. Four were sales called by us and one, Fortress Holdings (LSE: FOS), is in liquidation. Fortress is not part of the bad news, it was a cash rich company which should distribute payments somewhat in excess of the buy price.

Of the other four, we had two real woofs being Ultraframe (LSE: UTF) sold at a 58% loss and Montpellier (LSE: MPL) sold at a 49% loss. Another, Churchill China (LSE: CHH) was sold a few days ago at a small loss.

The remaining bad news concerns shares still held showing falls so far. The major ones are William Sinclair (LSE: SNCL) down 31%, Royal & SunAlliance (LSE: RSA) down 20%, UK Coal (LSE: UKC) down 16%, MJ Gleeson (LSE: GLE) down 10%. These figures are before dividends received. All these shares have yielded varying amounts of dividends since our buy advice which can make quite a difference in reducing paper losses. Regular readers will know that I find a good yield to be an important part of value investing.

Right, that's out of the way so let's look at the successes.

There was one further disposal in addition to the four above and it was a cracker. Maynard's choice of Yates (LSE: YTE) in May received a bid shortly after it was chosen and was eventually taken out in August for around 43% profit in three months.

Of the shares still held the biggest gainer is Maynard's pick FW Thorpe (LSE: TFW) up about 38%. The other largest profits are shown by Mitchells & Butlers (LSE: MAB) up 22%, Hardys & Hansons (LSE: HDYS) up 21%, T Clarke (LSE: CTO) up 20%, London Merchant Securities (LSE: LMSO) up 18%, Trans-Siberian Gold (LSE: TSG) up 17%, Chamberlin & Hill (LSE: CMH) up 17%.

Again the above are capital movements only but all of these shares except Trans-Siberian Gold paid out dividends thus increasing the total returns so far. Trans-Siberian Gold is an exception to my yield requirement, a very speculative play on gold mining with superb nomenology.

The remaining shares still held show a mixture of small gains or losses on capital, improved by the fact that in most cases these have paid or will pay dividends.

One point I have to stress is that, apart from our disposals, most of the shares have not been held anywhere near long enough for a decent appraisal to be made of their performance. The maximum holding time is eleven months for our January purchases and the average will be around half that time. Value needs a long period to out, frequently years, even though occasionally a very rapid profit can be realised. That however is the exception, not the rule.

It is only by looking back at a portfolio after several years that you really see how it did. This is because it is quite common for value shares to hang around with little interest in them for some time when suddenly something happens to wake them up. During that period the price may drift sideways or downwards. It is precisely because you never know when a re-rating may occur or what may cause it that you need great patience to hang in, even whilst you may see the wider market moving up or people winning with other strategies. A portfolio of value shares stands a huge likelihood in the end of doing very well, far better than almost any other approach, but the key factor is "in the end." To succeed, you must have the fiscal stamina to see it through which means holding for years in many cases, often through tough times.

As an example of a sudden wake up call, brewers and pub chains, of which I have Hardys & Hansons and Mitchells & Butlers in our portfolio, saw an upward blip recently. Mitchells announced a grand set of results and some brokers took to uprating the whole sector which had the effect of pushing up the prices of many shares in this business. But value got us in much earlier, at a time when few considered that such shares had much attraction, with the side benefit of reasonable yields whilst waiting.

During the wait, investors received their dividends but had to put up with fluctuating prices. If I recall correctly both Hardys and Mitchells went below my buy prices at some stage on adverse press comment. Ignore the noise. Sooner or later it was likely that the wider market would agree that these shares are rather too cheap and this has now started to happen.

Turning to the high yield portfolio in the newsletter, for which I have been selecting one new share per month, different criteria apply. These shares are very long term holds though I do intend to trade occasionally when propitious so to do, unlike the public demo HYPs I run on the Motley Fool.

The eleven share to date portfolio as a whole is up about 7% on capital alone. Add in the crucial dividends and we're talking about a total return of some 10% so far. Bear in mind that most of the shares have not been held long enough to pay out a full year's dividends and in fact the three most recent selections have not had sufficient time to pay out anything at all yet. Consequently the dividend contribution to total return will be improved substantially once all the shares have had a chance to pay a full year. The forecast yield on the portfolio is over 5%.

Not bad for an HYP with an average holding time of six months or so. Self aggrandisement apart, I do stress to readers that little conclusion about potential long term performance should be adduced from the very short term figures to date. Although it is a pretty big step in the right direction, a few years are required to really see whether it's delivering. I have no doubt that it will. For an example of much longer term HYP possibilities, have a look at my public HYP1 for which I recently reviewed the four year performance here.

I'm satisfied with the short term of Value Investor so far. It would have been nicer to have a few less poorly performing shares to date of course but anyone used to portfolios, whether value or otherwise, will know that you can't win 'em all. That is exactly why people invest in portfolios, to spread the risks

In the end value will out sufficiently to make decent profits.

Issue 12 of Value Investor is published next Friday. Sign up here for a free 30-day trial and get access to all eleven back issues, subscriber-only discussion boards and special reports.

Stephen owns shares in Mitchells & Butlers and Royal & SunAlliance.