VALUE INVESTING
KIS Complexity Goodbye

By Stephen Bland (TMFPyad)
December 17, 2004

I have long advocated the KIS - Keep It Simple - approach for both of the two equity strategies I advocate, being short-term value share trading and long-term high yield portfolios. Incidentally, many commentators describe this as KISS, the final S standing for Stupid. I don't like that version, the final word doesn't really make sense and I feel it is there to complexify needlessly KIS into KISS just for the sake of achieving that last S.

My view is that if you can't sum up the attractions of your target value share in a few words and figures then you are giving it too much attention, the point being that too much attention does not result in a better investment appraisal. Indeed, it will likely have the reverse effect. The kind of prolix exegesis sometimes written about shares will often owe more to the writer possessing some kind of interest in it over and above the merely financial. Something of which the author himself may be unaware.

Think about it. Why would anyone go to the trouble of writing a lengthy screed about a share if they really cared little about it? What has happened is that the writer is already taken with the share for emotional reasons. They are hardly likely to waste hours keyboarding away about some share that they don't like. So the long report is there merely to confirm and rationalise something he already feels for it, something that is probably not based on hard nosed value style criteria. Objectivity is thereby lost and the ostensibly independent opinion is little more than a billet-doux. So beware the overly long justification of the merits of a share. The writer is quite likely to be pushing it by using rational explanation for an irrational feeling. And you can always find good things to say about almost any share or sector, just as you can find bad things to say if you want.

Don't follow this model. Try and get your own personal appraisals shorter and shorter until they are barely visible. A few key ratios, a few key facts, that's all you need.

Paradoxically perhaps, the long-term high yield portfolio (HYP) approach requires even less information and more KIS than short-term value trading. This may seem odd to some. Why would you require less data on a share you might hold for 20 years than on one you might hold for 20 days? Answer, you know nothing of the future, you can only guess. But you know even less nothing of the long-term future than you do of the near term one.

Applying KIS to HYPs leads to my idea of Strategic Ignorance, a concept which is based on my zen koan that Ignorance is Knowledge. Beginners understandably, but also the experienced and conventional, often fail to comprehend this. Leave conventions to suits meeting in fancy hotels more interested in a bit of what used to be called hanky panky than in the subject for which superficially they are convened.

HYP players should not prognosticate but accept that they cannot know the future and that forecasts and opinions of what may happen long term to particular shares or industries are pretty sure to prove hopelessly inaccurate. Positively cultivate this ignorance, it is enlightening. Once freed of the shackles of attempting to know the unknown with your HYP, you will know the unknown. When you reach this state of satori, you will understand my koan that Ignorance is Knowledge.

Here's an example. Every HYP must have a major bank, a crucial sector of the economy and a massive sector of the stock market without which your portfolio reads like Hamlet without Yorrick. Those unused to KIS and who still think that ignorance is ignorance will mess around trying to analyse the merits of one against another. People will tell you that the management of one is better than another, as if they have the faintest idea, or go in depth into other matters. The truth is twofold. First, all the big banks are all the same near as makes no difference, second, whatever their merits right now this tells you nothing of the distant future. Different banks go in and out of favour over time.

So the smart money for a long-term HYP investor can conclude only that the cheapest one of all on yield by far is Lloyds TSB (LSE: LLOY). A KIS analysis that takes a few seconds and is worth more than all the bull on all the banks in all the market. I selected Lloyds for the Value Investor HYP a few months back, taking advantage of a then lower price to lock in an especially good yield. My complete and deliberate strategic ignorance of banks in general and Lloyds in particular aided the selection no end.

Some readers may be of the opinion after reading this that my tongue is stuck so far in my cheek that one side of my face resembles a large balloon. I assure them that nothing could be further from the truth.

Stephen owns shares in Lloyds TSB and picks shares each month for the Value Investor newsletter.