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Value Investing in the Current Climate

All investing is value investing; the rest is speculation Joel Greenblatt

Value investing has been back in the headlines this week. I'd like to think that it was in direct response to the article that I* wrote last week, but I suspect not! It has become relevant because value shares have been battered in the recent Market sell-off.

People are bemused because there is a generally held belief that every few years "value investing" has its place in the Sun. The problem is that it's taking a heck of a long time to get back to get back into the spotlight.

I've always considered that the art of investing is the ability find shares that are under-valued, buy them and hold them until such time as the risk premium of continuing to hold them is too high. That risk premium is often because those shares have become over-valued- too many people have piled into them and the price has been bid up to a silly level. 

A great example of this was a company called Lo-Q (now called Accesso Technology (ACSO)). They make the equipment and technology that allow people to pay a premium to jump to the front of queues at theme parks. I spotted them as a reasonable value play and bought them in 2012 for £3 a share. I sold half my shares in 2014 for £7 a share and then sold the balance when they'd achieved around £12 a share in 2016. Although by this stage they had grown into their price, but were looking expensive to me. I was ahead of my time- they actually grew to over £28 per share by September 2018. I grimaced, but thought the valuation was bonkers. As of today (16 May 2020) they trade at....£2.97 per share! As history showed, the risky time to buy them was when they were very expensive (they are now a tenth of what they were 20 months ago). If you'd bought a basket of them in 2012 and gradually sold them into a rising Market (as I did, albeit imperfectly) you'd have made some decent money.

Value share investing as a strategy has a long history. John Maynard Keynes is a darling of many economists and from the 1920's he managed the Cambridge University Endowment to great success using this philosophy. I've written about Ben Graham who is in my view the king of value investing. His disciple Warren Buffett extended the philosophy to the concept that buying quality companies at a discount could lead to less riskier returns. The original Berkshire Hathaway was an industrial cotton-milling company that Buffett bought due to it being a deep value proposition- in essence its assets were worth more than its liquidation value It was unfortunately in an industry that was in terminal decline and arguably was cheap for a reason. However Buffett was able to use its cash flows to buy other businesses (notably insurance) at a discount and there began his story.

Joel Greenblatt discovered value investing in the early 1970's when many were subscribing to the "efficient  market hypothesis"- the idea that stocks were usually priced correctly at all times by the Market. Greenblatt discovered that prices were not always correct and you could develop an "edge" by looking at market misprices. He brought in the Buffettesque concept of quality and commented, Buying cheap stocks is great, but buying good companies cheaply is even better. That's a potent combination.

I subscribe to the wider definition of Value Investing espoused by Greenblatt- in other words all true investing is value investing. The true investor is not looking to jump on highly rated expensive stocks and ride them even higher. He or she is looking to buy quality at a reasonable price in the hope that the price paid will look like a future bargain. 

The challenge to the Value Investor is the fact that most of the big returns in periods of history have been driven for a short period by the "hot stocks". Whether it be the Nifty Fifty in the 1960's (Kodak, IBM et al), the Dot.Com Stocks of the late 1990's or the FAANGs (Facebook, Amazon, Apple, Netflix, Google) of the last decade, you can look quite foolish at sticking to your value "knitting" during these periods. My philosophy has always been to have some exposure to these trends whether by an S&P Index Tracker or by holding such Investment Trusts who invest in them. For individual shares however, value is always a key consideration.

The dilemma at the moment is whether to try and predict the shares which are genuinely under-priced and buy them or whether to wait until we have some visibility on how the World is going to emerge from this Corona-Virus imposed crisis. Personally I have adopted a two pronged approach:

1. I have kept my main portfolio invested in Index Trackers and Investment Trusts. Risk has been suitably balanced due to exposure to Gilts, Gold etc. which were increased as we entered this crisis at the start of this year

2. I have kept my individual share portfolio account heavily in cash having allowed trailing stops to be triggered early in the Crisis. I continue to wait for compelling opportunities. My criteria for investment is challenging and I will seek to expand my methodology over the next few weeks. I don't think I'm alone in this approach. Although no great fan of baseball, I do subscribe to the concept of waiting for the right pitch to come along before seeking to knock it out of the park.

I could be wrong, but I think we have a long way to go yet in this Crisis and there is too much risk at this stage. Until we have seen some proper guidance on earnings from listed companies, in my personal view we are driving blind to a large extent as we look to assess true value of shares.

* Do please read my disclaimer and read this blog subject to it.


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