Value Investing: Patience is Required

Investing can be a bit like religion in that it requires a good dose of faith. When you buy into a company it could be years before you get any feedback on whether it was a good idea or not. In the mean time you just have to kneel before a picture of Ben Graham and say "I believe" before you go to bed each night. The same goes for the portfolio as a whole where you might under perform a simple stock/bond split for what seems like an eternity.

As well as faith and patience, it also helps if you get your kicks somewhere other than the stock market. Or, if you really want to get your kicks from your investments then perhaps take up day trading. Put bluntly, the market can move sideways longer than you can stand the inaction (see 2010 for a good example).

Value investing as I practice it seems to sit rather uncomfortably in the middle of the active/passive continuum. At one end you have passive indexing, where you don't do anything at all for huge stretches of time and frankly don't give a damn. Once a year or so you get out of bed and rebalance and that's about it. At the other end you have day trading, or variations thereof. Here you get to trade a lot, every day. If you close your positions at the end of the day you see your realised profit and loss each day which is a nice time scale for feedback.

The old school value investor has neither of these pleasures. You just get to sit and watch, in my case once a week, watching the prices go up and down and up and down again. Occasionally a dividend drops in which livens things up a bit. Months may tick by (in the last year I've bought into four new companies) in which nothing happens. Your faith will be tested by the grinding inactivity of it all and only the patient will stick with the game plan.

Value investing is not hard. It is not complicated. It is out there for all to see and should have long ago been vaporised by the efficient market. But it is beyond dull for most people and that dullness is an effective barrier to entry. That barrier is high enough to require a premium before anyone will do it, so in one sense the value premium is a dullness premium. Remember the employees of Graham and Dodd, in their grey coats with stacks of forms, filling out a form for each company, checking to see if the numbers met their criteria? That is the definition of boring to me.

And to put the boot in one more time, Gordon Gekko was not a value investor, the masters of the universe were not value investors, nor the dot com venture capital crowd. Value investing has a you-are-not-cool premium too.

I can't do much about coolness, but to combat the dullness I've tried looking at value investing like a very slow game of chess with a certain Mr Market. The moves come perhaps only once every quarter, the outcome is uncertain, but seeing the process as a game definitely helps to gets me in the right frame of mind. More importantly, it keeps me in the game.

Bought and Sold This Month 

Nothing whatsoever, which is precisely the point of this post. 

Dividends

Smart (J.) & Co (Contractors) (LON:SMJ) paid out a small dividend which brings the realised gains from that company to 3.5%, or 4.6% annualised. Titon Hldgs (LON:TON) , now my largest holding by market value, paid out yet another dividend, taking realised returns to 8.5% or 4.6% annualised. So although this was a down month for the market values of both the FTSE100 and my portfolio, my book value still went up very slightly, which to me is the most important thing.

FTSE 100 value

Today the FTSE 100 stands at 4916. My rather patchy data puts the current 10 year real PE at 12, Richard Beddard thinks it's 14 (although I think that's nominal rather than real), which is close enough for me. I'm currently estimating the long term average real PE10 as 13.8 (an amalgamation of various sources) so we are slightly on the cheap side. On this basis I would allocate 75/25 to UK stocks/bonds in an ETF portfolio, using my asset allocation method that I've written about previously.

House prices

I think prices are likely to end up between 3 and 4 times average earnings. Anything over 5x is crazy. We are currently at about 5.5, which means I won't be buying again any time soon.

Charts and tables

I've updated the current holdings, trade history and benchmark pages with the latest data, feel free to browse around.