UK Value Investor

Hi all

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John

Warren Buffett has a name for companies that are virtually certain to grow consistently for decades into the future. He calls them The Inevitables. Now, I certainly don’t think I have the skills to spot these uber-rare companies, nor do I think I need to. But occasionally I bump into a company whose financial results do a fantastic impression of one.

One of my favourite value investing sites is The Value Perspective which is the web outlet for some of the (value) fund managers over at Schroders.  In their latest piece, Andrew Lyddon talks about how the telecoms sector is not exactly a hot favourite.  Despite the sectors deserved reputation as a defensive play, share prices often fallen and lagged far behind the wider market and even other defensive sectors.

The FTSE 100 closed last Friday at 5,129, about 13% down from when the carnage began in early August. At that level it has a PE10 of about 12 (PE10 is the 10 year average real price to earnings ratio) while the PE10 average is around 17.6. PE10 has been a pretty good indicator of future returns over the last century and it’s a favourite of mine for checking what sort of returns might be possible in the next few years.

The model portfolio is filling up nicely (12 out of 20 slots taken) and now it's time to buy another company. I've scoured the market for the best high quality, high value shares and top of the pile for now is Balfour Beatty, the diversified engineering, construction and infrastructure services company.

Most of the academic research out there suggests that shares are the best investment vehicle.  They have produced the biggest returns for a given amount of risk; so does this means it always makes sense to invest all your savings in the stock market?

Microsoft style growth

When I talk to people who 'dabble' in the stock market, one of the thing that almost always comes up is growth.  The general idea seems to be that if you want a reasonable investment then put your money into Tesco, Marks & Spencer or RBS, but if you really want to get rich then the only way is to find some small company that's about to be the Next Big Thing.

Remember the mantra from last time – income first, capital growth second, invest for the long term.  With shares, income means dividends and the higher the yield the better.  However, there’s more to it than that.

If you go to your favourite stock screener (or just google ‘stock screener’, there are plenty out there) and sort all the shares in the UK market by dividend yield you are probably going to get a large number of junk shares.   That’s because the quoted dividend yield is based on the last dividend that was paid out, not the one that’s going to be paid out next; and it's what gets paid out over the next few years that really matters.

If you’re going to be a stock picker then one of your goals has to be to beat the market.  It must be, otherwise why would you bother with all the extra work?  And if you’re out to beat the market then it makes sense to check each potential investment against the market to see which is best.

I will shortly be launching a new model fund which will be called the UKVI 20.  This fund will be separate from my personal investments, although the two will be very similar to start with and I expect them to eventually have exactly the same constituent parts but with slightly different weightings.

I’ll put up the facts and figures for the UKVI 20 onto the web site in due course and I’ll keep posting my private investment performance for several more years until the new fund has some reasonable amount of history behind it.

Let's face it, investors go down the stock picking route because they think they can outperform both the 'market' (typically the FTSE 100) as well as fund managers.  Of course there is an element of interest and even excitement in stock picking, but at the end of they day if you're investing thousands of pounds in your own stock picks you're doing it to make more money than you could elsewhere.

Since that's the case, tracking your returns over the long term is important just to make sure your efforts are worth it and if they're not, then perhaps you should either buy the footsie and find another hobby, or get someone else to make your stock picks.

“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now”

I bought Luminar back in early 2010 as a turn-around play on the assumption that if (IF) it survived then it might return to average earnings at an average PE, which might be something like 40p and 7 respectively, giving a potential share price of 280p.  Currently they're around 9p and I bought at an average of 34p.  Yes, obviously that makes me look pretty stupid and with hindsight I'd agree.

Chemring is primarily a defence group that currently focuses on countermeasures, counter IED, pyrotechnics and munitions.  These four areas take advantage of the company’s three core competencies of energetic material expertise, high product safety and reliability and high volume manufacture of explosive products.

An entertaining review of the company can be seen at http://iball.iii.co.uk/2008/05/06/chemring-plc-chg