The return of the value investor

The unexpected answer is that there are managers who do have a belief in their abilities, and who have set out their philosophy and stuck to it, and have confidence in the worth of their investment style.

The management style I'm referring to is the one which carefully scrutinizes and analyses equities to determine fundamental value. Value investing was a methodology dismissed during the heady technobabble days as old fashioned and outmoded, but the consistency of some of its most die hard practioners has paid off and I believe will continue to do so.

The Value Manager believes that it is essential in stock selection and assessing management to spend time with financial statements 'Looking behind the Numbers,' rather than relying upon more glamorous management contact. In selecting individual stocks for its portfolio, a Value Fund will emphasize risk avoidance before a fuzzy ad hoc regard for 'potential' in its attempt to achieve its long-term capitol appreciation objective.

The Value Fund defines risk not on the basis of stock volatility, but on a company's financial strength, its ability to produce excess cash flow, the 'quality' of the earnings and the confidence in the predictability of the company's earnings based on proprietary fundamentals.

The Value Fund will select a portfolio in response to valuation extremes on a company-by company basis, usually going against a crowd which overreacts to short-term earnings disappointments, and ignoring over-all stock market timing techniques. In addition, when the Value Manager identifies stocks that have become significantly overvalued, he will probably seek to profit through outright sales of such existing holdings or by price declines of such securities via short sales.

The watch word is that 'Value is Value', and it can occur anywhere in the stock market and at any time, no matter what stage of the economic cycle the market is at. Most people do not have the temperament to be a 'value investor' because it requires so much patience and because Value usually needs time to emerge.

The most famous value investor of all of course is Warren Buffet and his investment vehicle, Berkshire Hathaway. He is also, and I am sure this is not a coincidence, an advocate of clear financial statements, and abhors the obfuscations and evasions that hid so much in Enron's accounts.

Berkshire Hathaway Inc., the Omaha-based conglomerate with businesses as varied as car insurance, confectionary and jewellery, produces an ideal annual report (available online at www.berkshirehathaway.com). It includes not only the wit and wisdom of its chairman, investor Warren Buffett, but also explains the statistics that investors need to decipher the activities of a large, diversified company.

'At Berkshire,' Buffett wrote last year, 'full reporting means giving you the information that we wish you to give to us if our positions were reversed.' That's a credo that all directors should follow, and investors should look for. Clear, transparent statements, written in understandable English, attract investors. When you can't decipher reports, it is safe to assume that the company has something to hide - again, remember Enron.