Peter Shearlock applies value investing principles to selecting UK companies for investors who aim to buy and hold for several years. Academic studies confirm that the value approach consistently beats the market over the long term, making this an ideal way of managing the core of your share portfolio.
In The IRS Report, Peter researches companies that meet his own stringent value tests. These are companies that he considers undervalued by the wider stockmarket or which have potential for recovery from some form of setback. He normally restricts his search to the top 350 UK companies by market capitalisation.
Undervaluation can arise because investors focus on the old rather than the new aspects of a business – and larger companies usually have several divisions or business areas, so a dull old business can often contain a rising star. Sentiment can turn against an entire sector – as with banks or REITs recently. Or investors can simply become too pessimistic about a company’s prospects.
In line with value investors generally, Peter has adapted Benjamin Graham’s original principles to suit modern conditions, but still emphasises the fundamental virtues a sound business model, strong finances and firm management as a guide to finding quality investments that can often be held for many years while providing rising dividends and steady capital appreciation.
Peter has been researching companies for over 30 years. He is the former City Editor of the Sunday Times, for which he writes an investment column.
For me, value investment is about fundamentals over fashion. The key is to stay focused on factors such as long-term cash generation, management quality, dividend-paying capacity, financial strength and asset-backing and ignore the vagaries of shifting sentiment. As Benjamin Graham, the Godfather of value investment, pointed out, if you can buy a share at a discount to what it is inherently worth you are cushioned for whatever the world may throw at you.
Undervalued shares are often found in unfashionable sectors. Those sectors can remain unfashionable for months or, sometimes, years. The value investor must be patient, prepared to take a long-term view of his or her investments. But experience shows this approach pays off in the end.
Above all, value investment is about discipline. Warren Buffett, the fabulously successful US value investor, famously refused to join in the dotcom boom on the grounds that he wouldn’t buy what he couldn’t understand. It stood him in good stead. Too often, investors are more worried about missing out on the New Big Thing than finding an underpriced bargain. As Christopher Browne of Tweedie Browne puts it: Risk is more often in the price you pay than the stock itself. Remembering that is the key to successful value investing.
You can see the last published version of the full value portfolio here.