Value investing

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4. Back in fashion

In the late 1990s, when the dotcom boom was propelling the market to new heights, value investors were an endangered species.

In the first place, share prices were so high that it was difficult to find any companies that fulfilled traditional value criteria. What could you buy when shares were so expensive?

In the second place, momentum investors - people who bought 'hot' telecom and internet stocks on high P/E multiples in the expectation that they would rise even higher - were having it all their own way. It seemed that you could buy any stock with '.com' attached to its name, and double your money in months.

Fund managers like Tony Dye of Phillips & Drewe, who publicly denounced the spiralling valuations and who refused to put their clients money into 'growth' stocks, were ridiculed. To be a value investor at this time was regarded as quaintly old-fashioned at best, disastrously myopic at worst.

When the bull market shuddered to a halt in Spring 2000 everything changed. Formerly 'hot' companies saw their share prices collapse (in some cases by as much as 99%), and momentum investors who failed to get out in time lost fortunes.

As share prices descended to more rational levels in 2000-2001, so fund managers switched from growth strategies to value strategies. The trick now was to find companies whose share prices were good value relative to their earnings and dividends, and where there were assets to underpin debts. Companies in 'old-fashioned' sectors like engineering, utilities, food and brewing, became popular again. The value investor was reborn.

This pendulum swing between value and growth is a recurring feature of the stock market, though not always in the stark extremes seen in 1999/2000. In raging bull markets, value investors are out in the wilderness. In bear markets, their forensic skills come into their own. The problem for private investors is that, temperamentally, it is difficult to be both a good value investor and a good growth investor. And secondly it is difficult to know when the market is turning.

1. What is value investing? 2. Ben Graham 3. Does value investing suit you? 4. Back in fashion 5. Undervalued assets - introduction 6. Undervalued assets - property companies 7. Debt 8. Earnings 9. Earnings - an example 10. Dividends 11. Ratio of market capitalisation to sales 12. Warren Buffett's principles 13. Why do stocks become undervalued/overvalued? 14. Conclusion

• Value Growth Investing