Are you buying value, quality or a story? Value Investing panel at UK Investor Show 2014

Bulletin Board favourites are mostly story stocks with poor quality and value ratios

Click to enlarge

The ever-smooth Ed Croft blew bubbles on the screen. Are Stockpedia's Quality Rank and Value Rank the
solution to our tendency to buy a great story stock, most of which will disappoint?
Addressing us in the old-fashioned way without a projector were investors Nigel Wray, Chris Bailey and
Paul Kavanagh of Killik & Co.

To kick off, Croft asserted that evidence is clear that, however you measure it, over the long term (4
years+):

• cheap stocks beat expensive stocks and 
• quality stocks out-perform junk stocks

Cheap means low PE, low PBV, low PCF or some combination.
Quality indicators are companies with strong franchise, positive earnings direction and low risk. ROCE is a strong quantitative measure.

Use Croft's interactive webpage. Click the Top Bulletin Boards button above the bubble chart.

Wray agreed about the out-performance and pointed out a further advantage of shares that generate good long term returns: the longer you hold a successful pick, the better the return if you are a capital gains tax (CGT) payer. The magic of compounding means that deferring the CGT hugely improves the final post-tax value compared to jumping in and out of positions and realising profit every year.

Why do people buy shares whose numbers show them to be expensive or poor quality?

Investors love a good story, promising outsized returns. I would add that 'doing the numbers' is not on everyone's checklist and in any case, once enthused, confirmation bias means we humans are willing to give good stories a lot of slack when it comes to balance sheets, tangible assets and real hard cash coming in.
Croft is not saying avoid all story stocks, just that they need more justification than quality-value ones. And judging a story is a lot harder than looking for booby traps under an otherwise good-value quality-brand car.
I've seen many AIM promotions, particularly mining and oil companies, that entirely rely on CEO charm, an exciting sounding potential resource (that is often a cast-off that cost them a tenner) and the difficulty of evaluating the risks, timescale and costs of development into production. The latter is called information asymmetry. Unethical directors will manipulate you as much as they legally can (and more) and it is your arch enemy.

Kavanagh did admit to picking some oil exploration shares "But it's lottery ticket type money."

Blinkx: Ben Edelman is Not backing Down

"It's the Wild West out there, and Ben is the sheriff" - Alvin Roth, Economist

The UK Investor Show on 5 April scored a coup in getting Ben "Web Sheriff" Edelman to show his latest findings on blinkx. Edelman is an associate professor at Harvard, lectures on the online economy and has a law degree. Ben and blinkx are having a shoot-out which started in January with Edelman's blog The Darker Side of Blinkx.

In a sometimes very technical piece, he accused blinkx of being party to deceptive practices involving web adverts and pop-up windows in which blinkx got paid when users clicked the ads or closed the pop-ups. Blinkx strongly refuted this but without any detail which surprised many market commentators.

Two months later Blink issued a detailed counter to Edelman. Blinkx also sent a lawyer to the UK Investment Show but declined an offer of a ten minute slot on stage and an exhibition stand.

Edelman admits to, indeed revels, in being a geek with an obsession for nailing what he views as people abusing the web for undeserved profit. The extreme depersonalisation and literal distancing of  business transactions by web and email leads him to say that "In some respects the Internet is the best machine ever made for swindling people."

He is especially exercised by adware: programs running in the background on a PC that causes
unwanted adverts to be displayed. He has developed automatic methods to capture and trace some of these companies that are spoiling our browsing and pinching pennies or even dollars on every click.

Click to enlarge slides

Edelman sounds and frankly looks in his blog pic (right) like a nerdy computer dullard who rarely exposes himself to sunlight, but I was pleased to find this is far from the case. On stage he was energised, confident and witty, which is just as well as much of his case is pretty technical. As he bounded about the stage explaining his slides it was clear that he loves
the challenge of bringing the hot breath of justice down on these modern age cheats.

He soon presented some new research on blinkx that his obedient and dilligent robot PC servants have
found. To boil it down, he makes two key allegations:

• blinkx's affiliates or sub-affiliates con people into installing blinkx adware on their computers
• blinkx breaches the US regulator's (FTC) rules by not doing enough to stop those affiliates or sub-affiliates from doing so

The blinkx adware does not say it's by blinkx. This is a deduction Edelman has made. The FTC requires that an adware program creator should know if there is widespread failure by affiliates or sub-affiliates to provide adequate notice of their adware installation and obtain consumer consent to its installation.

Disclaimer: I do not have enough expertise to judge whether Edelman's claims about blinkx are true, I am merely reporting what he said.
Slides reproduced with permission.

Other articles on Edelman's talk:

Doc Layman
Would I rather be long or short of blinkx? Dunno! - Tom Winnifrith (registration req)
Impressions of a self-publicist, and Blinkx - Roger Lawson, ShareSoc
View following the UK Investor Show - Steve Moore (reg req'd)
Telephone interview with Edelman - Doc Holiday
Edelman critics continuing to play ‘the man’, as the PR machine struggles to play ‘the ball’ - Steve Moore (reg req'd)

The best quotes from the UK Investor Show 2014

The first in a series of pieces on Tom Winnifrith's UK Investor Show, held on 5 April.

 

Quoted are:

• Ben Edelman AKA The Web Sheriff, Harvard associate professor
• Terry Smith, fund manager, CEO of Tullett Prebon and exposer of investment rip-offs
• Ed Croft, co-founder of Stockopedia. Damn good looking for an investment geek.
• Roger Lawson, Deputy Chairman of ShareSoc
• David Lenigas, Executive Chairman of Leni Gas & Oil
• Simon Cawkwell AKA Evil Knievil. Has he lost weight?
• Cathal Friel, Chairman of Fastnet Oil & Gas. Fast-talking Irish charmer.
• Paul Scott, AKA Paulypilot, Stockopedia writer and activist. A legend.
• Clem Chambers, CEO of advfn & market commentator. Writes thrillers.
• Dominic Frisby, actor, comedian & financial journalist. Like Auric Goldfinger, he loves gold.
• Vin Murria, CEO of Advanced Computer Software Group (sorry about the pic Vin)