Ask Clem!

The FINANCIAL — The market pays people to risk their money. Risk is thus equivalent to reward. This is a firm law of investing and trading.

The FINANCIAL — The market pays people to risk their money. Risk is thus equivalent to reward. This is a firm law of investing and trading.

What most people overlook is that money is not the only way to get paid. Many traders get “paid” in “entertainment” – in other words the “buzz” of trading means they are willing to trade more, and in riskier situations, losing cash just for the excitement factor

A boring market is in fact, just the place you want to be – using the above theory you could say the market pays people more to invest in boring stocks than it does to invest in interesting markets.

To seek excitement is to search for entertainment and its associated losses.

Europe — Europe is currently where the value is. Stock markets in Germany, France and Italy have all crashed. In a market crash, good and bad stocks get crushed just the same. There is plenty of opportunity for the keen stock picker to separate the wheat from the chaff, and for the trader to try and time a rally.
Yet if Europe is tied to the euro, what is the point of investing if the currency is going to fall off a cliff? Doing so would counterbalance any equity market rally with a fall in the value of its equities in non-euro currencies. As such, it might be a good plan to look away from Europe’s potential.

Value — The obvious response is to point to the emerging markets. Whilst this has been a mantra for nearly a decade, the emerging markets are taking a beating. Even so, many valuations are still extremely high with famous names in India and Brazil still commanding the sort of P/Es that would dizzy investors in the developed markets, where 40 and 50 P/Es are reserved for only the most fashionable stocks.

Value investing has been a successful theme for 50 years. It doesn’t matter what investing fashion is in town, value stock investing never seems to stop working. It has a simple premise, cheap is cheap and buying cheap stuff never gets old.

The best way to establish value is to look at P/E, but another is to combine that with sales to market cap – that is to say how many years sales buy the company.

It’s then worth checking for a good cash balance. Even good companies die if they run out of cash. Also, check the recent and long term news on the company to make sure nothing nasty has happened, that the management are sane.

Any stock with sound management, a P/E below 10 and sales to market cap below half is worth looking closely at. If you find such a company and the management insiders are buying the company’s stock for themselves, you are on to an interesting candidate.

Non-European Markets — The BRIC countries, (Brazil, Russia, India and China )are clearly in a bear market – hardly a prime place to be looking for value. As far as the question is concerned, Europe is off the list even if there are plenty of opportunities there.

In practical market thinking Australia and Hong Kong may as well be China, making them unappealing as far as value goes. This means the only market left is the US and if you want to think of the UK as not truly Europe, then the London also.

Both have taken a big hit in the resent crisis. Not as hard as Germany, France, Italy and obviously Greece, so recovery has been strong.

Underlying the big picture is what is going to happen to the US dollar and the UK pound, two currencies that appear bound together.

If you think the euro is going to fall then it would seem the chances of a strong pound and dollar are good.

That’s really a Forex bet rather than equity investment. Yet with Europe off the table there is only Japan to add into the mix.

With Japan constantly in deflation, its stock market ground into the dirt by a massively overvalued yen, and a long term chart showing only twenty years of pain, you have to have a clear belief and nerves of steel to buy into Japanese equities.

Better to either sit out the BRICs bear market or go looking for value in the US and UK, where there’s plenty on offer; small, medium and big cap equities. It’s a good idea to stick to deep value in these markets as the mess in the bond and currency markets are the actual drivers of everything whether equity, commodities or otherwise.

This makes life tricky. Yet very cheap stocks can be resilient in such markets – weak shareholders are long gone, leaving behind the believers.

Value investing is, in the long run a time tested way to build wealth. In good and bad markets, following the basics of value investing will keep you out of trouble. For this reason alone it’s hard to find value in a booming market. As we are clearly aren’t in a boom, we can look forward to an extended period where there will be plenty of opportunities for the patient and careful investor to build up a great long term value investment portfolio.

Clement Hadrian Chambers is a British entrepreneur, author and journalist, known for his involvement in ADVFN, formerly known as the Advanced Financial Network. Chambers is a frequent co-presenter on CNBC and CNBC Europe. He has been a market commentator on BBC News, Newsnight, BBC One, CNN, Al Jazeera, Sky News, TF1, Working Lunch, China’s Phoenix TV, Canada’s Business News Network and numerous US radio stations.