Easing the pain of value investing

Here are three things to focus on if you're finding the rough and tumble of investing a little, well, rough.

I've been personally enthusiastic about share registry group Computershare (ASX: CPU) over the years. It's a great business that was very expensive many years ago but that now looks pretty cheap.

I bought the first part of my current holding in August 2011 at a little less than $7.50. The stock performed pretty well thereafter, peaking around $13.00 in March 2015.

It was downhill for the remainder of 2015, with Computershare's final result causing the stock to slump below $10.00 in August 2015. I bought more at the time, topping up my holding to make it the second largest in my portfolio.

Value investing made easy?

Computershare's share price then recovered to about $12.00 by November last year. This seemed like value investing made easy – buying when the stock was out of favour and then just waiting for a fast recovery.

If only it were so simple.

Since then, the company has reported another profit warning, and the share price has lost all its recent gains and more. The stock now trades around the $9.00 mark.

There's also talk of blockchain technology revolutionising certain industries. Computershare looks like it might be one of those threatened.

Personally, I think blockchain technology looks a bit like a solution in search of a problem. That could just be my natural scepticism; the 'next big thing' frequently comes with a lot of hype. Even when the next big thing really is enormous – like the internet in the late 1990s – share prices aren't the best gauge of valuations (if they ever were).

Psychologically difficult

My point is that investing is psychologically difficult. Even when you get the 'buy on bad news' thing just right, some worse news can come along to slap you in the face six months later. If you're a Computershare holder, you might know what I'm talking about.

So what's the solution?

I wish I could reassure you that blockchain isn't going to destroy Computershare's business. I can't of course – investing involves risk, and one of those risks is that sometimes industries change radically.

But there are three main things I focus on when the share price plummets or more bad news hits. I find these three things keep me grounded and better able to block out the noise.

First, I focus on the valuation. This means heading back to the accounts and re-checking my numbers. For example, I know that Computershare has US$1.2bn of retained earnings sitting on its balance sheet, which means it has been a very profitable business for a long period. And I know the stock is trading on a free cash flow yield of 10%, which is pretty rare for a large, high quality company.

Higher dividend

Second, I look to the dividend. While a lower dividend isn't the end of the world – and may in fact flag a buying opportunity – Computershare's directors don't seem worried by weaker profits. Otherwise they wouldn't have lifted the interim dividend from 15 cents to 16 cents.

Third, I try to forget today's headlines and look five years out. This is perhaps the hardest part, but I try to imagine what Computershare might look like in five years. Who really knows but, while there's always a chance Computershare will have been destroyed, it's more likely to have adopted new technology itself or diversified away from the businesses most at risk.

The fact is that there's always something to worry about when you invest. The worst worries usually coincide with the share price being excellent value.

So try to focus on other things instead. If the valuation's cheap, directors are lifting the dividend, and you can imagine a more profitable business in five years, then maybe there's little to worry about. Value investing might tax the emotions, but that's exactly why it works.

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Disclosure: The author owns Computershare.

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