Book Review
How to value shares and outperform the market: A simple, new and effective approach to value investing by Glenn Martin
Glenn Martin, who has a background in investing and IT, developed his Share-Maestro stock market valuation system in the mid 1990s, packaging and marketing it from 2007 after backtesting and looking at its performance through several booms and busts. This book is a detailed description of the system and how it can be used by private investors, as well as providing wise words on investment objectives, risk controls, tax free investing etc. Investors who want to avoid the quite extensive calculations involved for market and individual share valuations can subscribe to the system through www.sharemaestro.co.uk
At the heart of the system is a dividend discount model, requiring projections of dividends and then discounting these and the forecast five year out market level / share price to current values using a gilt rate and a risk premium. Key to the valuation is of course the market level / share price forecast ? these are based on a projected market or individual share yield for which the book provides an approximate formula of ?proprietory and complex? calculations said to be embedded in the ShareMaestro system itself.
Does the system work? The book presents the record since 1984 (when FTSE indices started) to the end of 2010 for a strategy of buying and selling FTSE ETFs, using the same (default) assumptions on risk premia and real dividend growth rates throughout the period (the system also allows the user to set his own assumptions and to ?what if?).
The result is a 10.4% compound annual total return, compared to 6.8% compound return from the market over the same period together with a dividend return of 3-4% a year - so very much the same.
However, along the way, the investor might have slept more peacefully, since he would have been invested for only some 11 of the 27 years and would have avoided several market crashes ? but equally he would also have needed nerves of steel, since (at least according to the website) on the default assumptions he would not have been invested since late 2007. A strategy of (more actively) investing in covered warrants is also presented, with a compound return of 18.6% shown for the period.
To my mind, the book?s use is in focusing on the importance of dividends to equity investment returns (most advisers quote these as around half of total returns) and also of having in mind, amidst the market and emotional roller-coasters that investing involves, fundamental valuations for the market and individual shares. I have doubts on the exact methodology involved, not least since key investment relationships (such as those between dividend yields, gilt yields and inflation) change ? older investors will remember fondly the astonishment surrounding the ?reverse yield gap?, now itself reversed.
JeremyPrescott, 30/1/2012
