Remember the wisdom of Keynes and Mark Twain
Anthony Bolton, the City's most successful and respected fund manager, recalls lessons learned over three decades John Maynard Keynes said that picking shares was like a beauty contest where 'it's important to choose not who you think is the prettiest girl, but who the judges will think is the prettiest girl'. One of the key lessons I've learnt over the last 30 years or so of being an investment manager is that, although perception and reality are both factors in choosing investments, perception is probably the more important. When everyone thinks the shares of a company are unattractive, this can often create a great investment opportunity — but investments can be riskier when everyone has fallen for their 'beauty'. This is at the heart of my contrarian approach: buying the stocks I think are misvalued and paying little attention to the stock market index weightings which guide the majority of investors.
Many people have asked me what the secret of my track record is. Investment is not an exact science, but over the last three decades I have had plenty of time to reflect on the factors that matter in becoming a successful stock-picker. Many lessons come to mind, some of which are as a result of stocks that failed. Polly Peck, the conglomerate built up by Asil Nadir, appeared in my top ten holdings list in 1987, 1988 and 1989, but the growing business and rising share price did a very good job of masking holes in the balance sheet. Careful balance-sheet analysis can go a long way in limiting the downside risk of an investment: the stocks that have been my biggest disasters over the years nearly always had weak balance sheets.
I value very highly hearing directly from management, and I meet two or three companies each day. I like managers who do not overpromise, but consistently deliver more than they indicate; I would rather have a great business run by average managers than a poor business run by stars. 'Dodgy' management is a no-go area for me. As Warren Buffett says, the CEO who misleads shareholders may eventually mislead himself. Candidness and consistency are important management qualities as well. I handwrite notes in the meetings I attend and have kept them all since the late 1980s. I now have 50 books of UK company meeting notes, which are invaluable when I meet the companies again.
Experience also counts for a great deal. Mark Twain said, 'History never repeats itself but it sometimes rhymes' — eight words that should be burned into every fund manager's desk.
Experience cannot always prepare you for the moments of drama to come. Three such moments particularly stick in my mind: the 1987 'Black Monday' stock market crash when Wall Street fell more than 20 per cent in a day; the technology bubble of 1999-2000; and the terrorist attack on New York in 2001. Each of these reminds me of other lessons experience has taught me.
The crash of 1987 came a few days after the great storm that hit the south-east of England. It also coincided with the birth of our youngest child. Of course none of these events were related, but they do give me vivid memories of the most extraordinary few days of stock market performance I have ever experienced. Professional opinion after the crash was polarised. Plenty of commentators were predicting that it would bring about a huge recession, or even depression. I remember arguing that markets would recover — and presented a significant buying opportunity. I sent a note to my Fidelity colleagues, something I have not often done, to the effect that it was very unlikely the scale of the market fall would be matched by a similar deterioration in the economy.
Because of investor redemptions, I had to sell some of the stock in my fund. At times of panic like this I have found it helpful to focus the portfolio: I force myself to reassess the investment thesis and keep only the stocks about which I have most conviction. Market downturns are a good opportunity to weed out weaker or smaller holdings — though reassessing the investment thesis should not be limited to moments when the market turns down; it should be done on a regular basis.
The technology bubble of 1999-2000 is an illustration of the value of stock-picking. This period presented some of the biggest opportunities in the shares of 'old economy' companies that I have experienced. It also demonstrated the herd-like nature of most investment institutions and the cult of momentum investing. I remember a great debate about which was the more attractive IT stock, Logica or Sage. The answer, at the time, was that both were wildly overvalued.
Several events in that era really drove home to me that we were in cloud-cuckoo land, but one in particular sticks in my mind. A long-standing corporate finance contact telephoned to offer shares in a new internetrelated company placing. I think he had been allowed to approach eight institutions. The conversation went something like this: 'Hello Anthony, I want to tell you about a very interesting new company I'm listing.' Great,' I replied, 'when can we meet the management?' I'm afraid we're doing this on an accelerated basis and that won't be possible. In fact, I need to know your interest by this evening. Anthony, you should know that every other institution that I've contacted so far not only wants shares but would be happy to take many more than we're offering.'
We went through the figures. My opinion was that it was a very high valuation. 'Thanks,' I said, 'not for us.' But Anthony, you'll be the only institution to have turned this down.' This was a few weeks before the technology bubble burst in March 2000. I didn't follow what happened to this company, but I very much doubt it survived. That year, I outperformed the benchmark by the greatest margin I have ever achieved in a calendar year.
On 11 September 2001, I had lunch with a contact who runs a specialist broking firm and is an expert in general insurance. We talked about the insurance industry and by coffee we had convinced each other that the outlook was pretty good. As we reached this conclusion, the biggest insurance event in history was taking place on the other side of the Atlantic. Following this horrific incident, the worst-hit shares in global markets were insurance, hotel and travel companies. I later increased my fund's holdings in these industries and made good returns as the shares recovered. Being in the investment business sometimes involves being hard-nosed — especially as a contrarian, which means investing against the crowd. If an investment feels 'comfortable', then you're probably too late. The stock market is an excellent discounting mechanism: by the time everyone is either excited or worried about something, it is normally already in the price. When there is great optimism or great pessimism, there is the most opportunity.
Many things have changed dramatically in 30 years of stock market investment, but some haven't. Fundamental, research-led contrarian stock-picking works as well today as ever. Doing what everyone else is doing might work in the short term, but is nearly always costly in the long term.
Anthony Bolton has managed Fidelity's Special Situations Fund since 1979; he steps down from the fund at the end of this year to take on a new role at Fidelity.
Previous page
