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Lessons From a Life Running Money


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About the Author

Anthony Bolton is one of the UK’s best known investment fund managers and most successful investors, having managed the Fidelity Special Situations fund from December 1979 to December 2007. Over this 28-year period the fund achieved annualised growth of 19.5%, far in excess of the 13.5% growth of the wider stock exchange, turning a £1,000 investment into £147,000.

Educated at Stowe School and Cambridge University, Bolton left with a degree in engineering and business studies. He pursued a career in the city where, age 29, he was recruited by Fidelity as one of their first London based investment managers. He is now President of Investments at Fidelity International Limited and manager of Fidelity China Special Situations PLC.

Summary of Investing Against The Tide

Sometimes it just feels like the stock market has gone mad. At such times, it’s truly important to remember the lessons of Anthony Bolton, one of Great Britain’s greatest investors of all time. Bolton States that bull markets cover cracks while bear markets exposed them. Remember this, because the cracks are always there in one form or another.

It’s like a smiley face. If you look at it in one direction, it smiles back at you, but if you flip it around, it looks old and grumpy.

Today we will learn how to survive and even thrive during times of stock market madness. And this is a top-five takeaway summary of Investing Against the Tide by Anthony Bolton.

Takeaway #1: Conviction from many discreet elements and facts.

Anthony Bolton was one of the fund managers at Fidelity where other investing superstars like Peter Lynch worked at the time. He worked there for 28 years and gathered tons of experience on how to excel by investing in small and mid-sized companies during this time.

Bolton assessed that the investing landscape has changed a lot during his time as an investment manager in his earlier years. The focus was on digging up information that others didn’t have access to or that they had missed. Today, on the other hand, information exists in abundance and the secret to beating the rest of the investing community is now to analyze that information better than everyone else.

By having a structured way of analyzing many discreet elements and facts before making your investment decisions, you will have more conviction when you invest against the tide and you will be less susceptible to making large mistakes. Anthony’s approach to investing is quite bottom-up and he has six different areas that he judges before buying a company stock, only by being convinced after aggregating all of these six factors, will he make a purchase.

1) STRONG BUSINESS FRANCHISE

One of the most powerful questions that you can ask to ensure a strong business franchise is this:

How likely is it that the business will be around in 10 years’ time and to be more valuable than today?

2) EXCELLENT MANAGEMENT

More importantly than what the management is doing is how they are rewarded.

The right incentives will often lead to strong performance.

3) LOW VALUATION

We’ll cover this in takeaway #2.

4) STRONG FINANCIALS

We’ll cover this in takeaway #3.

5) TAKEOVER TARGET

You’ll often benefit a lot as a shareholder when your company’s purchased by a competitor, small and medium-sized companies are more likely to be takeover targets.

6) FAVOURABLE TECHNICALS

Bolt assessed that combining fundamentals with price information gives him an edge.

What he wants to see is a company with an attractive story where the attractiveness hasn’t yet been factored into the price. Therefore, he typically avoids stocks that have increased a lot in short periods of time. Say I’m 200% in three years or something like that.

Some information comes from newspapers. Some from annual reports, perhaps some from other analysts, interviews with managers, etc. Since the information is unstructured in its nature, it’s your task as an investor to organize it. So it’s possible to make investment decisions based on it, for example, to make it more visual, you could rate each of these six factors on a zero to five scale with five being the highest possible score.

Doing this and doing it well takes some time. So next up, we will look at how you can filter out companies that are worth diving deeper into.

Takeaway #2: A Relatively Low Price

Mean reversion is a truly strong phenomenon when it comes to investing.

Most things go back to normal. A strong business turns into a normal business.

A great manager turns into a mediocre manager, but most importantly, a low valuation turns into a normal valuation. Therefore, Anthony Bolton wants to own stocks that are cheap. Cheap, both when compared to historical prices and to peers. His primary four measurements for this are PE or Price to Earnings, Price to Book, Price to Sales, and EV/EBITDA (Enterprise Value / Earnings before interest, taxes, depreciation and amortization).

Bolton likes to evaluate these over 20 year periods, but for our example here, 10 years we’ll have to do. We’re going to look at Apple, Toyota, and GAP.

We can see that Apple trades at a higher price than it has ever done before, no matter which key ratio we look at while for Toyota and GAP, just the opposite is happening.


They haven’t been as cheap in 10 years as they are now. We can also see that Apple is more expensive than the average of the S&P 500 on every key ratio. While Toyota and GAP are cheaper. This is a good place to start looking for smart investments. But remember from takeaway #1, valuation is just one of the discreet elements that you have to consider before buying a stock.

It’s always easier to spot price anomalies than to know when they will correct themselves. Therefore, we want to have time on our side when we are investing in these types of companies, and this is what the next takeaway will be about.

Takeaway #3: Skeletons in the Balance Sheets

Peter Lynch said that “Never invest in a company without understanding its finances.

The biggest losses in stocks come from companies with poor balance sheets. Let’s say that you found a company that is really cheap according to the valuation metrics that we used in takeaway #2.

Then chances are that the business is not doing too well at the moment. It might even be losing money. We would prefer if mean reversion kicks in before the company goes bankrupt, and because of this, we need to make sure that the financials of the company are intact. Look at the balance sheet, and specifically, you want to avoid companies that have huge debts compare the debt to the equity of the business or to the profits if applicable.

Don’t forget to include items such as a future payment obligation, pension fund liabilities, and redeemable preferred share.

SOON REPAYABLE DEBT

Understand the debt profile and if the company has enough cash on hand to survive in the short term.

HIGH YIELDING DEBT

If the company has bonds outstanding, it’s a good idea to look at where they trade.

If the yield is really high on them, it’s a sign that bondholders are skeptical about the future or the financials of the company, and that means that you should probably be worried too.

Avoiding companies with weak balance sheets will make you miss some winners, but at the same time, it will make you avoid many more losers

Takeaway #4: A To-Do List When You Are Not Doing That Well

Even the greatest investors have periods when they don’t do very well. Here’s a short checklist that you should consider if your portfolio catches the flu.

1) The optimal conviction level is somewhere around 50%. You must maintain conviction, but you also want to keep your flexibility.

2) Don’t ever box yourself into a corner. The great activist investor, Bill Ackman famously lost a lot of money shorting the stock of a company called Herbalife. Probably his biggest mistake was to box himself into a corner by expressing on live TV that he thought the company was a fraud. Because of this, his ego was on the line and he admitted defeat much too late.

3) Don’t try something completely new just because of a few bad years.

I will not abandon a previous approach, which logic I understand, even though it may mean foregoing large and apparently easy profits to embrace an approach which I don’t fully understand, have not practiced successfully and which possibly could lead to substantial permanent loss of capital.

Warren Buffet

4) Go through your worst investments historically and look for common denominators. Are you making a mistake that you’ve made before?

5) Make sure that your portfolio matches your conviction level. In other words, is the stock that you believe the most is still your largest holding in the portfolio. If not, it’s time to rearrange by doing some buying and selling.

Takeaway #5: Look for Asymmetric Payoffs

An asymmetric payoff is a situation where there’s a big upside, yet a small downside. Peter Lynch famously coined the term “tenbaggers”, which means the stock that increases 10 times in value. Consider that if you just catch one such stock, you can fail completely and pick nine companies that go bankrupt and still be profitable.

This asymmetry is very powerful and a question that I think is interesting to consider when picking a stock is, therefore, “In 10 years, would it be possible for this company to be worth 10 times as much?”

For most companies that already are very large today, the odds of this happening are very low in my opinion.

I just don’t see how, for instance, Apple would grow from $1.13 trillion to $11.3 trillion. While not impossible, we should consider that the most valuable company 10 years ago was ExxonMobil with a market cap of $316 billion, and in 2000 it was Microsoft at $560 billion.

My point is that a small company is more likely to have asymmetric payoffs than a large one. An example of a stock with an asymmetric payoff would be a smaller oil company, an oil company with a favorable valuation and a strong cashflow that at the same time reinvested cash aggressively in new exploration activities.

The downside is very low in such a company, and the upside is enormous, especially currently when the oil prices are at their lowest since 2004. A combination of normalized oil prices. The finding of a large oil well and a following increase in the PE multiple would easily turn such a company into a tenbagger.

Another example would be a smaller pharma company with similar characteristics. It should have a fair valuation and a strong cashflow that, to a large extent is being reinvested back into research to find the next big thing. Moreover, such R&D should happen in a decentralized organization with energy devoted to numerous different prospects.

If a drug with a large market is found, this type of company will also easily turn into a tenbagger.

Another way to invest against the tide is to invest in the unsexy stocks out there that you can find. This strategy has been made famous by Peter Lynch in his book, one up on wall street.

Quotes

“Another type of situation I like are companies with asymmetric pay-offs – stocks where you might make a lot of money but you can be confident you won’t lose a lot.”

― Anthony Bolton, Investing Against the Tide: Lessons From a Life Running Money0 likesLike

“Jeremy Grantham, chairman of GMO, makes some very interesting observations about growth and value investing in the US: ‘Growth companies seem impressive as well as exciting. They seem so reasonable to own that they carry little career risk. Accordingly, they have underperformed for the last fifty years by about 1½ per cent a year. Value stocks, in contrast, belong to boring, struggling, or sub-average firms. Their continued poor performance seems, with hindsight, to have been predictable, and, therefore, when it happens, it carries serious career risk. To compensate for this career risk and lower fundamental quality, value stocks have outperformed by 1½ per cent a year.”

― Anthony Bolton, Investing Against the Tide: Lessons From a Life Running Money0 likesLike

“When management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact’ Warren Buffett”

― Anthony Bolton, Investing Against the Tide: Lessons From a Life Running Money0 likesLike

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