Anthony Bolton - Investing Against The Tide

This is a pretty light collection of advice and recollections from a highly successful fund management career in the UK and Europe.  Boton went on to have a considerably less successful second career in China between 2010-2014, which somewhat tarnished his reputation but, nonetheless, he’s definitely an investor worthy of some further study.

Breezy generalisations that are later contradicted and seemingly simple rules of thumb that are subject to endless exceptions are par for the course in this book.  For example, we are advised not to take tips but are also quoted Nils Taube’s observation that investment is plagiarism.  Bolton disapproves of target prices, which I would wholeheartedly agree with, but later advises that a stock reaching its target price should be sold.  Later, price ‘ranges’ are recommended as more acceptable in what is probably sound advice.  In any case, far from putting me off, these idiosyncrasies endeared the book and its author to me.  Bolton is the consummate eclectic, using complex formulae to assess balance sheet risk while simultaneously meeting with Fidelity’s in house chartist to pour over the tea leaves.  He talks about the importance of having a breadth of knowledge for success in fund management; a sentiment I wholeheartedly agree with.  Privately, I hear he is an enthusiastic composer of music too.  In this varied, and somewhat haphazard, approach I see a genuine investor who reminds me of other great investors I have met insofar as he has found a style that suits his personality and has broadly stuck to it.  He even invokes this principle himself, advising people to, “Find a style or method that suits their temperament and then stick to that approach" (p156).  Exactly what this style is may be harder to pin down precisely, as is almost always the case!  

There were a few things I would broadly disagree with: First, the purity of philosophy.  Bolton holds himself out to be something of a purist and often states rules but the reality is that he is more of a magpie, or perhaps a fox if we use Isaiah Berlin’s framework.  He collects lots of different, disparate pieces of information and how these factors combine to create a portfolio is really anyone’s guess.  A quick glance at his best and worst performers at the end of the book show his tastes to be very catholic, displaying no particular aversion to any part of the market.  To be sure, there is a lot of useful information on how Bolton goes about his job in this book.  However, I reject the conception of Bolton’s style as formulaic and easily replicable.  Some of his decisions seem mercurial and are not easily explained by the investment philosophy advocated in this book.  Bolton’s incredible prescience in buying and selling Cairn Energy, at the time a small oil and gas explorer, bears no relation to the style he espouses as far as I can see.

Bolton’s use of models is another area where I find myself in some disagreement with him.  I see the future as so unknowable and non-linear, and models as so open to manipulation, that I see little value in this elaborate exercise in attempting to predict the future.  Simple models are useful insofar as they may demonstrate to you what broad assumptions you’re making about a company’s prospects however I definitely place lesser importance on them than Bolton who sees them as central to his process.

Bolton sometimes casts himself as a long term investor and I don’t think this is really the case.  For example, on p199 in re. hedge funds, quants and momentum investors he writes, "in some ways the market is more efficient, certainly in reacting to short term events.  However, I am convinced that the growth of hedge funds, momentum investors and quant funds all jumping on a trend has led to periods of mis-pricing and led to great opportunities for investors taking a longer term view".  However, he mentions his average holding period might be around 18 months, which is short term to me although it is long term compared to some other strategies.  I’d be interested to know the turnover ratio for his Special Situations fund, for example.  In any case, I don’t see him as a truly long term investor and some parts of his strategy are more akin to a trader; e.g. chartism and market timing.  

He also claims not to look for takeover targets or to involve himself in market timing but then goes on to write quite extensively about the role both play in his style!  To reiterate, I don’t think this makes him a bad fund manager, or that this makes it a bad book.  Nonetheless, I do think it shows how flexible successful fund managers can be in their thinking and this flexibility may be one reason for their success.

Price is another good example of several contradictory things being said simultaneously.  Bolton is against the totemisation of price and writes that he tries to forget it immediately after he has bought a stock as valuation is so much more important (p32).  He even goes so far as to say fund managers would perform better without access to their own performance data (p145).  However, he also makes looking at price charts a key part of his investment process and makes comments about using them to assess a company’s prospects (p107-8)!  His predilection for chartism, one of the purest forms of analysis using only the price, seems similarly contradictory.

I’m also against Bolton’s section on the traits that make a good fund manager.  Perhaps there are very broad shared characteristics to be found in all good fund managers and it may be a worthwhile endeavour to contemplate this question even if they do not.  However, my guess is that when a successful fund manager talks about this topic all they end up doing is talking about how their characteristics have helped them.  Or, more accurately, how they think their perception of their characteristics has helped them.  Can we really talk about good traits in fund managers in a discipline so broad? Is it helpful?  My guess is probably not but there are some interesting observations in what Bolton writes so it isn’t terrible.

Areas where I would agree with Bolton’s philosophy with varying degrees of enthusiasm include: His insistence on honesty in the people associated with your investments.  You must trust the people who run the businesses that you invest in and if you can’t trust them then you can’t invest with them.  A dishonest management team or owners can mean that you never see any of the money that a company makes, even if these profits are wonderful on paper.  

I’m a big fan of his people focussed approach.  All businesses are run by people and they can have a huge impact on a company’s fortunes depending on the industry it operates in.  Regardless of the industry, people are very important to all businesses and I agree with Bolton’s extensive management meetings as a way of establishing the calibre of the people he is investing in.

Bolton’s insistence on integrity was also something that appealed to me and I do think that the book shows him in a broadly positive light in this regard.  For this reason I was surprised to read about his investment in casinos, including US online gaming when it was illegal.  This resulted in big losses in Party Gaming and Sportingbet.  I was also surprised to see his ownership of cigarette companies.  However, people have different ethical standards and I’m not suggesting that he has done anything dishonest.  To a lesser extent, I was also surprised to find Bolton an advocate of more bank regulation in the aftermath of the 2007-8 credit crisis.  While I agree that heightened supervision, especially of leverage, is desirable I also feel like the increased burden of regulatory compliance encourages consolidation in the industry and leads to “too big to fail” and all the horrors of moral hazard attendant!  I would prefer some regulation to focus on fragmenting the market to spread risk amongst more institutions.  In fairness some new banks have been created with encouragement from the regulator but I’d prefer to see larger steps in this direction.

Lastly, Bolton strikes me as a true eclectic and a life-long learner, which are two things that may be useful in a discipline as broad and varied as fund management.  I realise that I’m now contradicting my earlier stated aversion to identifying common traits amongst fund managers on the grounds that the discipline was too broad and too varied! By doing so I’m placing myself with Bolton as a flexible, eclectic thinker with a genuine passion for knowledge and speculation.  One who, like all good fund managers, is totally unafraid of contradictions!

On the whole, it was a decent combination of some general information on how Bolton picks stocks, notwithstanding his highly eclectic style, and reminiscences about his career.  It’s far from a classic of the genre and the insights are hardly spectacular but it’s a quick, easy and fairly interesting read.

The following will attempt to summarise the things I noted and learned:

TYPES OF STOCKS HE LIKES & STOCK SELECTION

• Cash generation is preferred to growth and consistently cash generating businesses are the best
• Sensitivity to factors outside a company’s control reduce the quality of a business
• L/T charts of price, P/E,B,S & EV to EBITDA (I’m less sure about last one), director dealing, management shareholdings, history of short interest, top shareholders, broker sentiment, earning upgrades/ downgrades, CDS spreads & history, size of pension fund liabilities to market cap
• Invest in trustworthy management, ask questions in the negative not positive (not always)
• Every stock should have a simple investment thesis comprehensible to a teenager. This should be checked regularly and is far more important than price targets. Bolton prefers price bands.
• He likes cheap shares because of the "margin of safety" they afford and says he would always chose a 5% growth coy on 5x to 10% on 10 or 20% on 20x. He likes to look at historical valuation ranges.  Also likes Holt, Quest and CROCI analyses.
• Jeremy Grantham, "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 50 years by 1.5% pa. 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 1.5% pa." 94
• Once a bid has been announced it's usually worth waiting unless you think it won't go through. Other bids may appear etc. Good acquisitions can be +ive for the acquirer but he is leery of "transformational" or "once in a lifetime deals" involving a high price / big premium.  Unconventional financing such as covenant-lite loans or convertible preference shares usually a bad sign.
• Chapter 10 - v interesting on turnarounds and unloved shares.
• Peter Lynch, "does it sound dull, or even better, ridiculous? Does it do something dull? Does it do something disagreeable? Is it a spin off? Is it disregarded and not owned by institutions or not followed by analysts? Do rumours abound involving something like waste or mafia ownership? Is there something depressing about it? Is it a no-growth industry? These are all characteristics that tend to put off the majority of institutional and private investors and can lead to attractive investment opportunities" 91
• Underperforming retailers / brand owners can improve via incremental small gains but should not be confused with weak franchises. Intra-Sectoral comparison can be useful here.
• Falling dollar can be good for UK retailers and TV coys that buy product in $
• CEOs with bodyguards for no ostensible reason shouldn't be trusted!
• Like AT he likes companies with the share price in the lobby. AT includes "today's price....tomorrow is up to you"
• He is a big believer in radio even in an online world

TRADING

• Warns against doubling down, saying "in general it's not good practice to try and make it back the way you lost it" (32)
• Good on the psychological factors associated with purchases and sales: easy to buy in an uptrend, harder in a downtrend. Buying a share that has fallen to your desired price is often hard because we are influenced by the opinion being expressed by the market
• Once we buy / sell a share this often cements our +ive / -ive opinion and closes one's mind to new evidence
• Everyone thinks they are better at investment than we are
• We are too conservative taking gains and too relaxed running losses
• Investors underestimate likelihood of rare events normally until they happen and then their probability is overestimated because we are all overly influenced by the short term
• He holds for quite a short period (18m) and seems to believe he can identify "valuation anomalies", which is probably overconfident and misguided

PORTFOLIO CONSTRUCTION

• Try to win by not losing too often. Like AT, risk is losing money.  Suggests writing down all stocks under headings Strong Buy, Buy, Hold, Reduce, Sell, ? every month
• For the most part he stays pretty fully invested and takes a "gradualist" approach, reducing risky stuff in a bull and adding in a bear - or attempting too!!
• 50 stocks is a good size - i think a few more depending on % in small cap
• Only wants to own big defensive coys in size >200bps and would rarely go over 400bps
• Reasons to sell: 1) change in thesis 2) reached price target (another contradiction of his aversion to TPs) 3) better ideas - also i would add 4) if you buy the wrong stock
• Beware unintended bets for e.g. Lots of currency or interest rate exposure

RESEARCH

• Read original coy docs not reports. Especially IPO and issue docs as they are heavily independently supervised and contain more info than usual.
• He places a lot of importance on models, which is mainly BS in my eyes notwithstanding the fact that investors must use what they find helpful
• Balance sheet risk is the biggest factor in losing money. He uses H-scores and Z-scores to assess this risk and a service called company watch.
• Avoid using PE for lumpy businesses like housebuilders, PB better
• Likes technical analysis and uses it as an overlay for fundamental analysis.  If it agrees then it will increase conviction, and if it disagrees he may go back and check his research. Also uses it to generate ideas for further research and used to have his portfolio analysed by a chartist. Also like to look at ratios as charts and read them. Graphical representation is a quick way of placing a factor in its historical context. AT always liked to turn them upside down!!
• Ask brokers what services no one uses and, similarly, like DG said, which stocks no one asks about!!
• Look at consensus and bet where your opinions are v different. Akin to a tissue in gambling

MARKET TIMING

• Safe yields are good way of limiting downside. Break up values and PEG ratios are bull market signs while divvy yields and coverage ratios are more in vogue in bear markets
• Big private equity deals are a bull market sign because of the prevalence of debt. Uncontrolled coys with large cash balances and / or strong cash flow are usually targets but he dislikes trying to identify M&A takeover targets.
• "Often you need to buy a recovery stock before you have all the information and it doesn't feel comfortable making the purchase - don't be put off by this.  By the time all the information is there and the recovery is established, an investor will have missed some of the most rewarding times to own the shares" 92
• Don't time the market! The majority are always proved wrong.
• Bull markets go on longer than you expect and bear markets can have a couple of false starts before they really get going. Tops and bottoms usually have a V shape, which is a ^ at the top. End of bull markets usually have a blow off of v strong price action in a short period of time.  
• "At tops, it's not that the news stops being good, it's that it stops getting better, with the reverse at lows" 135
• The beginning of two middle east wars marked market lows in his career as the market was v early in anticipating them meaning it was in the price by the time they started
• "Markets bottom not because of the appearance of buyers but because sellers stop selling and there is a similar process at tops" 136 - monitoring cash positions is interesting in this regard
• The outlook for the economy is not what's important at market tops, it is almost always good, rather it is the assumptions that are contained in the share prices that are dangerous / risky. Economic outlook is essentially useless as it is good at the top and bad at the bottom = lagging indicator
• 3 factors for judging market timing (again, something he claims he doesn't do!) - 1) length and distance travelled in bull / bear market 2) indicators of investor sentiment - put / call ratio, broker sentiment, breadth, volatility, mutual fund cash positions etc. 3) LT PB and PFCF - he says if all three agree then you will get the right quarter. Is this true for current bull market?

DESIRABLE QUALITIES FOR A  GOOD FUND MANAGER

• "Often there is so much analysis of the branch or even the leaves on the branch, there are fewer people taking a view on the tree, let alone a view of the forest" 139
• Grantham "the stock market fluctuates many times more than would be suggested by its future stream of earnings or dividends or by the GNP, both of which are remarkably stable: i.e. the market is driven by greed, fear and career risk, not economics.  Real risk is mainly career and business risk, which together shape our industry.  efforts to reduced career risk - "never be wrong on your own" - create herding, momentum and extrapolation which together are the main causes of mispricing." 139
• "I've always thought the best environment in which a FM could perform well was one in which they didn't know how they were doing" 145
• What to do when you're doing badly - 1) see how much your views agree with consensus and are therefore risky 2) keep conviction around 50% where 0 is no conviction and 100 is never change your mind 3) stick to principles and don't do things you don't believe in 4) draw up start from scratch portfolio and compare to actual 5) make sure you're spending enough time looking for new ideas 6) look at the portfolio as a whole - are highest conviction bets big enough etc
• Temperament is more important than intelligence - ability to deal with success and failure, willingness to make mistakes
• Organisation also v important as events can consume the whole day. One should dedicate the majority of the day to reading and planned activities not market watching or new flow following
• Breadth of knowledge is important - cf charlie munger
• Very cynical people don't make good investors - true? Have to be able to change your mind and move on - although stubbornness can be helpful too!
• Be your own person and don't take comfort from the crowd. John Maynard Keynes "worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally"
• Never stop learning
• Know thyself
• Integrity is key - both with other people and yourself
• Every good FM will have an underperforming year (bolton 1989, 1990 and 1991 - strange not during tech bubble but perhaps not that big in UK?)

MISCELLANEOUS

• In 70s the punishment for entering the stock exchange floor without being a member was a de-bagging!! P195
• He is against stamp duty and advocates reducing the risk of a PE takeover in listed equities by increasing leverage