Learning investing from the masters

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By Tensing Rodrigues*

Every successful investor is of his own making. So is every investor who goofs up. Therefore it pays to learn a few lessons from those who have learnt it the hard way. Today let us look at one such investor:  Anthony Bolton, who was the head of Fidelity Special Situations Fund (UK) for 28 years. He delivered 19.5 per cent annualised return over his tenure.

His thumb rules are simple but very stringent. The rules basically call for continuous diligence. The first, have a good reason to pick a stock. And this cannot be just because it is underpriced. Sheer valuation cannot be a reason to buy the stock the business of the company must make compelling sense.  In fact Bolton suggests that you forget the price paid after buying the stock as the price paid should not influence your decision to hold or sell it. In a similar way if the reason why you bought the stock initially, no longer holds good sell the stock irrespective of the price. The current price can be deceptive sooner or later the price will reflect the real worth and you will be a loser if you hold it beyond its ‘Best Before’ date.

Corollary to the first thumb rule: Decide even before you have bought it what will make you to sell the stock. There can be three reasons to sell.  Once you have decided to follow the first rule your original reason to buy the stock is no longer valid. Your original earnings goal is achieved and you find a more compelling alternative to that stock (going by the first rule) what is not fair in love is fair in case of stocks.

Second thumb rule: Befriend the company. Only when you know the company from close as companies are not always what they appear from far. Mere numbers do not tell the whole story. You need to find out the stories behind those numbers. And those stories need to be sustainable. Of every company you find interesting ask the question, how likely is this company to be around in ten years’ time? Of those that are expected to survive which are most likely to be grow in value ten years down the line? How much value does a company derive from its own goodness and how much from the industry it belongs to?

More a company derives its value from outside more uncertain will be its future earnings.    Every wind that blows its way will change its valuation. As against that a company that derives more of its value from its own merit independent of the macro factors around is bound to yield more stable returns. The philosophy of ‘who moved my cheese?’ is as valid for companies as it is to individuals particularly in this age of disruptive development. So bet on the Sniffs and Scurries of the corporate world. And keep it simple. Bolton prefers simple businesses and tends to avoid those where the business model is difficult to understand.

Third thumb rule: Before you befriend the company befriend yourself. Look at yourself without your masks on. There are more ways to play the stock market than you can master. But that is not very important. What is important and that is all that matters is what works the best for you or your own playing style. And what matters the most there is your temperament. Information and intelligence is important but not as important as choosing the game that suits your temperament. You know your tolerance for risk and you alone can set the bar on your greed. Too much of risk taking in pursuit of untamable greed can only lead to failure if risk is not your cup of poison. So play it in keeping with your temperament. And keep it rational. Bolton believes that emotional people don’t make good investors.

*The author is an investment consultant. Readers can send their comments and queries to [email protected]