Letter #157: Anthony Bolton (2016)
Portfolio Manager of Fidelity Special Situations Fund | The Market and the Sentiment Factor, Companies and the Dynamics of Businesses, and Knowing Yourself
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Today’s letter is the combined transcript of three short videos produced by Fidelity UK where Anthony Bolton shares three important investing lessons. In these videos, Anthony talks about the markets and market sentiment, companies and the dynamics of businesses, and knowing yourself as an investor.
Anthony Bolton managed the Fidelity Special Situations fund for 28 years, generating an annualized return of 19.5% and outperforming the market by 6% per annum. During his tenure, funds under management grew from ~£2mn to ~£6.5bn.
Anthony started his career in 1971 at the investment department of Keyser Ullman, a small British merchant bank that mainly managed investment trusts. After seeing weekly visits to the Bank of England penciled in on the CEO’s chauffeurs schedule, he decided to leave. Shortly after he left, Keyser Ullman collapsed. He then joined Schlesinger, a South African bank, where he first helped run a special situations fund. In 1979, at 29 years old, Anthony was recruited by Fidelity just as the firm was establishing a London base. At the time, there were just two fund managers.
From 1979 to 2009, Anthony started and ran the Fidelity Special Situations fund, which outperformed the market by 6% per annum. He also managed the Fidelity European Fund from 1985 to 2002, the Fidelity European Growth Fund from 1990-2003, the Fidelity European Values Trust from 1991-2001, and the Fidelity Special Values Trust from 1994 to 2007. By 2006 the Special Situations Fund had grown into the UK’s largest open ended fund and fears that it was becoming too big to manage successfully led to it being split into UK and Global Special Situations Funds. Anthony managed the UK fund until the end of 2007, when he retired.
Just two years later, in 2009, Anthony announced his return to fund management, and in 2010, moved to Hong Kong to start and manage the Fidelity China Special Situations Trust. The fund attracted high levels of investment and was fully subscribed on issue. After a strong start, it lost 34% of its value and was ranked 5 out of 6 trusts in its sector in 2011. But by the time Anthony retired again and handed over management of the trust, the share price had recovered and outperformed the index over his four year tenure.
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Transcript
I'd like to share with you today some of the lessons I've learned about investing that I think could be helpful to a private investor. And there are three areas particularly that I'd like to talk about. Firstly, I'd like to talk a little bit about markets. Then I'd like to talk about companies and what I look for in companies and I think private investors should look for. And then thirdly, I'd like to talk a bit about you, yourself as an investor and the attributes that I think make a good investor. So let me start off talking a little bit about markets.
Lesson #1: The Markets & the sentiment factor
First of all, there's an aspect of markets that has really interested me in my career. And I think people don't pay enough attention to that. And it's what I call the sentiment factor of markets or the perception factor of markets.
In Warren Buffett's words, he said, The stock market is both a weighing machine and a voting machine. And so what did he mean by that? He said, It's a weighing machine, in the sense, what you are trying to do, you're looking at companies and trying to decide what they or the market, what is the right valuation for a market? What's the right yield it should be on? With the company, what's the intrinsic value of that?
But it's also a place where a lot of investors are meeting and doing different things. And at times, if they're all voting the same way, either positively or negatively, the market can be carried way above its intrinsic value, the right value for it, or at times when people are very pessimistic, it can be carried well below.
And you need to know that cycle and be aware when things are overvalued and the sentiment is too positive, and the perception is too good. And vice versa. Well, that's a time to be more cautious. And when investors are very--the things are depressed and the voting has all been against the stock market and it's low, that might be a time of opportunity. It's not so much about what the future looks like, but it's about what future is already discounted in the stock market at that time.
So the stock market will be discounting a certain view of the future. And the opportunity is when you might have a different view of the future to that which is discounted in the stock market.
Lesson #2: Companies & the dynamics of businesses
When looking at companies, there are a few things that I think that you have to focus in on.
The first one is what is the quality of the franchise of that company? And here, you want to know how sustainable it is, how it's impacted by competition, and some financial things like what is the return on capital, and the balance sheet. In my experience, some of the worst mistakes I made was investing in companies with weak balance sheets. And that was because if the economic environment deteriorated or something went wrong at the company, it's often, you can get the stocks that do well, but if you can stop--not own the stocks that do badly, then that will really help your portfolio.
The second area is management. And I think if you can, try and find management you can trust and who run the business as owners, they act as owners of the business. Although actually, probably at the end of the day, the business franchise is the most important, and Warren Buffett said he would rather have a great business run by average management than try and pick a bad business run by great management. So the dynamics of the business is as important or more important, maybe, than the quality of the management
Lesson #3: The Investor: know yourself
The last area I'd like to talk a bit about is knowing about yourself as an investor.
When you invest in companies, you really need to understand the business that you're investing in. And if you have an information advantage, that there's some area of business that you know better than others, then I would recommend that you try and use that in investing and look at those areas, because that can really help you invest.
You also need an investment thesis to what--you need to understand why you think such and such a company is a good opportunity. And I think it's helpful at times even to write down what that thesis is.
You also, I think, need an element of contrarianism if you're going to be a good investor. And that means you have to be prepared at times to do things that feel slightly uncomfortable. The dangerous thing I think, is to do what everyone else is doing. And often, if it feels too comfortable, and you are doing something that is very popular, you must realize that that carries some extra risks with it. The popularity in itself carries a risk.
But behind this, I think, really, you have to know yourself. You have to know your strengths and weaknesses. I think to be a good investor, you need to be somewhat unemotional and detached from the stock market. And you need to be honest with yourself. Just knowing what your strengths and weaknesses are really important. In my career, I think it's really helped. I've had a contrarian approach, but I've known that that's something that works for me, and I think you need to be able to work out what sort of approach works for you as an investor and stick to it.
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Great piece