Embracing the Concept of Contrarian Investing
Bolton’s brilliant achievements are naturally inseparable from his steadfast investment philosophy. In "The Successful Investing of Anthony Bolton," Bolton details his investment principles and methods.
Bolton has always adhered to the concept of contrarian investing, targeting companies whose net assets, dividend yields, or earnings per share are undervalued yet possess potential factors that could enhance future stock prices. These companies have "business privileges," allowing them to dominate their industries for the next decade, continuously increasing in value, and possessing inherent strength unaffected by external factors, capable of generating cash flow in the medium term.
In Bolton’s view, the cash return rate is the ultimate measure of a company’s attractiveness. Bolton said if he had to choose between cash flow and growth rate, he would definitely prefer cash flow because in the long run, it's rare for a company's compound return rate to reach 10% — mean reversion is an unchanging rule of capitalism. For most companies, financial metrics used to gauge their performance, such as sales growth rate, profit margin, and return on capital, will revert to the mean over time. This also applies to valuations and sometimes even to assessing managers’ abilities.
Bolton believes that the most significant gain in investing is visiting the management of companies he is investing or plans to invest in and talking to them. During these talks, he would learn about the management’s capabilities, character, work methods, and the reward and penalty systems, because he believes an excellent manager should have strategic vision, be intimately familiar with the company's daily operations and financial management, and be honest with investors.
Regularly Reviewing the Reasons for Investing and Assessing Confidence Level
Moreover, Bolton states that the most important aspect when investing in stocks is not the target price or asset allocation, but confidence. He believes it is impossible to predict a company's future performance to set a specific target price since short-term stock prices result from buy and sell equilibrium, which is fragile and can fluctuate with minor market changes. Hence, Bolton focuses more on regularly reviewing the reasons for his investments and assessing the level of confidence, suggesting that investors should re-evaluate their investments periodically to see if the reasons still stand and sell decisively if the company's condition continually worsens.
In building his investment portfolio, Bolton’s first determination is "whether my portfolio matches my level of confidence." In choosing individual stocks, Bolton only selects those that are severely undervalued, and he will not buy into a stock without confidence. Initially, Bolton would invest only 0.25% of his portfolio in a single stock, and then, as his confidence grew, he would gradually increase his investment, but no stock would ever comprise more than 15% of his portfolio.
For selling stocks, Bolton considers three conditions: first, if something negates his reason for investment; second, if it reaches his valuation target; third, if he finds a better stock.
Thus, Bolton is always on the lookout for undervalued stocks to hold until they are fully valued before selling and searching for the next, allowing him to navigate through the volatile capital market and create his own glories.
Anthony Bolton's Investment Cases
Gallagher Tobacco Company
In the late 1990s, Bolton began investing in Gallagher Tobacco Company, chosen for its interesting geographical location, potential for acquisition, and strong profitability. The company’s performance proved Bolton’s acumen. In December 2006, Gallagher was gradually acquired by Japan Tobacco, and the Fidelity Special Situations Fund not only gained from the company's business growth but also received a significant premium from its stock being bought by a competitor.
MMO2 Mobile Operator
MMO2, separated from the major company BT (British Telecommunications), was a mobile phone service provider. Right after becoming independent, Bolton visited their CEO. During the management meeting, the CEO of MMO2 frankly told Bolton that the company could potentially be acquired by another large telecom company. Bolton evaluated this and thought MMO2’s stock price was very cheap. Due to its small size, many shareholders were eager to sell their shares, and the stock price kept falling, giving him an excellent opportunity to buy low. This aligned with his stock selection philosophy, so Bolton boldly invested heavily in the stock. A few years later, MMO2 was acquired by TeleFónica (Spain's telecommunications company), and Bolton made a substantial profit from it.
Anthony Bolton's Investment Principles
1. Understand the Essence and Quality of Businesses - Businesses vary greatly in quality and sustainable operational capability, it is crucial to understand the business itself, how it makes money, and its competitive positioning.
2. Recognize the Key Variables Driving a Business - Identify the key variables affecting a company's performance, especially those beyond the company's control, such as exchange rates, interest rates, and changes in taxation.
3. Individual Businesses Over Group Companies - If a business is part of a conglomerate, it usually has lower transparency in financial reporting.
4. Face-to-Face with Management - Bolton values managers who are honest and not prone to exaggeration. He prefers managers whose performance continually exceeds the expectations set by their conservative promises and warns against those who boast but fail to deliver.
5. Avoid Management That Exploits Loopholes - Never engage with businesses whose management lacks integrity or is prone to flip-flopping.
6. Try to Stay Two Steps Ahead - Try to discern what is currently overlooked by the market but could regain interest in the future. Like in chess, if you can think one step ahead of others, there are usually gains to be made.
7. Understand the Risks in the Balance Sheet - If there's one essential course for stock market investors, understanding the balance sheet tops the list. If the goal is to control downside risk and avoid pitfalls, then thorough research of the balance sheet is necessary.
8. Keep an Open Mind and Broadly Search for Resources - The more resources you have to draw inspiration from, the more likely you are to find a winner. However, the most obvious resources are often not the most valuable.
9. Closely Monitor Insider Transactions of Companies - Transactions by company insiders are valuable information, and buying actions are often more significant than selling.
10. Regularly Review Your Investment Reasons - Investing also requires management, aimed at establishing the reasons you chose an investment opportunity and, after incorporating it into your portfolio, continuing to revisit these reasons, especially when new information emerges.
11. Don't Fall in Love with Stock Prices - The amount of money you spend on stocks only affects your psyche; it's truly irrelevant. If the situation changes, be ready to cut your losses without hesitation.
12. Past Performance Does Not Indicate Future Results - If living means constantly making mistakes and learning from them, then the stock market is no different. No matter how stellar a stock's past performance, it is looking at the world through a rearview mirror, and you cannot see the future from it.
13. Value Absolute Worth - Investors need to do their homework and fact-check to avoid being misled by external splendor, therefore understanding a company's absolute worth is essential.
14. Use Technical Analysis as a Supportive Indicator - Sometimes, I use technical analysis indicators as a tool for decision-making. When deciding on investment positions, or whether to invest at all, I consider it as one of the factors.
15. Avoid Predicting Market Trends or Betting Big - Over the past 25 years, I've had only about five or six instances where I had a clear view of the market. Even then, I wouldn't bet the entire fund on such a one-sided view.
16. Think Contrarily - If an investment makes you feel "comfortable," it might already be too late. Try to think and invest against the crowd; avoid excessive optimism when stock prices rise. When almost everyone is skeptical and hesitant about the future, they might all be on the wrong side, and the situation might be starting to improve. Likewise, if no one is worried, that may be the time to be most alert.
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