There are many names by which Anthony Bolton is known, but the one he probably despises the most is “The Quiet Assassin”. He once confessed to a journalist at The Guardian that he would love to get rid of that nickname.
Here’s how it got coined.
The two largest surviving independent television companies in the U.K., Carlton and Granada were to merge in 2003. Bolton, an investor in both, was in favour of the merger and could see great benefits if structured correctly.
Michael Green (chairman at Carlton) was to become chairman of the new entity – ITV, while Charles Allen (chairman at Granada) would be CEO. Bolton thought it imperative that there should be an independent non-executive chairman capable of holding the ring between the two merged partners and led a shareholder campaign to that effect. As Bolton flexed his muscles, he was thrust into the British media spotlight and bagged the epitaph, which he would soon learn, once coined is hard to shake off.
He also earned the stellar reputation as Britain’s Warren Buffett when he was head of Fidelity Special Situations Fund in the U.K. With exquisite timing, he stepped down in 2007, at the top of the bull market, and boasted of annualised returns of 19.5% over the 28 years he was at the helm.
In an article titled What I learnt in three decades of investing, he narrows it down to three lessons:
1) Know why you own a stock.
Every stock must have an investment thesis, but one must go beyond. The thesis must be retested at regular intervals and a counter thesis should also be in place - what might lead it to become a bad stock.
Bolton believed that there would be some reasons certain investors don’t like the shares regardless of how positive the outlook for a company and he, as an investor, should know why he disagrees with each of the negative factors.
2) Know what’s discounted in the price.
Anthony Bolton’s approach to investment is to buy shares that represent a valuation anomaly and then wait for the anomaly to be corrected. Since it is easier to spot an anomaly than knowing exactly when it is going to correct, it is wise to have time on your side. Consequently, his holding period could vary from one year to many. If he believed his thesis to be bang on, he would wait for several years even if there was no short-term catalyst.
He has no favourite valuation measure but looks at a range of them, on an absolute and relative basis.
- P/E. The ratio of the price to predicted earnings in the current year and up to the two following years.
- Prospective ratio of the Enterprise Value to gross cash flow or EV/EBITDA, making sure the EV is adjusted for items such as minorities and pension fund deficits.
- Prospective free cash flow i.e. the prospective cash the company is expected to generate per share divided by the share price.
- Price to sales chart or, if available, an EV to sales chart.
- Cash flow return on investment (CFROI) in relation to how the share price trades relative to invested capital. Businesses that make returns above the risk-free rate are expected to trade at a premium to their invested capital and vice versa.
Importantly, he cautions that investors use the valuations most appropriate for the industry in concern. For instance, he cites PE ratios as pretty meaningless for housebuilding shares because of the once-off nature of profits on land sales, but price to adjusted book value is most helpful in such cases.
3) Know yourself.
There are many approaches to making money in the stock market. You must be able to establish what works for you personally and suits your temperament and stick to it. In fact, Bolton believes having the right temperament is more important than IQ. Having a reasonable level of intelligence is essential but being super intelligent without the right temperament is useless.
In an interview last year with Share Radio, he once again emphasized that emotional people don’t make good investors.
Daring to be different
Peter Jeffreys, who worked with Bolton for a while, was quoted in Investing with Anthony Bolton, as saying that Bolton will not be influenced by fashion or fad. When researching a company, he draws on the widest possible range of fact and opinion, but his final analysis is driven solely by his judgment of a situation, a company’s future prospects, or a share’s valuation.
The book went on to note that in 1999, 30 companies that Bolton owned were the subject of takeover bids or some form of corporate activity pointing to the fact that Bolton had the priceless gift of being able to spot an opportunity and the courage and decisiveness to act upon it.
His contrarian approach, which is probably key to his success, has various dimensions to it.
One of his famed bouts of conviction was during the tech boom in the late 1990s, where he stayed away from the crown mania. Stocks of “old economy” companies were sold off at attractive valuations while the opposite happened to the internet companies. He steadfastly stayed away from soaring dotcoms and was convinced that the technology boom was over-hyped. Consequently, the fund lagged the market by almost 20% but as it soared on in the coming years, critics were forced to admit that he had played his cards right.
Another contrarian trait was spotting companies which analysts give up on and few are making forecasts on the business.
Or, narrowing down on recovery stocks. Sometimes investors need to force themselves into a position of discomfort – what he called the discomfort zone, when buying a recovery stock before all the information is available. However, there is need for caution because it is very easy to be too early in recovery stocks – a common mistake investors make. A recovery buyer must be patient, especially in timing his main entry point and where there is conviction, averaging down is a good strategy.
In fact, patience is a crucial factor that investors need to get hold of. Most share prices do follow the company’s earnings, although over periods of one or two years the share price can become detached from earnings. So stand your ground and keep testing your investment hypothesis.
