Why focusing on the balance sheet will be to an investor's credit

BOOK REVIEW: EUGENE KIERNANreviews Investing Against the Tide: Lessons from a Life Running Moneyby Anthony Bolton; FT Prentice Hall; March 2009; £14.99 (€17)

ANTHONY BOLTON is probably the closest there is to a celebrity fund manager, if such a thing exists, on this side of the Atlantic.

After a long career in the city of London with global fund management group Fidelity, he has in this book composed and collated what for him are the lessons learnt, key metrics used, and highs and lows from his life running money.

There are two key sections to the book. The first and more substantial part covers how Bolton went about his day-to-day activity – how he assessed investment opportunities, analysed managements, investigated balance sheets, used stockbrokers, and so on.

In the second part, he reviews memorable company meetings and some of his best and worst investments. He also points towards developments for the future.

Much of the book deals with the practice of investing. Bolton wishes to pass on, in his view, the “essence” of what he has learnt over a 30-year career.

The watchwords from this experience and the cornerstones of a successful investment career are preparation, diligence, hard work, independent thinking and organisation.

For Bolton, there are no shortcuts, nor should there be. He describes meetings with companies in which he might invest, the level and quality of questioning, and the need to see through spin.

Questions need to be prepared, focused and thoughtful, and must address clearcut issues such as divisional operating margins and costs.

There is no room for, or point in, the vacuous “what keeps you awake at night?” questions that might be yearned for by chief executives.

Detailed notes need to be kept of all such meetings and Bolton describes in detail the number of A4 journals he has filled during his long career.

Bolton is at heart a “value” investor. He looks for anomalies in the marketplace and is content to be patient for the catalysts that will convert the opportunity into capital gain.

He suggests a series of valuation measures that he favours but ultimately he rightly notes that we need to “follow the money”, and look for cash flow.

He quotes Alfred Rappaport: “Cash is fact, profit is an opinion.”

Bolton has been prepared to back his conviction over time and feels that patience is a required trait of a good fund manager.

He is conscious of risk and wants the odds to be in his favour. He looks for what he calls “asymmetric risk” opportunities, namely the upside risk substantially outweighs the downside in any stock.

This is similar to the sentiment in Mohnish Pabrai’s investment book, The Dhandho Investor, which says an investor should look for opportunities that are “heads I win; tails I don’t lose too much”.

While investment conviction is important, Bolton is careful not to be stubborn. This has been the downfall of many fund managers who essentially “fall in love” with their stocks and are reluctant to change course even when positions are going against them.

This has been the experience of some of the managers cited in the book. Bolton rightly says that a good fund manager needs to be flexible, seek advice from colleagues and not become a victim of “groupthink”.

The author, like most good fund managers, is a stock picker. He does not spend too much time on overall macro views. He notes he has only had strong market views about a dozen times in his career. In arriving at market views, he says the one thing he will not look at is economic outlook. In his view, this is of no use when forecasting what direction the stock market may be going.

Many of the tenets of good investment practice have been expounded on by Bolton in articles such as his Financial Timescolumn, but here they are brought together in a comprehensive way.

The book becomes more colourful when Bolton discusses company meetings and his best and worst investments.

Meetings with managements, certainly during his early days in his European portfolio, can be instructive.

First impressions are not always the key but in several cases they made a difference. Certainly, the finance director of a German steel company who drank heavily during a business breakfast meeting was a useful early-warning indicator.

Bolton’s investment wins vastly outweigh the disappointments but it is to his credit, and the reader’s benefit, that he spends time on some of his failures.

In the late 1980s, for example, the UK conglomerate Polly Peck was one of his bigger holdings but, as many will recall, was ultimately a case for the UK Serious Fraud Office.

It was this experience and other similar ones that copperfastened Bolton’s focus on the balance sheet. This is where, in his experience and opinion, most problems arise. It is when the equity investor is most at risk – a lesson that will not be lost on today’s battered stockmarket investor. It also underlines why focusing too much on the next set of quarterly earnings is not particularly useful.

This is a practitioner’s book and all the better for that. It is not an academic discourse. It is well laid out and structured, and holds its own exceptionally well among works by authors such as Bolton’s Fidelity colleague Peter Lynch or any of John Train’s fine books on investing and investors.

The book will be of interest to investors both institutional and individual. It will serve a purpose for fund trustees and consultants too, to give them something of a best-practice yardstick when it comes to investment process and philosophy. Chief executives and chief financial officers of quoted companies will also find it useful to dip in to this book to gain a sense of the wide range of issues that exercise investors.

Overall, Bolton’s book is a good read and a good investment.

Eugene Kiernan is head of multimanager investments at AIB Investment Managers