In many aspects of life, be it pursuing a career or training to become an athlete, an individual can learn the secrets to success by studying up on an authority in the field. Investing is no exception. So let's take a look at Anthony Bolton, who ran the value-based Fidelity Special Situations Fund for nearly three decades. His success has led him to become one of the best known investors in the United Kingdom and he draws frequent comparisons to Peter Lynch, a Fidelity colleague of Bolton's from across the pond. (To learn about Peter Lynch, see our series on The Greatest Investors.)
We will be looking at Bolton's global investing acumen, his primary advice for outperforming the market over the long haul and garnering positive absolute returns, and lessons (including a few minor bones to pick) for individual investors looking to mimic his investment management techniques. The primary insight boils down to his contrarian market bias, which happens to be a style that is difficult to ignore given the multitude of investors that have gained acclaim (and grown rich) by employing this philosophy.
Who is Anthony Bolton?
Shortly after completing a Cambridge education, Anthony Bolton started his career at Fidelity in 1979, at the age of 29, and has been mentioned as one of Fidelity's first investment managers in the U.K. His tenure on the Fidelity Special Situations Fund started in December, 1979 and ran through December, 2007 where £1,000 would have grown to £147,000 over his 27 year tenure to handily beat the fund's equity benchmark and earn enviable absolute returns for fund shareholders.
Bolton's investment style is best described as value-based and contrarian. Bolton's primary quality in becoming an accomplished portfolio manager is the ability to think independently and have the conviction to go against the crowd. The title of his 2009 autobiography, Investing Against the Tide, serves as an illustration of how important this aspect is to achieving outperformance and double-digit absolute returns over a three to five year investment horizon. In his book he quotes John Maynard Keynes, who stated that his "central principle of investment is to go contrary to the general opinion, on the grounds that if everyone agreed about its merit, the investment is inevitably too dear and therefore unattractive." (Learn more about Keynes in Giants of Finance.)
In Bolton's mind, temperament is a key ingredient that distinguishes a successful money manager from an average one. Temperament speaks to the ability to go against the grain and not follow a herd mentality that seeks comfort in conventional wisdom. A proper mindset also means remaining objective, rational, and calm when faced with either investment achievement or failure. It also includes learning from one's mistakes and not letting success go to one's head. Bolton has demonstrated these are traits in spades during his investment career and are key reasons he was able to sustain such an impressive performance track record throughout a career that contained inevitable short-term dips in performance. (Find out more about herd behavior in our Behavioral Finance Tutorial.)
Bolton's investment style frequently draws comparisons to Peter Lynch, and Lynch briefly touches on the similarities in a foreword to Bolton's autobiography. Lynch refers to a well-known maxim of his that investment professionals who turn over the most stones stand the best chance of success. In other words, do whatever it takes to uncover investment ideas, be it reading financial periodicals, studying original company filings, or talking with company management and conversing with investment peers. Another important lesson is that investing is not gambling and should not be treated as such. Unfortunately, many individuals and institutions treat buying stocks as they would purchasing a lottery ticket or hitting the tables in Las Vegas by not carefully balancing investment rewards (i.e. positive total returns) with potential risks (negative returns or the permanent loss of investment principal).
To briefly highlight important aspects Bolton's specific management style, he is a bottom-up investor ("most of the risk in a portfolio lies at the stock level") that first starts with an analysis of the fundamental view of a company and progresses to an analysis of its competitive advantage, such as an enduring brand name (franchise value) and ability to withstand the vicissitudes of otherwise uncontrollable macroeconomic factors. This leads Bolton to service businesses and away from capital-intensive firms, such as most in manufacturing industries. He also shuns high debt, which can lead a company to financial ruin during an economic downturn. The generation of cash flow with minimal capital expenditure needs is a primary consideration and echoes that of other successful value managers and championed by Warren Buffett. And as with Lynch, Bolton also finds it important to be able to summarize a stock's investment merits in a few short sentences. In other words, why own it if it's too complicated to explain to your teenage son or daughter?
It is also worth noting that Bolton prefers reading original company filings, such as annual reports or quarterly and annual filings with the Securities and Exchange Commission (SEC), as is the case in the U.S. He poignantly finds that much information can be lost in translation via broker reports or the multitude of news wires that relay financial information and opinion. And in an industry obsessed with price targets and precise measures of value, Bolton finds a range of intrinsic value estimates more than appropriate. He also finds discounted cash flow (DCF) valuation models ineffective given they depend upon estimates many years out that are very difficult to predict with any certainty.
Bolton strongly recommends meeting company management in person and finds those that have a strong, detailed, and even fanatical handle on the underlying operations to be the most successful. He also likes managers that provide a balanced overview of their business (both positive and negative aspects) and have significant personal stakes in their respective firms. Bolton paraphrases Buffett's advice that one should feel comfortable enough that a manager could marry your son or daughter, and though Bolton does muse that this might be a slightly extreme suggestion, it does get the point across rather nicely.
Bolton finds benefit in analyzing the top 20 shareholders at a company and the extent it is concentrated within a few select holders or diversified across many. It can also convey information depending on who is holding the stock. For instance, it may be beneficial to learn that a like-minded value investor has a large position in a stock.
Bolton stresses diversification, which he says has led to portfolios he has managed having as many as 200 holdings. This is far too many, and he does admit that approximately 50 holdings is more ideal as it makes it easier to track individual stock developments more carefully. He also employs technical analysis and speaks favorably of market timing, both of which he finds useful in making shorter-term tactical decisions but are generally irrelevant investment techniques to value investors. And likely bowing to shorter-term pressures of fund managers, his holding periods of one to two years were too short, though he does recommend a three to five year period for individual investors more immune to industry constraints and did hold companies for extended periods of time in many instances. (Find out more about reducing risk with diversification in The Importance of Diversification.)
The essence of Bolton's approach is to find stocks that are unpopular but will inevitably turn around as they are discounting information that is too negative, are being improperly subject to the downside of fickle conventional wisdom, or have astute management teams capable of turning around firm operations. To return to Bolton's primary factors for success in the industry, his best investments felt uncomfortable at the time he made them but ended up with fantastic returns given that negative bias held the shares well below his range of intrinsic value estimates. To quote Keynes a final time, "worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." Bolton's lessons illustrate that contrarian value investing is compelling in its own right and can successfully be translated to markets outside of the U.S.
Read more about other great investors like George Soros and David Dreman in our series on The Greatest Investors.