Bolton started his career at Fidelity in 1979 at the age of 29, and was one of the central figures who contributed to the success of the firm for nearly three decades.
Compared frequently with his Fidelity peer Peter Lynch, Bolton’s success can be attributed to his contrarian market bias, which made him one of the best known investors in the UK.
He stepped down from Fidelity when he was at the top of his game, and boasted annualised returns of 19.5 per cent for over 28 years when he was at the helm.
Bolton is also a renowned author and his autobiography Investing against the Tide is still a hot favourite in the investing circle.
The book showcases his approach towards investing and provides guidance to achieving outperformance and double-digit absolute returns over three- to five-year investment horizon.
Bolton, who completed his education from Cambridge, became the fund manager for multiple funds during his long tenure at Fidelity.
The primary qualities that separated his from ordinary investors was his ability to think independently and have the conviction to go against the crowd, which were the key reasons he was able to sustain such an impressive performance throughout his investing career.
According to Bolton, temperament is the key ingredient that distinguishes a successful money manager from an average one.
He feels investors who have the right temperament develop the ability to go against the tide and make sure not to follow the herd mentality that seeks comfort in conventional wisdom.
Bolton says investors with the right mindset have great chances of achieving success, as they can remain objective, rational and calm when faced with achievement or failure. They also learn from their mistakes quickly and not let success go into their head.
Here are some of investing lessons from the legend that investors can imbibe in their investing strategies to amass wealth in the long run.
- Always know the reason for owning a stock:
Before investing in a stock, one should have a valid reason for owning it. For this, one needs to conduct a thorough research, says Bolton.
He feels one should have his/her own theory why a stock should be good for a portfolio and should retest that theory from time to time. One should conduct a counter-analysis on why a stock investment could turn bad going ahead.
Bolton says regardless of how positive the outlook for a company is, there will always be some investors who don’t find the same shares attractive. So one should try and know the reasons for this investor behaviour and make sure not to miss out on some vital information that may get them into trouble in the long run.
If after retesting an investment theory, one finds that some stocks are heading for disaster, they should go ahead and sell them even if the prices are below what they paid.
Bolton suggests investors to forget the price they have paid for a stock, otherwise it becomes a psychological barrier when the price falls subsequently.
“Trying to make money back in a share where you have lost money to date just to prove your initial thesis correct is dangerous. If the investment thesis is broken, the stock should be sold even if the valuation is attractive,” Bolton said in an interview whose video is available on YouTube.
- Conduct proper analysis before selling a stock: There are three main reasons to sell a stock, which are:-
1. The stock is not fitting in an investment thesis
2. The stock has met the valuation target
3. A better alternative is found for the stock
Bolton advises investors to look for a similar company that looks attractive to test one’s conviction in a stock and compare the two directly.
When one does so, clarity would emerge as to which one does he prefer considering all the pros and cons of the investment. This exercise can help prune the stocks on which one has less conviction.
He warns investors not to get emotionally attached to any stock as it may affect the portfolio and lead to losses.
- Follow an investment approach that suits you: An investorcan follow many approaches to make money in the stock market, but one should follow an approach that suits him/her. Bolton feels after gaining some experience in the market, one can have an idea as to what works for him/her personally and suits his/her temperament.
Bolton believes investors should stick to their preferred approach and not panic when they encounter some hurdles along the way during their investment journey.
Having the right temperament is more important than having a greater IQ, as emotional people do not tend to make good investors, he says.
“Having a reasonable level of intelligence is essential, but being super-intelligent without the right temperament is useless,” says he.
- Pick companies with a simple business model: Bolton believes one should try and pick businesses that are simple and do not have a complex business models. He says it’s easier to make money owning companies with strong franchises than weaker ones.
Bolton suggests investors to ask themselves the following questions before investing :
1. How likely is the business going to be around in 10 years and to be more valuable than today?
2. How much does a particular business stand on its own feet: how does it exist relatively independent of the macro factors around it?
Bolton says some businesses are very sensitive to interest rates and currencies and investors should avoid them and pick the ones that are insulated from such factors.
Also, he advises investors to look at relevant ratios before making an investment choice. For instance, when looking at banks, the relationship between the price-to-book value and the return on equity is very important. Bolton says businesses that can grow without requiring a lot of capital are particularly attractive and the cash-on-cash return is the ultimate measure of attractiveness in terms of valuation.
- Study the balance sheet of companies carefully: Investing is as much about avoiding disasters as it is about picking winners, and hence, one should try and study the balance sheet and take the risks associated with it very seriously.
Bolton feels equity investors lose the most when a company with a weak balance sheet is heading for disaster. He says while studying a balance sheet, an investor should look at both bank debt and bonds outstanding as well as future payment obligations, pension fund liabilities and redeemable preference shares.
He feels the debt level of any company can vary seasonally. So looking at absolute debt levels at the year-end may give a misguided impression about the strength of the company, as debt used sensibly can increase returns substantially for investors.
- Pick businesses available at discounted prices: Bolton says investors should buy shares of companies that are available at a deviation from their valuation and then they should wait for the deviation to get corrected to earn profits.
He says it is easier to spot a deviation in a stock than knowing exactly when it is going to correct. It is better for investors to have time on their side, as the holding period can vary from one year to many.
He advises investors to look at a range of valuation measures on an absolute and relative basis, which include:
1. P/E ratio
3. Prospective free cash flow
4. Price to sales chart or EV to sales chart.
5. Cash flow return on investment (CFROI) in relation to how the share price trades relative to invested capital.
Bolton also cautions that investors should use the valuation measure most appropriate for the industry concerned.
Giving an example, he says P/E ratios are not of much significance to look at shares of a real estate firm, because of the one-off nature of profits on land sales; price-to-adjusted book value can be very helpful in such cases.
- Patience is the key to success:
Bolton says patience is an important quality that investors need to develop if they want to remain successful for a long time.
Most share prices follow the company’s earnings, although over time, share prices do become detached from their earnings. So, Bolton says investors should stand their ground and keep testing their investment hypothesis to become better investors.
(Disclaimer: This article is based on different speeches delivered by Anthony Bolton)