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Thursday 20 November 2008

Investment: Stock-picking

Remember the wisdom of Keynes and Mark Twain

Many people have asked me what the secret of my track record is. Investment is not an exact science, but over the last three decades I have had plenty of time to reflect on the factors that matter in becoming a successful stock-picker. Many lessons come to mind, some of which are as a result of stocks that failed. Polly Peck, the conglomerate built up by Asil Nadir, appeared in my top ten holdings list in 1987, 1988 and 1989, but the growing business and rising share price did a very good job of masking holes in the balance sheet. Careful balance-sheet analysis can go a long way in limiting the downside risk of an investment: the stocks that have been my biggest disasters over the years nearly always had weak balance sheets.

I value very highly hearing directly from management, and I meet two or three companies each day. I like managers who do not overpromise, but consistently deliver more than they indicate; I would rather have a great business run by average managers than a poor business run by stars. ‘Dodgy’ management is a no-go area for me. As Warren Buffett says, the CEO who misleads shareholders may eventually mislead himself. Candidness and consistency are important management qualities as well. I handwrite notes in the meetings I attend and have kept them all since the late 1980s. I now have 50 books of UK company meeting notes, which are invaluable when I meet the companies again.

Experience also counts for a great deal. Mark Twain said, ‘History never repeats itself but it sometimes rhymes’ — eight words that should be burned into every fund manager’s desk.

Experience cannot always prepare you for the moments of drama to come. Three such moments particularly stick in my mind: the 1987 ‘Black Monday’ stock market crash when Wall Street fell more than 20 per cent in a day; the technology bubble of 1999-2000; and the terrorist attack on New York in 2001. Each of these reminds me of other lessons experience has taught me.

The crash of 1987 came a few days after the great storm that hit the south-east of England. It also coincided with the birth of our youngest child. Of course none of these events were related, but they do give me vivid memories of the most extraordinary few days of stock market performance I have ever experienced. Professional opinion after the crash was polarised. Plenty of commentators were predicting that it would bring about a huge recession, or even depression. I remember arguing that markets would recover — and presented a significant buying opportunity. I sent a note to my Fidelity colleagues, something I have not often done, to the effect that it was very unlikely the scale of the market fall would be matched by a similar deterioration in the economy.

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