How to give your returns a lift
“Nothing can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with great talent. Genius will not: unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.” Calvin Coolidge
“Predicting the future is easy. It’s trying to figure out what’s really going on now that’s hard.” Fritz Dressler
It’s said that everybody remembers where they were on the 11th of September 2001, known forever as 9/11. A Tuesday morning in New York that shocked the world, and most probably extended the dotcom bear market which began suddenly in March 2000. Those of you who are much older will remember when President Kennedy was assassinated in Dallas on the 22nd of November 1963. My Dad told me about it.
Personally I remember where I was on the 7th of May 1979. My then wife was late in her pregnancy with our second child. Early that morning disaster struck. Suddenly she went into labour, fainted and damaged her back. An ambulance was called and she was rushed out on a stretcher. Off it sped to the nearest maternity 7 miles away. Throwing some of her clothes into a case I followed minutes later.
Fortunately it was a Bank Holiday Monday, so thanks to a lack of other road users and with no police cars around, I set a new speed record between Bo’ness and Falkirk Infirmary. I believe that record still stands today. I landed just in time to watch my son being born. As it turns out it was the fastest he’s ever moved. I reminded him of that on Saturday at his 40th Birthday bash. For, as a teenager he morphed into half man/half mattress. It’s done him no harm though. He’s turned into a top, if suddenly middle-aged, IFA. It’s in the genes I guess.
Thinking of that eventful day forty years ago led me to think back to the awful financial situation at the time. After all, we’re constantly told are how bad things are today, and how it’s just going to get worse. So how about this? In late 1977 we’d bought a Victorian semi for the enormous sum of £18,000 and to secure it we doubled our mortgage to £13,000! On only one income too: mine! Mortgage rate? 15% pa. Inflation rate? 13.4%. And both rates got even higher over the following two years despite Thatcher’s May ’79 election victory and promise to lower tax, interest and inflation rates.
Basic rate tax was still a lofty 33%. Highest rate income tax? 60%. But for those with decent investment income there was an extra 15% tax waiting in the wings. Tax on death? Up to 75%. And from 1973 into January 1975 we’d somehow survived a stockmarket fall in the UK of around 70%. Previous generations of pessimists saw no hope anywhere. And we call them “the good old days”??
Forty years ago the long term savings industry was dominated by insurance companies. Remember With-Profits? They turned out to be Without-Profits in extra time when investors lost on penalties. But it was in 1979 that a clever chap who studied engineering, played the piano and cello, and wrote symphonies in his spare time was put in charge of a new Unit Trust from Fidelity. His name? Anthony Bolton. And with his musical background he clearly knew the score, despite warnings by “experts” that the fund was far too risky.
I was lucky enough to get to know Anthony on a one to one basis. Like all other successful investors such as Warren Buffett, Peter Lynch and Joel Greenblatt (to name but 3) he believed that discipline and process were all important. He was quietly cerebral and wasn’t one for making brash predictions. He collected quality businesses at the right price, ignored short term noise, and stuck with them no matter how long it took.
He did it his way for 28 years. Since then the recipe hasn’t changed. £1,000 invested on day one, by last summer had grown to over £360,000 after all costs, more than 3 times greater than the return from the FT All Share total return. That’s a fact. I have a friend who was a day-one investor who stayed the course.
Ten years ago in May 2009 I wrote a second piece in the Daily Telegraph following the positive one in late February. By May, in only 12 weeks the FTSE 100 was up 24% and the Dow up 26% which enraged pessimists who called it a “sucker’s rally” and “a fluke.” But as I pointed out in that article (still on our new website www.alansteel.com, under “Insights and Media”) history and probability agreed with me.
I gave examples of previous similar occasions when widespread media despondency was a buying signal for the brave. And pointed out that the last time that extreme pessimism was as high as March 2009 was December 1974 into January 1975 when the contrarian in me had led me to resign my “safe job” and head into self-employment much to my Mum’s dismay. (Sadly she tended to side with pessimists).
If going back about 40 years wasn’t long enough I suggested we look back 200 years where you find that the 4 most outstanding investment opportunities coinciding with extreme pessimism were 1807, 1857, 1932 and March 2009. But I do accept that predictions publicised regularly these days are typically wrong. Jim O’Shaughnessy over in the US reported the results of 6,582 investment predictions from 68 “gurus” over a fifteen year period to 2012. The average accuracy was just 47%. That’s worse than just tossing a coin.
So what do we do at ASAM? First of all we spend considerable time following facts (not headlines) on cycles. Our long relationships with Ned Davis Research and others are key in laying down probabilities. Then we try to source special fund managers who have the persistence, determination and a well-structured process which they stick to, despite short term noise or failure and the negative hyperbole that goes with the job.
In short we look out for today’s and tomorrow’s Anthony Boltons. And with patience, determination and hard detective work we’ve found a good few. Once we recommend them we stay close to them. We meet them regularly. And as in the most successful football teams we build from the back. Get your defence right no matter how good your attackers are, is a strategy that’s paid dividends over the years. For football fans think of a combination of Van Dyke and Salah for example.
We like to find these stars early. In our biggest fifteen funds for instance two-thirds were “discovered” when their fund sizes were about 5% of what they are now. Let me give you only one such example of a manager who’s well-known now, but who wasn’t when we found him 8 years ago, about 7 months after he’d launched his fund, now several billions of pounds in size. But first a puzzle-
One day, on her way to work, a woman decides to take the mass-transit system instead of her usual method. Just before she gets on board she looks at an app on her phone that gives her position with the exact latitude and longitude. Her journey is smooth and perfectly fine, despite frequent stops, and when she disembarks she checks her phone again. Her latitude and longitude haven’t changed. What’s going on?
The answer…. she works in a skyscraper and instead of walking up the stairs, she takes the lift. Now we don’t think of lifts or elevators as mass-transit transportation systems but they are. They move millions of people every day, and China alone installs 700,000 a year! The tallest building today is the Burj Khalifa in Dubai with over 300,000 square metres of floor space. And the only way so many people can work together in one huge building is because of the lift. Or rather the safety elevator or lift. It simply has to be safe. And the man who changed the world on that score was Elisha Otis in 1853. And lifts have to be continually serviced, usually by the company who installed and built the equipment.
So wouldn’t it make sense to invest in the only 2 publicly quoted elevator companies that dominate the world market? That’s just one idea from our second largest fund holding featuring the attacking genius of Terry Smith who we discovered for our clients long before the herd (chasing only the most recent successes) piled in.
As I’ve said earlier, Terry’s just one of a select bunch of excellent process-driven fund managers we’ve found over the years, instead of settling for skewed average indices. And rather than Sell in May and Go Astray, as long as our “team” sticks to what they’re good at, we’ll continue to recommend them to you. As my Grannie McKay would say about herds and about what’s popular “If everybody else is daft enough to jump over a cliff why do you have to?”