Book Reviews, Value Investing

Book Review of Investing Against The Tide (Pub)

Just finished reading Investing Against The Tide: Lessons from a Life Running Money by Anthony Bolton. Anthony Bolton spent almost his whole career managing money at Fidelity, notably he managed the Fidelity Special Situations fund from December 1979 to December 2007 and achieved achieved annualised growth of 19.5% over 28 years.

This is a great book, highly recommended!

A big appeal of this book is that the content covers many key topics that most value investing books fail to address (e.g. position sizing, evaluating risk, market timing), yet despite its breadth, its chock full of information at a good depth. The chapters are written very succinctly (e.g. it can be 3 pages in a chapter), to the point, and wastes little words. Almost all of the content is very good. This is very different from most investment books out there where you may have to read 10-20 pages (or worse!) before you find something noteworthy.

Briefly, the book covers the following topics

  1. Operational
    • Developing an investment thesis for every stock you own
    • Preparing for company meetings
  2. Evaluating a target
    • What to look for in a business
    • What kind of companies are attractive
    • How to assess the financials
    • How to look at valuations
    • What to look for in management
  3. Tips on special situations
    • Criteria for short targets
    • Finding takeover targets
    • Buying recovery or turnaround stocks on attractive valuations
  4. Portfolio management
    • How to construct a portfolio of shares (includes position sizing and sell discipline)
    • Evaluating risk
    • Technical analysis
    • How to trade
    • Market timing and how to evaluate the market outlook
  5. Others
    • Psychology
    • What to do when you are not doing well
    • Twelve qualities that make a good portfolio manager

I’ll just highlight a few good takeaways. Anthony gradually buys into a position by doubling its position size each time, bit of like doubling down when the bet turns against you. This makes perfect sense, and is how value investing makes its money. The book has a good quote from Bill Miller:

We average down relentlessly. Two things seem pretty clear to me: first, no one can consistently buy at the low or sell at the high (except liars, as Bernard Baruch said), and second, lowest average cost wins. We constantly strive to lower the average cost of our positions by buying more if and when the price drops.

Anthony uses technical analysis together with fundamental analysis. Technical analysis influences his position size and is also used to time his entry and exits. In the event the technical analysis goes against his fundamental views, it may cause him to re-check his fundamental analysis.

On valuation, Anthony shared that DCF and DDM are only used as cross-checking tools, because of their sensitivity estimates in year 4 and beyond, which he thinks are too difficult to predict. Rather, Fidelity analysts only estimate up to 2-3 years in the future, and he uses ratios as the main valuation tool: P/E, EV/EBITDA, FCF/P, P/S, EV/S, CFROI (CSFB Holt), CROCI (Deutsche Bank).

Great book.

Develop an Investment Thesis for Every Stock You Own

  1. Be able to summarise in a few simple sentences why you own a particular company’s shares.
  2. Be able to list negative factors that might lead it to become a bad stock (i.e. the counter thesis), and know why you disagree with each of the negative factors.
  3. Think in level of conviction rather than in price targets.
  4. Share prices can become detached from earnings over periods of 1 or 2 years.
  5. Consider 6 factors
    1. Quality of business franchise
    2. Management
    3. Financials
    4. Valuation
    5. Prospects for M&A
    6. Technicals


What to Look for in Evaluating a Business

  1. How likely is this business to be around in 10 years’ time and to be more valuable than today? How sustainable is its franchise? 
  2. How much is the business in control of its own destiny, relatively independent of the macro factors around it? e.g. not very sensitive to interest rates or currencies
  3. Prefer simple business model
  4. Prefer business that generates cash over the medium term
  5. Prefer businesses that can grow without requiring a lot of capital
  6. For different types of businesses, summarise the financial characteristics of the company in a few key ratios
    1. Banks: P/B and ROE.
    2. Housebuilding: P/adjusted book (P/E ratios are useless because of the once-off nature of profits on land sales).
    3. Life insurance: (Overheads / Funds under management) should be low else high risks would be taken on investments
  7. Cash generation is more important than growth
  8. Beware that most statistics (e.g. sales growth, margins, return on capital) revert to the mean over time.

Criteria for Short Targets

  1. Weak balance sheet
  2. Suspect management
  3. Poor business franchise
  4. High valuation
  5. High institutional ownership
  6. Loved by brokers
  7. Already performed really well
  8. Low likelihood of being taken over


Attractive Companies

  1. Companies with asymmetric payoffs (e.g. an attractively valued oil exploration company with sustainable cash flow from existing wells and a strong balance sheet that reinvests this cash flow in exploration including some wildcat wells where the reward can be very high if successful. Cairn Energy was one).
  2. Companies selling at a big discount to their assets
  3. Unappreciated growth stocks in areas unfamiliar to many investors
  4. Companies with a growth division hidden within its less attractive main business
  5. Valuation anomalies within a particular sector (e.g. a stock in a sector that is the cheapest but should not be so)
  6. Takeover targets

Assessing the Financials

  1. Fidelity analysts make forecasts covering 2-3 years for their companies.
  2. If in doubt about how a company is doing, follow the cash.
  3. Read the notes to the accounts very carefully.
  4. Statements a company makes in its market listing or share issue document has to be independently verified, so these are good places to start if they are not too out of date.
  5. Look at company information in its original form rather than relying on second-hand summary.


How to Look at Valuations

  1. Buy with a 1-2 year time frame. Average holding period is 18 months. Willing to wait several years.
  2. It is very unusual to see a significant anomaly and at the same time the catalyst that will correct it.
  3. Buying when valuations are low against history substantially increases your chance of making money, while buying when they are high increases your risk of loss.
  4. For most companies (esp. non-financials), look at
    1. P/E (predicted earnings in the current year, and up to 2 following years)
    2. Relative P/E
    3. EV/EBITDA (minority interest and pension fund deficits should be added to the EV numerator to make it consistent with the EBITDA denominator, which included 100% of the results of subsidiaries even through they may not be 100% owned)
    4. (Prospective FCF)/P
    5. P/S or better yet EV/S (useful for companies making losses or low profits)
    6. Cash flow return on investment (CFROI), and compare that with a chart showing the share price and the invested capita. Businesses with CFROI above the risk free rate should trade at a premium to their invested capital.
  5. Uses data from CSFB Holt, Quest (owned by Collins Stewart), and CROCI from Deutsche Bank.
  6. Don’t see the logic in PEG ratio.
  7. DDM and DCF have too much of the value captured in the predictions from year 4 onwards, which is too difficult to predict. Only use these as a cross check.
  8. Dividends over time are affected by earnings. Focus on the earnings and not on the yield.
  9. Dividend yields are useful in protecting the downside. Also look at break-up values.


What to Look for in Management

  1. NEVER buy shares in a company where you like the franchise but have doubts about the management (be it competence or integrity).
  2. Things to Assess
    1. Competence
    2. Knowledge of the business strategically, operationally, financially
    3. Optimists or pessimists
    4. Strategic or operational
    5. How the management team works
    6. How are they rewarded (e.g. what KPIs), what are the incentives, are they aligned with shareholders
    7. Trades by insiders
    8. Past track record: have they let down investors before? people seldom change.
  3. Gets a list of insider deals in UK companies every day. Deals are ranked by significance according to the following factors:
    1. Size of deal
    2. One-off or several insiders are doing similarly
    3. Chief Executive / Finance Director, vs. Division Director / Non-Executive
    4. Does the insider have a track record of buying and selling shares opportunistically (i.e. specially timed)
    5. Did the insider buy in size after the shares have risen considerably? or sell even after they have fallen a lot?


Takeover Targets

  1. Average premium on a buy-out is 25-30% above last trading price.
  2. Finding takeover targets
    1. Bias towards medium and smaller companies to increase your odds.
    2. Find companies with steady, predictable cash flow.
    3. Identify industries where consolidation is more likely (e.g. TV companies, tobacco).
  3. Analyse the shareholder list.
    1. For companies with a controlling shareholder or group of shareholders, a takeover will be at their discretion.
    2. Companies with 1 or 2 large, but not controlling, shareholders can be more vulnerable.
    3. Companies controlled by a handful of institutional shareholders can be more vulnerable.
    4. Uncontrolled companies with cash surpluses can be particularly vulnerable.
  4. Bidders can compulsorily buy in all shares if they over 90% of shareholders accept their bid. Bidders may need this if their financing structures need 100% of the target company’s cash flow.
  5. If you don’t tender your shares, you can own an unlisted share with a chance of being bought out later or having the company re-listed at a much higher level.
  6. Do not buy on tips of M&A targets in the very short term.
  7. Best not to sell after the first bid announcement unless you think the bid will not be successful.
  8. If the bidder uses non-conventional financing (e.g. convertible preferred stock rather than bank debt or bonds), it is a warning sign that the conventional financing structures are not available to it.

Buying Recovery or Turnaround Stocks on Attractive Valuations

  1. Signs
    • Analysts give up on a company and there are few people making forecasts on the business.
    • Companies coming out of bankruptcy or Chapter 11.
    • Companies with complex or unusual capital structures.
  2. Best recovery stocks
    • Best recovery stocks are those where new management comes in who can demonstrate that the company in question lags behind its peers on a number of fronts and they have a clear plan, which normally involves doing lots of little things better, to return it to performing in line or better than its competitors.
    • If these factors are measurable, so much the better, because you can keep track of how the new team is doing and how far along the recoery path they are.
  3. How to buy?
    • Investors must force themselves into a ‘discomfort’ zone where they do not have all the information.
    • It is easy to be too early, so take a small holding (e.g. 10bp), then add as your conviction grows that the worst is over. You need to be patient in timing your main entry point.
    • The first bad news (e.g. profit warning) is rarely the last.
    • If the shares of a company decline for some time in anticipation of an bad event that is well known for the company, by the time the event arrives it is well in the price and buying just before (the event) makes sense.


Company Meetings

  1. Preparation materials
    1. Performance
      1. Chart of stock price (3, 5, 10-year)
    2. Valuation
      1. Charts (20 years or minimally 1 complete business cycle) for P/E, P/B, P/S, EV/S, EV/EBITDA, to compare today’s valuation with history. Less than 10 year charts can be misleading as they will not contain enough variety of business conditions.
    3. Background
      1. Chart with history of director deals (my note: best if transposed on price chart)
      2. List of top twenty shareholders (who’s controlling the company?)
    4. Management
      1. List of insider holdings
    5. Business
      1. Financial strength report (H-Score report)
    6. Sentiment
      1. Chart showing net short position across time
      2. Chart of credit default spreads (indication of troubles ahead or whether its highly/lowly owned by institutional investors)
      3. Chart of earnings upgrades / downgrades
    7. Current Information
      1. Latest company results, official releases, press reports. Any company guidance should be accompanied with specific strategies (with assumptions) on how they plan to get there.
      2. Recent broker notes
      3. Internal analyst notes and financial models
    8. Notes of previous meetings
  2. Meetings
    1. Goal
      1. Understand the business model and the primary factors that affect it, including the dynamics of the P&L, the cash flow, and the balance sheet.
    2. Content
      1. Financial trends in the business (volume, price, costs, gross margins, operating margins, interest costs, taxes, etc. division by division)
      2. Balance sheet items (e.g. capex, working capital, debt, debt covenants)
      3. Strategy
      4. Recent performance
      5. New developments
      6. Management’s outlook for each division and the market in general
      7. Competitors, suppliers, and customers
    3. To note
      1. Ask questions in a way that will elicit an elaboration rather than yes/no, e.g. “we heard some companies are having problems in ….”
      2. Independently confirm what the management says because there is a lot of ‘spin’.
      3. Consider the riskiness of the business model (e.g. Northern Rock relied much more on wholesale funding than its own deposits and got killed in July 2007). Riskiness is often due to balance sheet structure.

How to Construct a Portfolio of Shares

  1. Three key questions
    1. Does your portfolio match your conviction levels as much as possible?
      1. A portfolio should as nearly as possible reflect a ‘start from scratch’ portfolio.
      2. Each month, put each stock that you own under 5 buckets according to your level of conviction: ‘strong buy’, ‘buy’, ‘hold’, ‘reduce’, and ‘?’. This helps to quantify your conviction and highlight stocks where you need to do more work.
      3. Test your conviction by finding a similar company that you like and compare the two stocks to see which one you prefer.
    2. Are you aware of the risks you are taking?
      1. Know the shape of your portfolio in terms of sector and stock bets (e.g. are you very exposed to a particular sector?)
      2. Be aware of any unintended bets existing in the portfolio (e.g. high exposure to companies that are exposed to currency weakness)
      3. Are you intentionally taking on more volatility for better long term returns?
    3. Is there anything to learn from your mistakes?
      1. You need to avoid the losers.
      2. On average, at least 2 in 5 of your investment decisions will be wrong (probably for 1 your thesis was wrong in the first place, and another 1 the situation changed after you bought the shares).
  2. Position sizing
    1. Based on following factors
      1. Conviction level for the stock
      2. How risky it is (e.g. H-score)
      3. How marketable these shares are
      4. Percentage of equity you hold in the company (absolute limit of 15% as the maximum exposure)
    2. Position size changes over time as the conviction level changes.
    3. For large portfolios, start with a 25bp (0.25% of your portfolio) holding. As conviction level increases, increase the holding to 50bp, then 100bp, then 200bp, and finally 400bp. For a smaller portfolio, you can start with 50bp.
    4. May go above 400bp in a mega-cap share. Company would need to be FTSE 100 company to go over 200bp.
    5. Make incremental moves and not large adjustments to the position size.
  3. Sell discipline
    1. Sell when something negates the investment thesis.
    2. Sell when it meets the valuation target.
    3. Sell when something better is found.
  4. Watch list
    1. Keep a watch list of companies that are possible candidates to buy but you do not yet have enough conviction to act on. Each company should have its own file of reports and notes.
    2. Every quarter, review them and decide whether to look in more depth before starting a position, keep on the watch list for another quarter, or remove them from the list.

Evaluating Risk

  1. Common mistakes
    1. The biggest mistakes over the years have nearly always been in companies with poor balance sheets [echoed by Peter Lynch as well]. When something goes wrong, a company with a weak balance sheet will cause its equity investors to lose the most (e.g. bankers forcing the company to dispose its divisions, market offering low prices to forced sellers).
    2. Buying companies with poor business franchises.
    3. Buying companies with poor management, management with suspect business practices, or management who are not open with investors.
  2. Buying a highly geared business is similar to buying an ungeared business on margin.
  3. Company Watch publishes a H-score for companies, using 7 ratios that are combined to a single H-score of 0 to 100. Companies with scores > 25 are unlikely to experience financial distress.
  4. Every fortnight, go through the companies that are in the lowest quartile and companies that moved out from the lowest quartile.
  5. Understand the debt profile
    1. How much is repayable under a year
    2. Covenants relating to the debt
    3. Bank debt
    4. Bonds outstanding
    5. Future payment obligations
    6. Pension fund liabilities
    7. Redeemable preference shares
  6. Companies can have debt levels that vary a lot seasonally or during the month or quarter, so looking at debt levels on reporting dates can give a false impression. Look at their net interest figure in comparison to the debt figure to determine if average debt levels are higher.
  7. During company meetings, ask what are the average debt levels over the year, and the seasonal pattern.
  8. Be aware that many contractor companies with customer advances will consume cash when they shrink (e.g. they will have to refund their customers).
  9. In highly geared businesses, look at where the debt trades (or credit default spreads). If there is a big discount on the debt, it may not be cheery for the equity.
  10. Work out what are the factors that can destroy the investment thesis, so as to spot them before others.
  11. Try to create a believable scenario that can cause the share price to be halved.


  1. Perception is as important as reality. Keynes said that picking stocks was like a beauty contest where ‘it is more important to choose not who you think is the prettiest girl, but who the judges think is the prettiest’.
  2. The risks of owning shares are much lower for sectors and companies that are under-owned and unloved by investors and stockbrokers.
  3. Falling prices create uncertainty and doubt, rising prices create confidence and conviction. If you work out that the 70p is a good price when the price was 100p, when it subsequently dropped to 70p, you will be doubting yourself that maybe the sellers know something that you don’t. You will be influenced solely by the price movement itself even though the economics of the situation has not changed. A good investor must resist this tendency.
  4. Keep an open mind to the idea that your decision to buy was wrong.
  5. We are too conservative when we take gains and too relaxed in running losses.


Technical Analysis

  1. If the technical analysis confirms his fundamental view, he may take a bigger bet. If it doesn’t confirm his fundamental positive view, it makes him review his investment thesis and check for negative factors they may have overlooked. Sometimes it may cause him to take a smaller bet or reduce his position.
  2. Technical input is used to help time entry and exits, or when to double up or halve a position. The combination of both technical analysis and fundamental analysis works better than just one on its own.
  3. Sits down once a month with the Chief Technician to go through the holdings and have a monthly review of world markets.
  4. QAS (Quantitative Analysis Service) by Mal Roesch ranks major stocks, market indices, currencies, commodities and interest rates, against the short and medium term and assigns them grades according to where QAS thinks they are in their own price cycle. D7 or D8 is bottoming a stock; A1 and A2 are in up-trends, B3 and B4 are topping stocks; C5 and C6 are in downtrends.

How to Trade

  1. A good trader learns when a manager may want to pay up and when they won’t. They know what news is important to pass on and what is just part of the daily ‘babble’. Alert the manager if the price moves more than 3% against him.
  2. When setting limits, avoid round numbers because most investors set limits in terms of round numbers (e.g. set buy limit at 101p and sell limit at 89p). This increases the odds of being able to execute a particular trade. Wonder if this is because they are so big that it is really hard to get shares. Normal people will do it in reverse.
  3. Unless the news item is very significant, if you are patient, you normally get a second opportunity (to make a trade at a specific level) once the initial excitement has died down.



  1. The salesman needs to filter the output of their firm, know the fund manager’s style and what it is that he is looking for, but also have their own views and ideas. They need to know how are the best analysts in their firm.
  2. The advantage of broker analysts is that they normally cover a set of companies for much longer than the majority of buy-side analysts who change sector every 2-3 years.
  3. Fund managers do not need the broker to call them first with their buy/sell ideas, but fund managers need to know if the broker has a strong view and the reasons for it.

Market Timing

  1. Bull markets
    • Bull markets paper over the ‘cracks’ which are always there.
    • Many bull trends go on for longer than expected.
  2. Market tops
    • Be on your guard after a long upward move of 4-5 years.
    • A ‘blow-off’ top when prices move a lot in a day after a period when share prices have moved exponentially, is usually a warning sign.
    • At tops, the news continues being good, but it stops getting better.
    • At the first setback of a bull market (e.g. 10% drop), analysts usually get reassurance from management that everything is ok. This can be early days into the downtrend.
  3. Bear markets
    • A new bear market can often have a few false starts before it really gets going. Markets are more likely to make a V-shape at their lows than they are to make an upside down V at their tops.
  4. Market bottoms
    • At bottoms, the news continues being bad, but it stops getting worse.
  5. Evaluating market outlook
    • Don’t consider the economic outlook
    • Look at the historical pattern of bull and bear markets, compare that with how long and how far the bull market has risen, or the bear market has fallen.
    • Look at indicators of investment sentiment and behaviour (e.g. put/call ratio, advisor sentiment, breadth, volatility, mutual fund cash positions, hedge fund gross and net exposure, etc.). When these indicate extreme optimism or pessimism, it normally pays to bet against them
    • Look at long term valuations (particularly P/B or P/FCF). When they move outside their normal range, it represents risk or opportunity.
  6. Macro views set the tone for the portfolio. If he believes that he is in the mature stage of a bull market, he will prune back holdings of more risky stocks and those that have done particularly well.
  7. To test a view that a certain scenario lies ahead, play it backwards to today and review the progression to determine if it seems plausible.
  8. Investors should take at least a 3 year view if not a 5 year view.

What To Do When You Are Not Doing Well

  1. Don’t box yourself into a corner with your own views (e.g. everyone knows you hate mining stocks such that you find it very difficult to ever buy them back)
  2. Listen to advice from others about why you are not doing well with an open mind
  3. Check whether your views are firmly agreed with the consensus and therefore more risky (i.e. following the herd is risky).
  4. Don’t give up on your principles. Don’t try something very different that you don’t believe in.
  5. Put down on paper your ‘start from scratch’ portfolio and see how that differs from what you own. Are your strongest conviction bets large enough? What are the characteristics of the tail of your portfolio? Do you have any unintended bets?
  6. Put down on paper your 20 worst investments over the past 6 or 12 months and an honest explanation of why they went wrong. What are the lessons from this? What are common denominators? Think more about the downside risks of your positions.
  7. Work out whether you are deciding how your day is spent or letting events and others dictate your calendar. You should always allocate the bulk of your working days to tasks/events that you choose.
  8. Make sure that you are spending enough time on looking for new ideas rather than just monitoring what you own already.
  9. If you don’t use it, try using technical analysis as a cross check for your views.
  10. Don’t cut yourself off from colleagues and clients and think that there is nothing you can do.
  11. When it’s going well again, don’t forget the bad days and think that you are infallible.

Twelve Qualities That Make a Good Portfolio Manager

  1. See the secondary effects of a change (e.g. UK clothes retailer and UK TV companies buy goods from overseas that are priced in U.S. dollars, so a falling dollar will benefit them). Good lateral thinker – think tangentially about the world. Question what others take for granted.
  2. Good temperament. Calm. Treat success and failure the same. Humble.
  3. Well-organised. Be able to organise unstructured information. Take charge of your day’s agenda. Prioritising time.
  4. Hunger for analysis. Want to know how things work.
  5. A detailed generalist. Be able to get up to speed quickly on a new subject in a few hours of study.
  6. Desire to win. Motivated to succeed in a intense and competitive environment.
  7. Flexible conviction. Ability to change their views if the evidence changes.
  8. Happy to go against the crowd.
  9. Know yourself. Know your strengths and weaknesses and compensate for them.
  10. Experience. Never stop learning. Not seasoned until one has experienced a full economic and stock market cycle and be able to put today’s events in a historical context.
  11. Integrity.
  12. Common sense. When something doesn’t make sense, don’t do it.




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