Investing like Anthony Bolton

In practice:

Anthony Bolton, step-by-step

I remember being impressed by a chapter in a book by Jonathan Davis called Investing with Anthony Bolton, first published five years ago.

Anthony Bolton is an investment great, particularly in the UK, and a rarity. A fund manager who beat the average over decades, not years.

Davis provided a clear description of his methods, and examination of his performance but the chapter that impressed me most was written by Bolton himself, a personal reflection on his career.

Since he’s expanded that chapter into a book, Investing Against The Tide: Lessons From a Life Running Money, I quickly emailed the publisher for a review copy.

I’m glad I did. I dipped in and out of the book over the bank holiday, reading chapters of particular interest rather than starting at the beginning.

The ease of flitting around its 220 pages indicates how well the book is organised and should reassure you that, although its billed as a guide for professional investors, presumably people who invest other peoples’ money, it’s relevant to those of us who invest our own.

This isn’t a review, because I’ve only read four chapters, but after reading the first, I feel compelled to stop and write about it.

‘How to assess a company and the role of meetings‘ is written in the characteristic Bolton style. He doesn’t harp on about grand theories. He’s very practical, explaining what he does, how he does it, and why.

He describes meeting the company’s managers as one of the most important inputs in his investment process, because it helps him understand the business, and in particular, whether demand for its product or service will still exist in ten years time.

Most private investors don’t have time to meet the managers of all the companies they might invest in, and most executives would need a very good reason to meet a private investor, so you might wonder why I’ve singled out this chapter.

First, it tells us a lot about Anthony Bolton’s investment process. Not having a rigorous investment process has, in the past, often been my downfall and creating one is one of the themes of this blog.

Secondly, there are so many similarities between Bolton’s process and mine I can, by linking to old blog posts, present a version of Bolton’s for private investors. This is a step-by-step account of how Bolton prepares for a meeting with company executives. Although the end product isn’t a meeting, underneath each step, I’ve written what I do, with links to more information.

1. Look at the company’s chart over three, five and ten years to see how it’s been performing.
   Ditto, see OPD for a chart that tells a story.
2. Examine the company’s valuation history (as long as possible, twenty years or at least one business cycle), particularly price earnings, price to book, price to sales, price to EBITDA.
   Ditto. I focus on the ten-year PE and check accounting profit against cash flow. I also look for net-nets, examples of extreme value, like Holders Technology.
3. Check director deals, significant shareholdings, and whether insiders have control.
   Ditto, see Robert Walters for commentary on directors deals and Dewhurst for significant shareholdings.
4. Look at a financial strength report. He uses a proprietary service called the H-Score.
   Ditto, I calculate the F_Score, and also check for large pension funds, a nasty not picked up by the F_Score. Other investors use the Z-Score.
5. Check the chart of earnings upgrades and downgrades to gauge expectations.
   OK, I don’t look at forecasts because I believe they are misleading, so this is the rule that proves I’m no exception.
6. Read company reports and announcements.
   Ditto. People don’t seem to realise you can download them free from most company websites. Obviously you need to check subsequent company announcements for more recent developments.
7. Set the agenda and meet the company.
   Almost ditto. This is where my experience as a journalist deviates from my experience as in investor. Journalists meet executives, but private investors rarely need to. If stages one to six (excluding five) leave me with unanswered questions, and I’m still interested in the company, I call the financial director. As I explained recently to a reader of this blog, I’ve never had a financial director refuse to talk to me. He made the call, and got his answers.

Bolton’s process isn’t infallible. Like many value investors, myself included, he’s sometimes tempted by bad companies because they’re so cheap, only to see them collapse. Generally though, he tries to buy good companies when they’re cheap, which makes a lot of sense.

I’m not saying his book will turn us into mini-Boltons, it takes a lot of effort even in the pared-down form I’ve presented, but I think a resourceful private investor can develop a process, and beat the averages.

In fact, as I write this, I’m remembering Dr Martin, an atomic weapons scientist and private investor who was doing technical analysis on aluminium prices before there were computers to do it with.

He inspired me too.