Twelve qualities that make a great portfolio manager
Lessons from 'Investing Against The Tide', by Anthony Bolton
I recently read a book written by a highly underrated investor. It’s one of the only finance books I’ve ever rated five stars.
It’s forward was written by Peter Lynch, and in it Lynch mentioned that being associated with this investor was one of the greatest compliments he’d ever received.
That’s pretty high praise. The investor is Anthony Bolton, and during his 28-year career he achieved compounded returns of 19%. This would turn a $1,000 investment into around $150,000.
Bolton followed a contrarian value approach. The value of his ideas remains mostly untapped. In the coming months I’ll be discussing him further, going into more detail on his strategy. He has genuinely original ideas that never fail to leave me fascinated and inspired.
In his book, Investing Against The Tide, he laid out a 12-point framework on the characteristics that a great manager should have. These ideas were originally only shared internally at Fidelity, where he worked. They had a profound impact on me, and I thought I’d share them with you.
These is real insight into what makes a successful fund manager, from one himself.
Bolton’s twelve traits that make a successful portfolio manager.
1) The Seeing Eye
Fund management is like chess and the best fund managers can see a couple of moves ahead of their competitors. You need to understand not just the immediate effects of a change but the secondary effects. For example, everyone can work out that a falling dollar against the pound is bad news for UK-based manufacturers exporting to the US. It’s perhaps less obvious that it’s good for UK clothes retailers (much of their product is imported from overseas and priced in dollars). You need to be a good lateral thinker — thinking tangentially about the world. You need to be prepared to question what others take for granted, to be able to spot attributes of companies that are out of favour today but may excite investors at some stage in the future. A good fund manager needs vision.
2) Temperament
Having the right temperament is extremely important and Bolton believes it to be more important than IQ. Having a reasonable level of intelligence is obviously essential but being super-intelligent without the right temperament is useless. A good fund manager needs to be calm and treat success and failure the same… Good fund managers should be humble and happy to make mistakes: mistakes are an integral part of the job. It’s an odds game and no one gets it right all the time. A good fund manager can handle mistakes and learn from them. You need to be open-minded and questioning, to have application and perseverance… It’s a never ending race that you can’t tire of… stamina is important… (It is both) draining but also very stimulating.
3) Organised
A good fund manager is well organised. Because information often comes to them in an unstructured manner, a manager needs to be disciplined in how they go about their job. Because the job has no beginning or end, and because it is never possible to say you know everything about a particular company or industry, there is a need for structure and many inexperienced fund managers flounder because they are unorganised… A large part of being an investor is about digesting information, which comes en masse and in various forms. One needs a structure to accommodate for it all; devise a framework for your day, prioritisation of time is essential. Stay in control of your day and time.
4) Hunger For Analysis
The best fund managers like to know how things work. They don’t want to know just conclusions, but they like to know the process used to get there. They want to know how results have been achieved… Bolton thinks all fund managers are intellectually curious… always questioning and always thinking. There is no substitute in investment for doing your own thinking and one must allow time for this.
5) A Detailed Generalist
One must be able to know a reasonable amount about the wide range of businesses and industries listed on the stock markets that one covers. Your knowledge needs to be both broad and also in reasonable depth in each area. You also need to be able to get up to speed quickly on a new subject so that, in a few hours of study, you become more knowledgeable than the average investor. You don’t need to be a specialist, just above average. The best fund managers always surprised Bolton with their wide knowledge, even and especially on topics outside of markets.
6) Desire To Win
This is one of the most competitive jobs and, unlike any many others, you see how how you are doing day-by-day.
“Jeremy Grantham puts it this way: ‘the investment management business creates no value, but it costs, in round numbers, 1 per cent a year to play the game. In total, we are the market, and given costs, we, collectively, must underperform. It is like a poker game in which the good player must inflict his costs and his profits on to a loser. To win by 2 per cent, you must find a volunteer to lose by 4 per cent, every year… Remember, it is the worst player who drops out of the poker game to index. The standard of the remaining players, therefore, rises… and rises… but, fortunately for us, beginners continue to join the game.”
You have to be intensely motivated to succeed.
7) Flexible Conviction
It’s critical to have conviction in your views, but it’s even better to have flexible conviction. This is what I call to have ‘strong beliefs, held loosely’.
There is often a narrow line between certainty and uncertainty and to be too certain can be a disadvantage - one needs a continually open mind. Some cynicism is good but too much cynicism is a bad thing because the ultra-cynic will find a flaw in everything and never act. (AB) Doesn’t think very cynical people make good investors. One must avoid overconfidence or pig-headedness at all costs. If you’re never prepared to change your mind you won’t do well. Random events always occur and one must update ones thesis for these events; be prepared to admit being wrong and move on.
8) Happy To Go Against The Crowd
You have to ‘be your own man’; be an independent thinker not overly influenced by, and often willing to challenge, conventional wisdom. You need to be happy to go against the crowd — to do something regardless of what others are doing. Many of his best investments were times he felt uncomfortable doing so, because by the time things were comfortable, it’s too late. Wisdom teaches you that it is better to fail conventionally than to succeed unconventionally. Reject this at all costs.
9) Know Yourself
Know yourself, your strengths and weaknesses. Find a style that suits your temperament and stick with it. There are many ways to get from A to B, stick with what works for you. It’s far too difficult to try and succeed at many different approaches.
10) Experience
Beware of what John Train calls ‘Icarus syndrome’ — ‘nothing is more dangerous than trusting a young enthusiast who has done brilliantly for a while — what I call Icarus syndrome. With a distressing fatality he plunges to earth in the next bear market… I want to see a manager who has been tested by hard times, a veteran campaigner.’
One is not a ‘seasoned’ investor until one has experienced a full economic and stock market cycle. Being able to put today’s events into a historical context is really useful. Additionally, a good manager never, ever stops learning.
11) Integrity
Integrity is essential. It’s to be honest with your investors, companies, and colleagues. It’s equally important that one is honest with oneself.
12) Common Sense
Common sense, despite being obvious, is still under-appreciated. When presented with a new or unusual opportunity, Bolton always reverts back to first principles — does this make sense? It’s amazing how much regret is saved in asking a few simple questions. When it seems too good to be true it probably is. Many investors look for shortcuts when investing, there is categorically no substitute for doing your own thinking.
A good fund manager often comes from a variety of backgrounds. There is not one qualification that is more appropriate for the job than others. A good manager needs both quantitative and qualitative attributes.
And most importantly, never forget how hard it is to differentiate between luck and skill in the short term. Skillful investors need time for the probabilities to work in their favour. Every good manager will have an underperforming year, Bolton had three in a row once.
That’s it for today, have a wonderful Christmas to those who celebrate!
Enjoy spending quality time with friends and family. Our time is precious, it’s easy to forget what’s important in life, I often get so caught up in the investment world that I forget other worlds exist. A healthy mind and body is where the real treasure lies. So it’s time to relax for a few days and appreciate the things that matter.
Thank you so much for reading and for sticking with me in this first year of writing. It’s been a hell of a journey and I appreciate your support. It’s changed the trajectory of my life. Thank you.
If you enjoy the content, I’d appreciate it if you considered becoming a paid subscriber. The lifetime discount I’m running has only a few spots left — you have my word on this — the price will never be this low again. On a discounted annual subscription, you pay less than $130 for an entire year of work. You can essentially hire me as your full-time investment research analyst for a wage of less than one cent per hour. Sounds like a deal to me.
Thank you for reading, have a wonderful Christmas break.
Sincerely,
The Intellectual Edge
#9 is what I'm thinking about this weekend -- many paths to riches but ones gotta find their own path. Btw would love to upgrade but I'm already an annual subscriber.
A brilliant write-up