Richard Oldfield’s book contains valuable lessons on how to become a better investor
Thursday 17 Oct 2019 Author: Ian Conway

Like Howard Marks, the author of The Most Important Thing, Richard Oldfield is a highly-experienced value investor who after a long career in institutional asset management now runs his own firm managing money on behalf of families, trusts, charities and pension funds.

Also like Marx, Oldfield sets out early on in his book Simple But Not Easy that successful investing isn’t straightforward but that with the right approach it is simpler than non-professionals think. He draws heavily on his own mistakes as well as his successes to get his message across.

MAKE FEWER MISTAKES

Strongly autobiographical, the first chapter is called ‘Howlers’ because howlers recur and they are instructive. By the author’s reckoning, the gap between a successful and an unsuccessful investor ‘is between one who gets it right 55% or 60% of the time and another who gets it right 40% to 45% of the time’.

Mistakes are usually judgement calls. For example this would be selling out of a stock which has fallen sharply when the right decision is to buy more; or worse, buying more when a share collapses and you haven’t understood that the investment case has fundamentally changed.

Being ‘too close to the market’ and letting other people’s views shape your own is another common mistake, which is why legendary investor Warren Buffett is quite happy to run his business from his home town of Omaha, Nebraska, well away from the frenzy of Wall Street. Distance brings dispassion.

The easiest mistake to avoid is to not take huge bets. Oldfield tells the story of how in the mid-1990s a currency hedge which was supposed to help his fund ended up swamping his performance.

He learnt two lessons: currency and stock decisions generally don’t mix well, as the markets have very different dynamics, and a portfolio should depend on a lot of little decisions not one big decision.

KNOW YOUR RISK LIMITS

Rather than presenting a DIY kit for budding investors, Oldfield draws on his twin experiences as a fund manager at Mercury Asset Management, where he was head of US and global portfolios, and client of the fund management industry as head of a family office.

While he explains the fundamentals of good stock picking, he also explains the attractions of different asset classes including bonds, property, gold and ‘alternatives’ such as hedge funds and private equity, with an emphasis on the risks involved with each type of investment.

There is a wealth of academic evidence to show that over the long term equities are the most likely of all asset classes to provide high returns. However they are the most volatile and the least predictable in the short term, and are likely to give you ‘plenty of hard knocks along the way’. Bonds offer fewer nasty knocks, but a lower long- term return.

As an equity investor, Oldfield favours a value approach because over long periods of time valuation matters, as it should. However, he dismisses the idea that ‘value’ stocks exist as a clearly-defined group. Values change, so after the tech bubble burst in the early 2000s there were even ‘value’ stocks in the technology sector which for many investors is the epitome of ‘growth’.

The reason why value works, as Joel Greenblatt explained in his Little Book That Beats The Market, is that it is hard for people to make confident decisions about this group. ‘The companies that show up on the screens can be scary and not doing so well, so people find them difficult to buy’. Also, most people just aren’t capable of sticking with them during a period of underperformance.

Seth Klarman, chief executive of Baupost Group, puts it another way: ‘If the entire country became securities analysts, memorised Benjamin Graham’s Intelligent Investor and regularly attended Warren Buffett’s annual shareholder meetings, most people would still find themselves irresistibly drawn to hot IPOs, momentum strategies and investment fads.

‘Even the best-trained investors would make the same mistakes that investors have been making forever, (because) they cannot help it’.

MANAGING MANAGERS

For investors who would rather let someone else run their money than take decisions themselves, Oldfield devotes a large part of the book to how to pick a manager.

The right manager should have strong convictions but be conscious of probabilities. In terms of conviction, a portfolio of as few as 15 stocks can still be ‘diversified’. After that each additional holding does little to reduce risk.

The right fund manager should not trade much as ‘on average the busiest managers perform less well than the least busy’. As the average turnover ratio of funds has risen due to short-termism, so average fund returns have fallen.

The right manager should also stick to their guns. A ‘growth’ investor can’t and shouldn’t change horses when ‘value’ outperforms and vice versa. It is down to the investor to choose which style of investment they believe in, and if that style stops working they have the option to switch managers.

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