In an exclusive for The Telegraph, Fidelity’s star fund manager Anthony Bolton wrote about the most important lessons he learnt in his investing career. He admits that he learnt a lot but they arguably boil down to three simple lessons. Below is an excerpt from the original article.
Lesson I: Know why you own a stock
Don’t invest in tips, they very rarely work out. You should know what you own and why you own it – your “investment thesis”. If something changes to undermine this, it is normally better to move on than to hang in and hope for the best.
Lesson II: Know what’s discounted in the price
One thing about investment that surprises many is the extent to which the stock market discounts the future. It’s not so much a matter of whether the future looks good or poor but whether that outlook is already factored into prices.
When prospects are good and there are few economic clouds on the horizon, it can be a bad time to invest because often at such times the stock market is already high. The reverse is also true, of course; when everything looks terrible, it can be a great time to buy.
As well as being a weighing machine (working out the intrinsic, or real, value of companies) the stock market is a voting machine, which can push stocks or markets well above or below their intrinsic value as investors follow the herd.
Most people tend to be excessively influenced by what the crowd is doing. One of the most dramatic examples of this was during the internet bubble in 1999-2000, when the stocks of “old economy” companies were sold off to attractive valuations while the opposite happened to the internet companies.
This extra dimension of the stock market I call sentiment and it’s important to know whether this is normal or overextended in either direction. Bull markets climb a wall of worry. At the bottom, nearly everyone is cautious and, as the market rises, these bears gradually turn into bulls until, at the top, nearly everyone is optimistic.
If at any one moment there are still plenty of cautious investors around then the bull market probably has some way to go. The stock market is not about what the future holds; it’s a reflection of what people think the future holds. Most of the time this is already discounted in prices.
Lesson III: Know yourself
To be a good investor you need to know yourself, including your strengths and weaknesses. For example, if you are very emotional you may not make a good investor as you will be too influenced by the prevailing investment climate. You have to stick it out in rough times, avoiding the temptation to be shaken out of good investments because the crowd is cautious and the outlook is poor.
Also, when the future looks very promising, you should avoid being sucked into the market when prices are very high. You need to stand apart from the crowd and, at times, do the opposite of what they are doing. You must be honest with yourself, prepared to admit you were wrong. It is better to admit a mistake, take your losses and move on.
Often you need to cut losses and run profits but most of us are emotionally programmed to do the opposite. Sometimes, though, you must be able to stay put in investments where you are showing losses.
Just as important, when investments go well you must not get too full of yourself and believe everything you touch will turn to gold. It won’t, and often the time when one feels the most confident is when investment is the most dangerous.
The original article which appeared in The Telegraph can be accessed here - Anthony Bolton: What I learnt in three decades of investing
