Schroders’ Nick Kirrage spells out the key lessons he has learnt as a value investor.
After ten years co-managing a £777 million fund, Nick Kirrage has learnt many lessons but the thrust of his investing approach remains unchanged.
“There are plenty of technical explanations of this concept, but the spirit of it is simple – it is merely the exploitation of human emotion,” says Kirrage. “The value investor waits patiently, observing as irrational investors sell amid turmoil and buy at times of euphoria.”
The dotcom bubble in 2000 and the banks dip in 2008 are just two examples of fads or events that pushed stocks too far in a single direction, providing opportunities for the value investor.
Kirrage believes he has learnt 16 important rules of investing – many of which long-term investors would do well to heed.
Rule 1: Don't continue to hold stocks that you wouldn't want as a first-time buyer
Constantly review your reasons for first investing and ask yourself if they still stand. Stocks don't become better investments just because you hold them.
Rule 2: Don't sell just because the price falls
The best solution to underperformance is often doing nothing. People frequently sell out of underperforming stocks, when the best thing to do would be to wait – or buy more!
Rule 3: Don't be ashamed to hold cash
Investors believe money left on the sidelines might miss out on dividend income and price gains. But cash is king when opportunities arrive – it enables value investors to buy at times of fear.
Rule 4: Don't buy the dream
Don't buy businesses that are pinning all their hopes on the next model, invention or drug.
Rule 5: Don't buy single product companies
The general advice to investors about putting all eggs in one basket applies equally when evaluating the merits of single stocks.
Rule 6: Don't buy stocks you don't want to own in 12 months
It is possible to be fooled into buying a cheap stock that has genuine structural impediments to generating returns over the long term. Such companies are on a downward elevator of value destruction. The test is to not buy stocks you don't want to own in 12 months.
Rule 7: Don't buy stocks you wouldn't want to buy more of if they fell 20% for no reason
This is a good test for the true value investor. If your analysis is thorough – and constantly retested – have faith in your decisions, and the stomach to keep buying.
Rule 8: Only back companies with high debts if they are already priced for financial distress
This high-risk strategy can yield results for the brave value investor. But it is a difficult path to tread.
Rule 9: Don't chase stocks
For value investors it is better to not get any of a stock than get too much at the wrong price.
Rule 10: Think long-term and forget about the index
We have a natural inclination to focus on other investors and the performance of stockmarket indices in the short term. It can cloud your thinking.
Rule 11: Don't let past performance affect future investment decisions
The desire to take more risk when you are ahead of the benchmark index and less when you are behind is powerful, but ultimately self-defeating. Ask yourself: would I be doing this same trade if I was 10% behind/ahead of the index? If the answer is no, why do it?
Rule 12: You can't predict volatility
Volatility can come out of nowhere. Consider the relative stability of bank shares in the years before the financial crisis. It can also disappear just as quickly, and often unexpectedly. For a patient, long-term investor, volatility is often an opportunity, not a threat.
Rule 13: Don't buy and sell too often
Long term investors don't need to trade constantly. With high turnover, the only certainty is high fees.
Rule 14: Risk vs reward
The danger of losing money should dictate how much you buy, not your view of how much money you might make.
Rule 15: Focus on your weaknesses
Good investing is about identifying what you are bad at, not just what you are good at. Then you can limit the impact of your weaknesses.
Rule 16: Keep it simple
Beware any investment strategy you can't explain to a 12-year-old.
Schroders is a fund manager for St. James’s Place. The opinions expressed are those of Nick Kirrage of Schroders and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by St. James’s Place Wealth Management.
The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Please be aware that past performance is not indicative of future performance..