Back in secondary school, our head of multi-asset investments David Coombs was a champion stock-picker. Although, he had help from his teacher’s direct line to the market – which taught him markets tend to be unfair.
Ceasing to worship at the altar of stock-pickers
My mother is moving to a smaller house and has had to have what is now known as a Stacey Solomon sort-out. Despite the fact I left home almost 40 years ago and never actually lived in the house she is vacating, there was a box of my stuff from my teen years.
This was duly sent to me. Among the detritus of the 18th birthday pewter tankards and a Now That’s What I Call Music Volume 2 vinyl album, there was a newspaper photograph of me holding a cup surrounded by other teens, my headmaster, teacher and local suits.
This gathering was to celebrate winning a regional investment competition as part of my O-level economics course. It was called Stockpiler, I think. Now I know what you’re thinking, this was an early sign of a prodigious stock-picking talent. Well, you’d be wrong.
Each month we would select a portfolio of five companies quoted on the London stock exchange. We had to use the back pages of the morning Financial Times as our source of ideas, buying at last night’s closing prices. The fax was sent in the afternoon. My teacher would call a friend at lunchtime and ask which five stocks had gone up the most that morning and we would select those. Genius – my old economics teacher (Dickie), who was in his last year before retirement, was basically a hedge fund manager, exploiting market anomalies.
Now this may seem slightly like, I don’t know, cheating. But it wasn’t outside the rules and, anyway, the prices could fall back over the next 30 days before the rebalance. So really he was teaching us that the stock market was not a wholly fair place to trade. A good life lesson which has served me well! Also, it’s worth remembering that back in the 1980s insider trading was seen by many as an edge, not a criminal activity (although not by parliament, which made it illegal in 1980). Back then, insider trading created an exciting image of smart alpha males (it seemed to be always men) getting one over the boring institutional investors. See Showtime’s Billions for reference.
Are you a gamer or are you a steward?
The term stock-picker is still used all the time and to be called a great stock-picker is seen as a fine compliment. Despite buying equities for our multi-asset portfolio funds I shy away from this term as I think it infantilises the industry and distracts from the purpose of compiling a portfolio of assets to produce consistent real returns.
To the outsider, ‘stock-picking’ makes it seem like a game or a competition in the City bubble, rather than the stewardship of investors’ savings in a portfolio of assets that need to be grown and protected. Is Warren Buffet a stock-picker running an investment trust or a CEO of a holding company driving high returns on capital?
Why is this important? I think the need for quality active investment/capital management is more important than ever as we enter a period of higher interest rates and more frequent economic cycles.
The point about active management in an equity portfolio is that it covers four equally important skills/rules:
- Identifying companies with sound management, who take the long view and offer future-proofed products or services that retain a competitive edge through quality and innovation
- Avoiding companies whose managers take the opposite strategy of those found under rule 1
- Actively trading the shares of those companies selected under rule 1 during periods of price volatility to add additional returns
- Selling companies whose management becomes complacent or whose products or services are becoming less attractive or relevant
Stock-picking, if we must use the term, is only linked to one of these and is in some ways the easiest. Anyone can buy something; it’s much harder to sell (admit you are wrong) or take profits when markets are irrational.
The other three skills may not garner headlines, but I believe they are the key to achieving above-average returns. Understanding that markets – despite increased regulation – are still open to manipulation, albeit less overtly (and with abuses more stringently punished) than in the ’80s maybe, is important. And that realism, I believe, is why trading around the volatility it creates is a valuable skill. Knowing when the price of an asset simply makes no sense based on its intrinsic value, whether overly high or ridiculously low, and taking advantage. A skill that, I would argue, is at least as important as picking a good stock. It’s certainly an area of focus for us.
As you will see from the photograph, despite being team captain I was the only one without a tie and was wearing old trainers. My mother was appalled, I was clearly already channelling the hedgy vibe.