TIP720: Investing Against The Tide
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You're listening to TIP. Anthony Bolton is one of the most fascinating investors to emerge from the UK. Over a 28-year period, he compounded at an annual rate of 19.5%, significantly outperforming the market's 13.5% return before stepping away from fund management. But he couldn't stay retired for long. He ended up staging a comeback, this time focused on China. However, things didn't go as planned, and over the course of four years, his performance was actually negative 5%.

In this episode, we'll focus on what made Bolton such an exceptional investor during his prime. We'll examine aspects such as the core traits he observed in himself and other top fund managers. Things including vision, temperament, and the ability to anticipate change before it became apparent to others. Similar to Buffett and Munger, Bolton believed that staying even-keeled under pressure was just far more important than having a sky-high IQ.

We'll also explore a topic that deeply resonates with me, which is being comfortable with incomplete information. Since Bolton covered so many sectors and geographies, he had to accept that he'd never know as much as the specialist. And rather than let that paralyze him, he figured out how to use that reality to his advantage. We'll dig into how he assessed sentiment not just by ignoring it, but by actively studying it. While he didn't want to be swept up in market emotions, he had tools to help him gauge where others' heads were at.

One of them, technical charts, not just to predict the future, but to understand where the herd might already be positioned. I'm not a chartist myself, but Bolton's approach has me rethinking how charts can help understand narrative shifts. So whether you're a classic value investor or someone drawn to growth stocks that are trading at a discount to intrinsic value, there's something in Bolton's playbook for you to learn. Now let's get into Anthony Bolton's investing against the tide and see what we can learn from one of the UK's most successful contrarians.

Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve.

Welcome to the Investors Podcast. I'm your host, Kyle Grieve. And today I'll be discussing the book, Investing Against the Tide by Anthony Bolton. I really like Anthony Bolton because he employs a few kind of interesting little tweaks to gain an edge that I think really make him distinctive from other value investors. And don't worry, we're going to get to that later in this episode, but a couple of things that we're going to cover will be things such as the qualities that I think made Anthony a true contrarian, some of the edges that he took advantage of,

the importance of reading people and how he used it to improve his own decision-making, how he built a contrarian portfolio and his stance on position sizing and scaling positions. We'll look at how he looked at other investors already invested in a business that he was maybe interested in and how that helped guide him. We'll also look at how he used technical analysis, which is an area of investing that's very often overlooked by fundamentally focused value investors.

And then we're going to look at just how Anthony read the markets. He wasn't a market timer, but he has some very interesting insights on that front as well. So throughout the episode, we're going to weave Anthony's thoughts on decision-making and biases and learn from some of the mistakes that he made during his storied career.

Let's begin here by peering into the mind of a very successful investor to see what characteristics he felt made up just a generally good portfolio manager. So the first one here is what he calls the seeing eye. So Anthony believes that the best fund managers need to be able to see things before their competitors do. This means your entry price will be lower and therefore you're going to take less risk and have more upside. They also need vision and the ability to see potential events that could happen in the future, which could positively impact a business sometime down the road.

Second one here, temperament is more important than intelligence. IQ is great, but there isn't really a big difference once you have a reasonable amount of intelligence. Being super intelligent is useless if you don't have the right temperament, especially in investing. As part of good temperament, they should be even-keeled, meaning their wins and losses shouldn't have a disproportionately large effect on their decision-making. Obviously, humility is going to be a crucial attribute that Anthony believed is lacking in many portfolio managers.

A good manager should be open-minded and inquisitive with a lot of perseverance. The third one, all good fund managers must be well-organized. Anthony mentions that portfolio managers will receive information in kind of unstructured ways. So it's crucial to be open-minded. You're never going to know everything. So you must filter the data that comes to you to identify the most essential things while minimizing the noise as much as possible. Now, this is a fascinating subject because we really only have a limited amount of time in a given day.

And it's not hard to deep dive into a company, its competitors, or maybe even its industry and spend 40 plus hours on it, maybe 80 hours, maybe 100 hours. But you have to think about the opportunity cost of doing that. If you spend 40 hours on a business, does that give you double the edge over spending 20 hours?

I think the answer to this question is impossible to actually answer, but that's the type of question we must ask ourselves pretty regularly. This is why being content with incomplete knowledge is so important. Otherwise, you run the risk of concentrating too much time on one idea while letting yourself slide on other ideas. The fourth one is the hunger for analysis.

This is crucial for longevity and optimal performance. If you aren't just a generally curious person who enjoys actively learning about new things, it's going to be really hard to stay interested in investing over multiple decades. Additionally, your performance probably just won't be very good if you aren't a curious person. Curiosity is what makes you challenge your existing beliefs. And if you aren't willing to do that, you're going to hold on to businesses with changing narratives that could easily harm you if you aren't on top of things. The fifth year is a detailed generalist.

So Anthony really liked being intellectually curious. He thought that being a generalist was very important. He mentions having knowledge that is both broad and deep in certain areas. The other advantage he attributes to being a generalist is the ability to learn just new subjects. He notes that this ability is essential for becoming more knowledgeable about a business or subject than the average investor typically is. One important part about being a generalist is that you'll unlikely know as much about an industry as a specific individual.

industry expert. For instance, when I owned Micron, a guy on Seeking Alpha always impressed me with his semiconductor industry analysis. At the time, I used to think that I would need to get my analysis base as good as his was if I wanted to succeed in investing in semiconductors. And while that may be true, since I don't invest solely in the semiconductor industry, my time needs to be spread across 10 or so different investments in various sectors and different countries and different industries.

Therefore, you have to be willing to acknowledge that there's going to be a gap there in knowledge compared to, say, an industry expert. And I think that's fine. As long as you know more than the average investor, that's the point that Anthony wants to point out here. So the sixth one here is flexible conviction. Another factor that can complicate investing is a balance of conviction.

Of course, we want to put capital behind our highest conviction ideas, but we must strike a balance between certainty and uncertainty. If we enter an investment with high degrees of conviction, that's perfectly fine. Most investment legends we hold in high esteem put just large sums of money behind their best ideas, just like Charlie Munger and Warren Buffett.

However, we also must be wary of additional uncertainty that can creep into our most deeply held convictions over time. And ignoring that uncertainty entirely is most definitely a mistake. One exercise that I do every month is what I call my investment totem pole.

It's kind of a ranking system where the best businesses I own go at the top of the totem pole. The companies I have least conviction in, or maybe businesses that are maybe accumulating some sorts of uncertainty tend to be at the bottom of the totem pole. Now, this exercise helps me with a few things. First, it reminds me to continuously challenge my cherished beliefs in the businesses that are in my portfolio. Second, it helps me determine what businesses to sell if I need additional capital. And third, I want to avoid cutting my flowers to water my weeds. Instead, I like to cut my weeds to water my flowers.

So back to Anthony's points here, the seventh one here is knowing yourself. I agree with Anthony totally here that knowing yourself is so powerful when it comes to investing. You need to just be aware of your strengths and your weaknesses. You need to know how to accentuate your strengths while trying to hide your weaknesses as best as you possibly can. And if you have the means like Anthony did, you can hire people whose strengths are your weaknesses.

This allows you to compensate for your weaknesses by allowing others to lift you up. Ray Dalio, I think, is probably the master of this. If you want to learn more, I highly recommend reading his book, Principles. Another key point that Anthony makes here is the importance of developing a strategy that's tailored specifically to your temperament. Look, we all have our preferences, and it's best to stick with an investing strategy that makes investing enjoyable.

Listeners of TIP are probably pretty aware that I prefer a long-term buy and hold strategy. However, I've also added inflection point businesses to my strategy, which allows me to be a little more proactive, which I'm personally okay with, but other investors might not be.

But there's this balancing act I have to play because my inflecting point strategy has actually been incredibly successful. It's actually outperformed my quality buy and hold strategy. However, because I'm aware of my tendency to be somewhat lazy with my investments, I choose to maintain both these strategies. And so far it's worked really, really well. I also think some of my larger holdings in the buy and hold bucket have underperformed and I think are due for some positive regression, meaning that the performance gap will probably close at some point. So the eighth one here is experience.

Bolton discussed a concept that he calls the Icarus Syndrome, which refers to the phenomenon of flying just too high for too long only to crash to the ground. He applies this to investing specifically in terms of certain managers with very good short-term track records who unfortunately eventually fail.

His point here is that you need time investing through full economic cycles in order to determine if a strategy is a result of luck or skill. The ninth point here is just common sense. When Bolton was presented with a new investing idea, he went to first principles and would ask himself just a super simple question. Does this make sense?

Now, I love this because I think it helps you make sense of a business's business model. The problem with investing is that many of the founders or owners of businesses are great salesmen, so they can spin a terrific story. But when you look at the business's financials, you might realize that the story and reality just aren't aligned.

If you get caught up in a story, it can be very easy to justify poor financials as just a passing event that will eventually correct itself. However, there is significant downside to taking that stance if you are unfortunately wrong. Another point that Anthony makes is that when you're evaluating a business, it's essential to understand how the business operates and how it generates revenue. If you can't understand it, that's just a major red flag and taking a pass is most definitely the right decision.

Another area of importance that Anthony stresses here is concerning what to do when you aren't doing well. Now, as I write this, the S&P 500 has declined by approximately 9% over the past two days. Even though I have zero exposure to that index, my portfolio, like probably 99.9% of other people's, probably isn't doing very, very well. A few points that stood out to me that he suggested when you aren't doing well are as follows. So don't lose conviction just because the stock price goes down.

Now, you definitely have to focus on why the price is going down, but you should be completely flexible to the fact that the market can be completely wrong.

Keep an open mind. Consider conflicting views and recognize that when a conflicting view is reality and your view is incorrect, you should have an idea of what that conflicting view is going to look like. Then you need to verify if that conflicting view is reality and take action based on whether the view is true or if the view from the market is false, in which case you're probably still right and you can maintain your conviction.

So another thing that he liked to do here was to write down his worst investments over the last year or so. So he would then come up with an honest explanation of what went wrong with each of these investments. And then from this experience, he would take lessons from it and try and find some of the common denominators about why he messed up in the past. Then he'd evaluate what he currently holds to see if maybe he's exposing himself to these exact same mistakes. Another thing he liked to do when things weren't going so well was to make sure that he was spending time on new ideas as well. Because obviously,

obviously during times where the market is very, very weak, of course, your ideas are probably not going to be doing very, very well, but that doesn't mean that there's other ideas out there that also aren't doing very, very well that might provide a lot of upside. So his point here was don't just focus on trying to understand your own portfolio and what could be going wrong with everything. Don't spend 100% of your time there, but allocate some time to that, sure, but I'll also allocate time to finding new ideas. The last one here was just check

check conviction levels and measure them specifically against bet sizes. A simple question that he would ask was, are your highest conviction ideas the largest positions? Now, this last point is excellent. And I think I want to go over in a little more detail here. So I just went through this exercise on my own portfolio to see where I have the most conviction versus having the lowest conviction. And the places where I tend to have lower conviction are businesses that aren't necessarily the smallest concentrations in my portfolio.

However, given that the market is primarily efficient, I think my lowest conviction ideas are those that have experienced significant challenges in terms of their fundamentals and are now being penalized by the market for this weakness.

Where this exercise comes in really handy is realizing that a low conviction idea no longer belongs in your portfolio and can be reallocated to either higher conviction ideas or new ideas. Now let's transition here to a couple of Bolton's edges in investing. So he wrote, popularity is risk. Unpopularity is opportunity. Now I think this thinking process is pretty similar with most really, really good and successful contrarian investors.

I think this also perfectly describes the type of investments that many value investors look for. The thinking is simply that if a stock is popular, it's probably been voted up using Benjamin Graham's metaphor. And if a stock is voted up, that generally means that the share price is appreciated and potential future returns are going to be lower. Now, this is how many good investors think, especially when it comes to lower quality businesses that won't compound intrinsic value at very high rates. Now, let me expand on that.

When Graham and Buffett were buying cigar butts, they would have stayed away from popular stocks like it was the next stage of the coronavirus. After all, they were looking for businesses that were trading at very, very steep discounts to its liquidation value. Once this business gained in popularity, that gap between price and value would narrow. Since the business was of low quality, you were probably best off getting out once the price reached intrinsic value.

Now, I've learned a lot here that some businesses are worth paying for. And I think investors will look at a high quality business and then see that the multiple is at a premium to the market and then just completely shun it. Now, the problem with this strategy is that there are truly exceptional businesses out there where even when they become popular, it may not be popular enough. A company that comes to mind that fits this bill is like Terravest. So I

I started buying TerraVest around $67 in early 2024. As of April 9th, 2025, the price is $134. Now, Anthony Volton might be a gas that I've been averaging up on my position this whole time, despite TerraVest's obvious popularity. However, I believe the market underweighs the resilience of a great business fairly regularly. And this is why a business like Amazon could be acquired despite incurring gap losses and then go on to produce 26% compounded annual returns since the year 2000. Robert Leonard :

Now, again, this advice of selling businesses when price reaches intrinsic value works really, really well. I think specifically if you're looking for single digit PE stocks. And even if you like good businesses that are chronically trading at above market multiples, you should try and avoid buying shares at bubble-like prices. However, I still believe that you can generate good returns on optically popular businesses because sometimes these businesses just aren't popular enough.

Now let's return to Anthony Bolton and examine some of the edges that he utilized that I think deferred significantly from some of the other investors that I've researched. The first differentiator is the stress that he put on sentiment analysis. So I research a lot of investors and investing strategies, and most of the information that I've learned is that sentiment shouldn't guide investing behavior. However, Bolton has some interesting quotes on this topic. For instance, he wrote, the price itself influences behavior. Falling prices create uncertainty and concern. Rising prices create confidence and

and conviction. All stockbrokers know it's generally easier to sell a share that's in an uptrend and popular than one that's in a downtrend and unpopular. Because of human nature, a good investor must keep on trying to make himself or herself resist this tendency. Now, I don't think he's saying that price should influence an investor's behavior, but it just does.

And if you want an edge, if you can find areas of the market where price is driving behavior and that behavior is incorrect, then of course you're going to find some incredible opportunities. This is why many value investors buy unloved stocks. They have a variant perception from the market. And if you're correct on that perception and the market is wrong, you're simply going to be rewarded. The other important part of this quote concerns fighting your natural tendencies. When price rises, it creates confidence and conviction. And that's the truth right there. The problem arises

when investors become momentum investors, allowing a stock's price to influence their own confidence and conviction. I think this is a really, really good area to try and dissociate the price and value of a business. Let's take a quick break and hear from today's sponsors. If you're a high net worth individual, a family office, or an institutional investor managing significant Bitcoin holdings, there's one question you need to be asking. Is your Bitcoin insured against loss?

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All right, back to the show. If a business is going up in price, ask yourself if the intrinsic value of the business has grown at the same rate as that price increase. If you ask yourself that question, you're probably going to find some really interesting opportunities, even if a business has increased in price. Let's go over an example here. Let's say you find a company that is currently undervalued. Perhaps let's say it's a serial acquirer, a business model that I very, very much like. Now let's say you don't own it, but it's at the top of your watch list.

A year passes by and the price is now increased by 25%. You ask yourself the questions above and you end up finding some interesting things. So the first thing you find out is that the business has made three acquisitions over the past year. Now, when looking at these acquisitions, you notice that all three of these acquisitions have now added 50% to the parent company's intrinsic value. In this case, we'll pretend the parent company will experience, let's say a 50% increase in its per share earnings as a result of these acquisitions.

Now, if we forecasted year out, the business has increased its intrinsic value by 50%, yet the share price has only risen by 25%. This means that the business has become more expensive, of course, on an absolute basis, but it is still actually trading at a larger discount to its intrinsic value. Now, you're not going to find many of these opportunities in low quality businesses, but if you search for higher quality, you might find some very good opportunities using this specific framework.

Now, where most investors tend to go wrong is building this artificial confidence and conviction. If you like a company and its share price increases, you can easily build this artificial conviction because you are using a company's stock price as confirmation bias that your thesis is correct. And the problem is if you buy shares in a business that has fundamentally deteriorated, but is, let's say, being propped up by a euphoric market, you are increasing the risk of multiple compression once the market becomes less euphoric.

When looking at sentiment, Anthony used a few other investing analytical steps to help him understand businesses a little bit better.

So he would ask himself, what is the business's ownership structure and who else owns shares in the business? Now, I find this point just fascinating because while I enjoy examining the performance of other shareholders in the businesses that I own, it's not nearly as important to me as a company's fundamentals. With Anthony, though, he was managing billions of dollars. So if another investor that he highly respected had an idea, he might assume that he was late on it and therefore use that as a signal that he should take a pass on an opportunity. Now,

Now, if you subscribe to his point that popularity poses a risk, you will actively seek investments with less competition for the shares.

If everyone and their dog owns shares in the business, then there's a better chance that the price meets or exceeds its intrinsic value, and taking a pass isn't necessarily a bad choice. Now let's take a look at some of the favorite types of shares that Bolton was looking for in his book. He wrote, "The heart of my approach has been buying recovery or turnaround stocks on attractive valuations." So Anthony was looking for some pretty rundown businesses. He was looking for businesses that had a history of short-term poor performance.

He mentions Peter Lynch's framework for finding businesses with characteristics that he was looking for. So he specifically mentions, does it sound dull or even better, ridiculous? Does it do something dull? Does it do something disagreeable? Is it a spinoff? Is it disregarded and not owned by institutions? Or is it followed by analysts? Do rumors abound involving something like waste or mafia ownership? Is there something depressing about it? Is it in a no growth industry?

A few additions that he makes include where the business has actually lost analyst coverage when a company is emerging from bankruptcy or when a business has an unusual capital structure.

He mentions one business that made a very, very good investment for him, which was Cairn Energy. This was a cheap oil exploration company with asymmetric upside. The business had existing wells and a strong balance sheet, which enabled it to reinvest its cash flows continuously. These reinvestments paid off significantly in a few company maker wells, yielding some outstanding returns. Now concerning growth and value, Bolton cites a great quote by Jeremy Grantham, who Clay interviewed on TIP 650.

Both companies seem impressive as well as exciting. They seem so reasonable to own that they carry very little career risk. Accordingly, they have underperformed for the last 50 years by about 1.5%. Value stocks, in contrast, belong to boring, struggling, or sub-average firms. Their continued poor performance seems with hindsight to have been predictable, and therefore, when it happens, it carries serious career risk.

To compensate for this career risk and lower fundamental quality, value stocks have outperformed by 1.5% a year. Now this is very interesting research and I've seen somewhat similar results from other studies as well, which have concluded that value stocks outperform growth stocks over the long run. Now given that data, I think many investors will stick to value and Bolton certainly did an exceptional job of sticking with that strategy over almost three decades.

But when it comes down to the argument of growth with value, I just tend to gravitate towards Charlie Munger's take, which is that all intelligent investing is value investing, acquiring more than you were paying for. You must value the business in order to value the stock. Now, this means for me that whether the stock is trading for a P of one, a P of 30 or P of 50, it just doesn't really matter to me as long as I'm paying less than the value that I'm getting in return.

Now on the point of risk, Anthony has some great points. He admitted that out of the largest mistakes that he ever made, nearly all of them have been investments into businesses with poor balance sheets. His point regarding the strength of a good balance sheet was that it enabled a company to better withstand problems than one with a poor balance sheet. Bolton mentions four of his worst performing stocks, which were Isoft, SMG, Aeronaceous, and Johnson Services Group.

And in all four of these cases, these businesses were very, very exposed if the business's fundamentals deteriorated, which unfortunately they did. And he points out here that when things go wrong, the owner of a company's debt will often force the company to take actions that aren't in the best interest of the company or in the best interest of shareholders. Things like selling off assets or disposing of a business division is an example. And if the market knows the company is going to be a for-seller in these circumstances,

then the bids on these assets will be lower than initially thought, meaning that the business value will actually come down even faster.

Now, some advice that Anthony points out for reading balance sheets are as follows here. So he looked at both bank debt and any outstanding bonds. He wanted to make sure to be aware of any future payment obligations and to make sure that, of course, the business can service any of that debt. He would also examine the pension fund liabilities. He would look at any preferred shares. He tried to understand the difference between current and long-term debt and have a very clear understanding of what financing costs were going to be into the future.

And then he'd also examine the covenants on the debt. Is it recourse or non-recourse debt? Understanding these nuances is imperative to help you know what you'd be left with as an equity owner. In the best case scenario, you can hopefully recover your money. However, it's pretty challenging to find these types of setups. Another interesting way to analyze risk is to look at a company's bonds very, very closely. Look at where those bonds are trading. Let's suppose bond traders are heavily discounting a company's bonds.

In that case, it's very good information because if debt investors aren't willing to pay par, then there's a very good chance that the company's equity will be worth significantly less than it's currently valued at. Robert Leonard :

I recall during my conversation with Matthew Peterson on Millennial Investing 308, we actually discussed one of Matt's mistakes at Horsehead. And he told me that he should have paid a lot closer attention to where their bonds were trading. He noted that the bonds were trading at a massive discount. And he thinks that if he'd seen that, it might have dissuaded him from making an investment in the first place. Now, let's take a look about how we can evaluate bonds and do it in a more specific manner. So

I got five keys here to look at when you're looking at bonds. So the first one here is to just simply look at credit ratings. Companies like Moody's, S&P, and Fitch are all very, very popular as investments, but they actually have a function, which is to rate credit. So when you're looking at them, you want to look at the grade that a company is getting. Is it AAA? In that case, they're probably going to be pretty safe.

But if you're looking at something that's maybe triple B or less, you're looking at maybe a high yield or junk bonds. And these are obviously going to have lower ratings and these lower ratings tend to default increase in default risk. The second one is just to compare bond prices to par. So I did this, I went to Interactive Brokers. I can then look at certain companies which offer bonds and I can see what they're trading at. Now, usually these bonds are going to trade at par value, which is usually $100 or $1,000. If it's trading at or above par,

the issuer generally is going to see lower risk in the business. But if there's a discount, that means that there's going to be concerns about credit risk. The third one here is yield to maturity. A yield to maturity that's higher than average may indicate increased risk. The fourth one is to look at bond spreads to treasury yields. So wider spreads equal a higher risk of default or illiquidity. The last one here is just free cash flow generation. A business that generates substantial cash can more easily service its debt compared to a business with negative cash flow.

You can use pretty simple metrics like the coverage ratio, which is just earnings before interest and taxes divided by the interest expense as a simple measure. And generally you want to have a number that exceeds two times. So let's use a real example here. Let's look at Staples. So I looked at the 2029 bond and I noticed that it had a 10.75% coupon and is actually trading at around 85 cents on the dollar. So it's not trading at par. Now, the reason for this is the potential for tariffs to negatively impact that business. And you can have your own view on whether that's justified or not.

but I actually had an interesting idea here. And if you're looking at bonds, especially bonds that are trading below par, if you think that these bond investors are wrong, you're probably going to be able to find some businesses whose equity is also trading for very, very cheap. And if you believe that bondholders are incorrect and that the quality of the debt should be higher, you may be looking at a business that is currently undervalued and can re-rate shortly. So an example like Staples, let's say if you have some sort of

view that tariffs won't affect them in any single way. I don't know Staples enough to make that assumption at all, but let's just say you could make that assumption. Well, chances are the stock price of Staples is down a lot and buying it now might make for a really good investment.

Now, let's look at some of the specific business aspects that Anthony was looking for. I think a lot of them are kind of what you would expect from most value investors. Anthony wanted businesses that could control their own destiny. And this is a point that I've been thinking a lot about lately. The longer that you own certain businesses, the more you understand just how reliant a business can be on extrinsic factors that are just completely out of their control. While this can be a really good tailwind for certain companies, it can also be debilitating for

a decent business that is maybe struggling through some tough times or whose business model is heavily dependent on macroeconomic factors or turns out to be more cyclical than maybe you initially thought.

So back to some of the attributes that he was looking at. So he wanted the following characteristics. He wanted a business with minimal sensitivity to macroeconomic factors. He wanted businesses that were simple to understand. If he felt that there was too much complexity involved in that business, he saw that as a red flag and would just pass on the opportunity. He also wanted a business that generated cash rather than consumed it. And he generally preferred cash generation to growth. And then he just wanted high insider ownership, which is often shown on

on a concentrated shareholder list. Now, I'd like to touch on this point about the concentrated shareholder list a little bit. So Bolton believed that investors often overlook this and to their detriment. Bolton felt that understanding whether the list was diversified or concentrated was just crucial because it signaled whether a few or many people held control of the business. Additionally, if you see names on that shareholder list that you highly respect and admire, he'd weigh that heavier than if it was a list of people that he didn't know.

Now, we've covered some of the ways that Anthony mitigated risk, primarily by examining a business's debt. So naturally, when evaluating a company, he would scrutinize the balance sheet. He wanted to know the risk profile of the business compared to other businesses in the industry. And the reason is that some business models are inherently more risky than others. Being aware of this is essential to ensuring that you protect yourself from downside risk. One example that illustrates the importance of this fact is Northern Rock.

Anthony didn't specify whether he had made an investment in this business, but he mentioned it. So I wanted to bring it up here. So Northern Rock had many of the attributes that he looked for, and it also had good management. Northern Rock was a bank that was very, very focused on growth. So between 1998 and 2007, they increased significantly their assets from 17 billion pounds to 113 billion pounds. The problem with this growth was that it was fueled by wholesale funded markets versus its own depositor base.

When the great financial crisis occurred, this source of liquidity dried up, which severely hampered Northern Rock's business model.

As a result, Northern Rock requested emergency protection from the Bank of England. And once this news was reported to the public, a bank run ensued as depositors rushed to withdraw their cash, which exacerbated the situation for Northern Rock. The bank was eventually nationalized. Now, this is a really good lesson in growth. And I think this applies to me because I also enjoy investing in growth businesses. But investors must understand how a company's ambitions for growth is going to be fueled. While, of course, it would be nice if a business could rely solely on self-funding, that's

That's just rarely the case. Often, even a really high quality company can deploy more capital than they might have available to them on their balance sheet. And as a result, they'll utilize debt to continue growing at faster rates. I think the key lesson is to understand how sensitive a business though is to changes in debt or even to its cost of capital. In the case of a bank like Northern Rock, if liquidity were to dry up, it just breaks the business model.

However, there are businesses where if liquidity were to dry up, the business model would continue to operate, but growth might be hampered to some degree. These are the types of companies that I kind of like. If there's a liquidity crisis, it means that I'm not going to lose my investment because the business can continue functioning, continue making cash flows. But in these liquidity crisis, a business that needs debt to optimize growth can actually still capture market share from competitors because some of these competitors who

who do rely on debt as a lifeline, have the option to either go out of business or to sell to someone. And that's where a lot of businesses can do really, really well during these liquidity crisis situations. One such example here is Bank OZK. So Bank OZK did incredible during the great financial crisis. So they were able to purchase multiple failing banks at huge discounts. And this allowed them to expand their deposit base

And this allowed them to grow specifically because this business of OZK was protected from this need for liquidity. So it could operate even though other businesses were having troubles gaining access to liquidity. Now, I like this example because it requires you to create a scenario where a business has little to no access to debt. If that scenario were to happen, ask yourself whether your business would continue operations as normal or if it would be forced to just shut down.

And if you find that the business would be forced to shut down, it's probably a good signal that you don't want to own it. Now, once Anthony finds a business that he likes, he wants to further his understanding by meeting management. This is an area where investors that are at very high level tend to diverge in their thought processes. So some investors believe that managers are such skilled salesmen that they'll be swayed by their persuasive arguments when talking with them and will make poorer decisions.

Others like Bolton believe it was a necessary part of the analytical process. So what was Anthony looking for specifically when he talked with management? He wanted to see if they had competence and he wanted to see how well aligned they were with shareholders. He also would have multiple meetings with management and this would help him allay some of the fears of having an incorrect first impression. He wanted management teams that both under-promised and over-delivered. And then, given his position as a large institution, he

He obviously had access that is unfortunately not replicable by all investors. Now, regarding the people part of the management equation, Anthony placed a lot of importance on track records. So he wrote, "Another thing I've learned is that people don't change. The tenure of the average fund manager is only a few years. And because of this, entrepreneurs who disappoint a decade or two previously sometimes return. Many fund managers are unaware of or ignore their previous record.

I generally avoid these situations, or if I do invest, I will have a foot closer to the door than I normally would.

Someone who has let down or disappointed investors once is likely to do it again. Anthony lists several memorable company meetings. Now, I'm not going to go over all of them, but there were some very good observations he made during these meetings that I think other investors could overlook. So while meeting with the CEO of Nokia in the late 80s, Bolton learned that many of Nokia's divisions were losing money. But there was this one division called Mobira, which was doing incredibly well. So he discovered that poorly performing divisions were likely to be sold in the near future. However, that meant that

what would be left would be the highly profitable divisions like Mobira. And a few years later, management told Anthony that the business had been picking up in the US and Anthony was just amazed by their optimism with that business. So this intelligent capital allocation showed Anthony how profitable the business could be and Nokia as an investment ended up doing very, very well for him. In another meeting with the Spanish conglomerate during the Gogol years called Torres-Hostench, he learned that the CEO was accompanied by two bodyguards everywhere he went. So

So Anthony actually owned stock in that company before learning about this. And as soon as he learned, he sold out afterwards. And the reason was basically that if the CEO felt the need for that kind of security, they were probably hiding something. And he said the company later became one of the biggest Spanish bankruptcies. And I believe he ended up in prison.

Now, in another case study that's very reminiscent of Peter Lynch, Bolton discusses a business called EC Cases. So this was a business that manufactured pots and pans. After meeting with management, Anthony was given a tour of the facility. Right away, Anthony noticed huge piles of boxes. Now, when he asked about what these were, he discovered that large quantities of the product had been recalled due to shoddy workmanship. Anthony ultimately sold all of his shares in the business after learning about this. So a few key themes from Anthony Bolton were

First, that he felt that meeting management gave a better edge than a stock screener. Second, he placed a higher degree of importance on consistency over charisma. And third, some of the best insights came from having multiple meetings with management where he could get a more accurate view of them. So as you can see, Bolton believed that meeting management was crucial to developing an investment thesis. But not all investors have the luxury of managing billions of dollars and therefore cannot schedule meetings with the management teams of all the businesses that they own or track.

So this advantage isn't amenable by everyone. But if you have industry contacts or know people inside of these businesses, you can often get very, very valuable information.

If you want to learn more about how to do this, I'd highly recommend listening to TIP 694, where I break down how to do scuttlebutt and sleuthing on a business. Now, the next thing I want to cover in the book concerns assessing financials and valuations. Let's first cover the areas of the financials that Anthony placed the highest degree of importance. The first two areas he liked to understand were the balance sheet, which you won't be surprised at given all the work that he would do on debt analysis. But even more important than the balance sheet was actually the cashflow statement for him. Since

Since Anthony liked cash flowing businesses, it's no surprise that he spent a lot of time on the cash flow statement. I think this is a very smart place to spend your time. One area of importance that I've been focusing on examining is in owner's earnings. So owner's earnings is a framework that Buffett came up with that he originally wrote about in his 1986 letter to shareholders. So owner's earnings are just net income plus depreciation, amortization, and depletion, plus or minus changes in working capital, minus maintenance capital expenditure.

Now, I like this number because it shows how cashflow generation is in a variety of different types of businesses. For instance, the cashflow of two businesses can be drastically different due to growth capital expenditures. However, when you use owner's earnings, you can see that a business with maybe lower free cashflow is actually producing more cash than a no growth business with high free cashflow.

But when you use owner's earnings, you can actually see how much cash each business is generating to maintain its current operations. Owner's earnings works exceptionally well with serial acquirers, which is a business model that I already mentioned I like a lot.

Since these serial acquirers are reinvesting a significant amount of money into the business, their free cashflow usually doesn't look very, very good. And that's a great thing because basically that means that they're reinvesting their cash back into the business at hopefully high rates of return. And I prefer they take that route rather than distributing earnings. Let's take a quick break and hear from today's sponsors. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast?

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All right, back to the show. So a business I own is like Topicus is a great example here. If I look at Topicus's reported free cashflow for 2024, it was about 206 million euros. That's still good. However, when I calculate the owner's earnings, that number actually increases to 285 million euros. So if you want to examine the yield of both of these numbers, you obtain a 2.5% for the free cashflow yield and a 3.5% for the owner's earnings yield. And that's just a massive, massive difference.

Now let's look at how Anthony viewed evaluations.

Anthony writes, my whole approach to investment is to buy shares that represent what I believe to be a valuation anomaly in the stock market, and then wait for that anomaly to be corrected. Hardly ever would I buy a share where I believe the valuation appeared correct. Now, it is easier to spot an anomaly than knowing exactly when it's going to correct, and therefore, I like to have time on my side. So, normally, I buy on a one to two-year timeframe, with over the years a fairly consistent average holding period of about 18 months.

Now, this all makes sense and I think is very well aligned with most deep value investors. But there is one area here that I particularly like, which concerns his holding periods. I also prefer looking at one to two year timeframes for most of my businesses. I think this gives you a short enough time to expect any anomalies to close and also allows for the possibility of additional upside in the future, which makes extending your holding periods even easier.

He reminds me here of a little bit of John Templeton who preferred to use multiple metrics when evaluating inexpensive businesses. So let's go over a few of them. One of Anthony's favorite methods was to just simply look at historical valuations. He would examine valuations dating back up to 20 years, but he could minimize that as long as the valuation history contained a full business cycle. What he was most interested in was learning the range of normalized valuations.

And his conclusion was buying when valuations are low in a historical context increased his chances of making money. And buying when they're high obviously increased his chances for a loss. Now, you might be asking, okay, cool, but what specific metrics was he looking at? So he mentions five major ones in the book. The first one, pretty obvious, price to earnings ratios. Here, he would focus on the numbers for the trailing 12 months, as well as looking into the future for one and two years.

Another one was just enterprise value to EBITDA. He would look at free cashflow per share. He would look at enterprise value to sales. And he felt this was especially useful, of course, on businesses that were making a loss or had very low profits. And then the last one here was the cashflow return on investment, CFROI. So he used this to compare yields with the risk-free rate. If a business's CFROI was higher than the risk-free rate, he realized that they deserve to trade at a premium.

You'll know here that he does not mention the use of a discounted cash flow for reasons which I completely agree. So he says it's nearly impossible to predict what will happen to a business in five to 10 years. So why even bother trying?

The changes to assumptions when you go out that far can drastically alter the value of business. So he just didn't bother trying. The way I like to value businesses is to look at what kind of earnings or owner's earnings I think it'll generate over the next, say, two to three years. Then I just put a conservative multiple on it and I can see what my rate of return is going to be. Now, Anthony doesn't mention if he uses a similar method, but given the fact that he was looking at forward PEs,

I assume that he probably would be using a method that was somewhat similar to the one I just outlined. One last thing I'll mention here that I thought was noteworthy was his points on using the peg ratio. So the peg ratio is the price to expected growth ratio. Companies with a peg of one could have the following attributes. They could trade at five times earnings and have 5% earnings growth. They could trade at 10 times earnings and have 10% earnings growth, or they could trade at 20 times earnings and have 20% earnings growth. Interestingly, Bolton said he'd prefer

the option of business trading at five times earnings and growing at 5%. I personally would actually prefer the opposite end of the spectrum and go for the one trading at 20 times earnings that was growing at 20%.

So ultimately, you can tell here that Anthony really liked cheap shares. And I think in that light, he would use financials to help him understand if these cheap shares could get any cheaper. So he was looking at financials essentially as a source to help him protect his downside. If he felt that his downside was well-protected and he felt that the shares were undervalued, then that was all he needed to really make an investment into a business. Let's now shift to how Anthony thought about concentration, entering, maintaining, and exiting positions.

So when examining concentration, Bolton was significantly more diversified than someone like a Warren Buffett. Bolton wrote, "Even though Warren Buffett would argue that most portfolios are just too diverse and good investment ideas are not abundant, most professional investment managers will own at least 40 to 50 shares. In my case, the amount of money that I ran grew considerably over the years. And as a result, I had no choice but to run a more diversified portfolio than this. I did this to maintain my traditional significant exposure to medium and smaller companies.

Many observers think wrongly that I had chosen to have a lot of holdings. This was not the case. My ideal portfolio would contain about 50 holdings. Now, it's hard to say if Bolton was running less money if he would have taken a more concentrated approach. But given his success, it's hard to say that getting any more concentrated would have given him any additional edge.

For someone who clearly did a lot of research on businesses and got to talk with management teams multiple times, I actually think a concentrated approach would have probably worked out really, really well for him. However, if you want to smooth his results and maybe lower volatility, I suppose I could see a justification for owning 50 or more stocks at a time. Now, when evaluating his effort and performance, he would ask himself three questions. The first one was, does my portfolio align with my conviction levels as closely as possible? The

The second one was, am I aware of the risks I'm taking? And thirdly, is there anything to learn from my mistakes? As a corollary to this, Bolton created this really cool concept that he called the start from scratch portfolio. So this is an idea that would help them optimize his portfolio allocations. To help him determine the proper allocations, he would conduct a monthly exercise in which he would create five buckets. So these five buckets were strong buy, buy, hold, question mark, and sell.

This exercise would help him fortify his conviction levels and see which of his businesses require more work to come up with a better answer. Now, I've been doing this exercise every month for the last six months or so, and I found it super, super helpful for the exact same reasons that Anthony used it. If I see a business is in the strong buy or buy category and I don't already have a full position in it, that's a really, really good place for me to allocate capital.

If I find that my uncertainty is rising in specific names, it might go into the question mark category, which would help signal to me that I should probably spend some time clarifying areas of that business that require my attention. If something is in the sell category, it's pretty self-explanatory that it becomes a business that I should no longer own.

Most of the businesses that I own today are in the hold category, meaning I don't really need to take any action on the stock. Now, I enjoy having this because as I've said, I tend to be kind of lazy as an investor. I like to just have businesses that I don't necessarily have to spend a lot of time thinking about or ones that provide me with a lot of pain. And so I like having businesses in this hold category. Obviously, that means that they're probably priced closer to perfection.

than other opportunities out there. But just because I have a business in that whole category does not mean that I'm in any rush to sell it at a profit, even though probably a lot of times it means that I could sell it at a profit. Now, moving into entering positions, Anthony, obviously, since he was more diversified, would have pretty small starter position. So he would start at about 25 basis points or a quarter of a percent. Then from that time on, he would allow his conviction levels to help drive his decision-making.

If he had improving conviction on an idea, then he would bring that concentration up to say 2%, 3%, 4%. Now, as for selling, Bolton would exit positions for three reasons. The first one was when price and value converged. The second one was when he discovered that his thesis was invalidated. And third was that he just found a better idea. Another area that Anthony discussed in a great interview was how his allocation strategy shifted during bear and bull markets. So during bull markets, he was likely to have increased conviction, meaning he'd be more likely to add to a position.

He admitted that perhaps he was succumbing to FOMO. So he said here, in bull markets, I tended to build up the number of holdings. There were more good stories around. And during bear markets, he was more likely to consolidate the portfolio and get to pruning. So he said in bear markets, that was a time for weeding out the less good things, going back to the ones that you had the biggest conviction in.

So of course, as investors, we would like to avoid FOMO as much as possible, but obviously that's an incredibly challenging task. So one thing that you can do to attempt to fight it is look for good stories that are actually backed up by facts rather than hype. So this will help you find investments that can actually create value rather than destroy it. So Anthony's points about adding to high conviction positions, I think are a great strategy during bear markets.

Doing this helps you avoid further bleeding from positions where you lack conviction, and it allows you to add to your highest conviction position, which during bear markets are more likely to be trading at a discount to intrinsic value compared to a bull market.

Today, as I write this, we're in a bear market or at least in correction territory. So year to day, the S&P 500 has dropped about 10%. I personally sold out of a few positions this year, not actually in relation to this drop in share price that everything I sold was before, but it was actually in relation to just my conviction. So using some of these frameworks that I mentioned here, I found that I had certain positions that I had lower conviction in. And I basically just started reallocating that cash back into holdings that I have higher levels of conviction in.

Now, the key point here that Anthony discusses in relation to portfolio construction is that portfolio construction is a dynamic and ongoing process. You should not have a fixed mindset when thinking about portfolio construction. If you do this, you're just not going to do well in investing because there's always the risk in a business that things are just not going to go according to plan. So Peter Lynch, who Anthony Bolton highly respected once said, in this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10.

So in this light, we must be willing to entertain the chance we were wrong because even the best are going to be wrong 40% of the time. I would like to discuss an interesting nuance that I've been hinting at, which Bolton used to enhance his investing analysis. And this is his application of technical analysis utilizing stock charts. This is a subject you rarely hear about on TIP as we tend to focus more on the fundamentals of a business rather than the movement of a stock chart. However, just bear with me here because Anthony has a pretty well thought out process. So when Anthony looks at stocks,

One of the first things he'll do is look at the stock chart. This helps him put the current price in context. Is it high or low compared to its three or five year history? Has it been performing well or poorly lately? It's almost as if he uses the charts as validation for a narrative. He provides an example from 2007 when one of his colleagues returned from China. His colleague told Anthony that China had some exciting opportunities in cyclicals. And while Anthony actually agreed with him, he felt that many other investors had made the exact same journey and reached the exact same conclusion.

As a result, that optimism was already baked into the stock price as they had already been buying shares based on that exact same hypothesis. Now, technical analysis, I don't think guided his investing analysis. He just felt it was an additional tool on top of his fundamental analysis that he could employ to just help him stay disciplined. Bolton said, "I didn't use charts to predict where the stock was going. I used them to understand whether I was early or late." He also used technical analysis to help him determine if a hypothesis was playing out as he thought.

If a business was gaining momentum that he could see in a technical analysis, he would use that as a type of validation for his investing thesis. This would help him determine if a position should be added to. This is a strategy that I've been focused on for the past few years, and I've noticed a lot more success actually buying businesses that are executing at a high level than buying those that appear to be faltering.

Many value investors become fixated on buying a business at a low price, but they often overlook the underlying quality of a company. If a business continues to perform well, its intrinsic value will rise, which can justify buying more of that business at a higher price. Now let's shift gears and discuss how Anthony read the markets as best that he could.

So one of his key differentiators was that he did not use the market to attempt to create macroeconomic theories. He was more interested in understanding the market sentiment, and I highly resonate with this. So I'd like to point out a few of his insights. So the market heavily discounts the very near future. If the market anticipates that a business will face headwinds, let's say over the next six to 12 months, the business's price will likely decline before that event occurs. He also makes the point that sudden events can crystallize opinions, but it's not

but it's rarer than slow and steady changes. So a considerable surprise can still be anticipated beforehand, albeit on a shorter timescale. Just realize that significant changes in stock prices will usually happen before the event and not after. So another point was that individual company management shouldn't be relied on to help you understand turning points. So Anthony believed that they are less on top of trend changes than investment managers.

This may be true for certain managers who do not closely examine their competitors very, very closely. Investment managers will most likely zoom out when reviewing a specific company to assess the current environment for the industry, the company, or the sector as a whole. So corporate managers must obviously spend time on their own business and spending time on other people's businesses could be seen as a waste of time.

And then the last one here was that when evaluating the market outlook, just avoid focusing on the economic outlook. If you focus on the economic outlook, your signals are going to be very, very weak, and they're probably never going to be accurate enough to actually help guide your decision-making.

So instead of looking at the economic outlook, Anthony would focus on three things. So the first one is that he would look at the historical patterns of bull and bear markets. He would ask himself, how long has a current sentiment been going on for? If it's an extended period versus history, then there's obviously a probability of a reversal at some point in the future. And the longer that it's extended, the more likely the probability of a reversal happening. The second one would be indicators of investor sentiment that he observed. So these would be things such as put-call ratios.

advisor sentiment, volatility, mutual fund cash positions, and just exposure to a variety of different areas, industries, geographies. And lastly, he would examine pricing metrics. If the price to book or price to free cash flow were elevated or depressed compared to historical numbers, he knew that there would be an opportunity. Now, it's important to note here that he used all three of these in conjunction.

He also admitted that it wouldn't give you the exact day of a market top or bottom, but he felt that it was good enough to determine the turning point within, say, a quarter. Now, this strategy makes sense for hedge fund managers to follow, as they must feel questions and calls from their investors to justify their actions. If you have a view on the market, it can help with knowing when to hoard or deploy cash as well.

Now, I personally have never found this to be a strategy that I can employ. So while I will have elevated levels of cash at some points, it's usually just a function of whether my businesses are priced for perfection or priced for a good return. If everything I own is priced for perfection, it's a good indicator that the market may be overpriced. In that case, I'll just let my cash pile build up and then look to deploy it when share price weakens, or if there's a business on my watch list that starts looking attractive. As I've gotten more investing experience,

I've realized that I just don't need to rush into a position. I can take my time with some of the high quality businesses that I own, as I believe I'm going to hold them for multi-year time periods. Because of this, there's just no rush to get my capital into an opportunity if it just doesn't make sense. And it appears that Anthony took a very similar approach here.

Now, let's focus on some of the lessons that Bolton learned from his biggest mistakes. And I got three just short case studies here. So the first one is on a business called Sporting Bet. So this company was a UK-based online gambling company, which attempted to expand into the US. So Anthony conducted his due diligence on the company, and he wanted specifically to look at this US market. And he did realize that there was a risk that regulation could change over time. But given the research that he did, he felt that the risk was worthwhile.

And unfortunately, in the last minute, a law was passed that actually outlawed payments for internet gambling, which basically just killed the investing thesis. The second case study is in a business called Premier Foods, which was a UK-based food group. So in 2006, it acquired another food business called RHM for about 1.2 billion pounds in shares and debt to facilitate the acquisition. Anthony noted that he admired management very much, but there were headwinds, such as food price inflation, which limited profitability.

Now, this was a good example that Anthony uses to illustrate how businesses with a poor balance sheet should be avoided. The last one that I wanted to go over here was iSoft, which I mentioned earlier briefly. iSoft was a UK software company which had recently won one of the largest IT contracts globally. And due to that contract win, the shares performed very, very well for a time, benefiting from the narrative shift and some unfortunately aggressive accounting. But similar to Premier Foods, its balance sheet eventually deteriorated and it's experienced also project delays.

This resulted in ISOF being put up for sale eventually and selling at a fraction of its earlier valuation. So just summarizing some of his overall mistakes, a couple of key points that I had was don't fall for stories talks with poor financials. This is very important. Never underestimate companies in industries that are in structural decline. And similar to the point on story stocks, don't fall victim to a management team that are great storytellers, but just mediocre managers. And then lastly, don't try to rationalize aggressive accounting.

If you see a red flag in how they're doing their accounting, just get out or stop researching it. Find something that has less aggressive accounting. Now, I want to touch on some of the lessons from his wins here as well. So there are a couple of key ones. The first one here was buying during periods of extreme pessimism. Obviously, buying during these times when you're right and the market is wrong can be highly lucrative.

The second point here was about turnarounds. So while Buffett doesn't like turnarounds, Bolton actually found great success in new management teams that could take over companies with excellent assets. However, you have to ensure that management has a proven track record of success. Another point here was to focus specifically on the business model and not necessarily as much on the industry that that single business is inside of. So you can sometimes find business models that are incorrectly categorized as cyclicals, but in reality have these very, very powerful secular tailwinds.

And lastly here is just invest in earlier stage businesses where the market may overlook their potential to scale. And this might be my favorite one. If you can find a company that can scale profitably with competitive advantages, you can often get in cheap before other major institutional investors deploy capital into the idea. And if you do this, you get the twin engines of growth. You get multiple re-rating, and then you get a very, very nice steady growth rate in earnings. And this is a great recipe for success. So to

So to conclude here, Anthony Bolton truly invested against the tide, which I think helped him fuel his outperformance for nearly three decades. My major takeaways from the book and researching him were sentiment is an important signal. Acknowledge its effects and utilize it as a tool to gauge the market sentiments towards a specific business. Technical analysis can be used to gain a deeper understanding of sentiment.

While you don't have to be a chartist, it's helpful to look at a chart to see how a business is performing in a historical context. Utilize the start-from-scratch portfolio exercise regularly to ensure you're balancing conviction and position sizing. Additionally, use it as a tool to identify areas where you need to gain clarity. Turnarounds can be effective investments, especially when a new management takes over. And lastly here, overweight the importance of a healthy balance sheet and be very wary of businesses with a poor financial health profile.

That's all I have for you today. If you'd like to interact with me on Twitter, please follow me at IrrationalMRKTS or on LinkedIn under Kyle Grieve. If you enjoy my episodes, please don't hesitate to let me know how I can improve your listening experience. Thanks again for tuning in. Bye-bye.

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