In an extract from Intelligent Investors, a book to mark the 20th anniversary of Investment Week, Lindsell Train co-founder Nick Train tells Lawrence Gosling about his early influences.
From your early days, do you remember any investment decisions where you felt you really learnt something?
Almost too many. I will have made every mistake. You look at an extraordinary career like Neil Woodford's. Long may it continue by the way, and I am being slightly unfair, but I would guess there are no more than half a dozen really critical strategic decisions he has taken in a long, long career.
And those six decisions have been the ones that have been the difference between him being justifiably a contemporary hero in this industry, and a nobody. Relatively few major strategic judgements make such a difference.
What I remember from the earlier phase of my career was taking a Warren Buffett idea that had a transformative effect on both my performance, hence my reputation, but also my confidence in doing what I was doing.
It was in the late 1980s/early 1990s and I built a really major exposure for the fund I was running then to the regional ITV companies: Thames, Yorkshire, Carlton and Anglia TV. I owned them all in a big size and that was, from a Templeton point of view, a really contrarian thing to do.
But it also borrowed directly from the example of Berkshire Hathaway; Buffett had very, very successful investments in US TV companies and had written so transparently about why TV was such a great industry to invest in, and in particular, how he felt investors did not ascribe value to the programming.
Train reaffirms commitment to Burberry despite share price fall
What actually makes people switch on a TV set to watch a particular channel is the programming. This perception that Coronation Street, which Granada made and owned, was hugely valuable because it attracted 20 million viewers a week, and yet investors did not appear to be aware of that intangible asset. It was an idea I took directly from Buffett.
Buffett once said: "Stocks are simple: all you do is buy shares in a great business, for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever." What aspects of his strategy are important for you?
The first is this straightforward proposition: invest in great businesses. At one level you might think, well, what a truism that is. Of course, no-one is going to invest in anything except a great business.
But actually, that is not true, is it? People do invest in all sorts of businesses of all different qualities and calibres, and often with great success.
People will say: "Well, we knew this was a pile of rubbish but the price was so cheap that it could not go down anymore and we made a great return". That is a valid approach to the investment challenge.
I know people who have been very successful, who have done nothing but look for what Tom Dobell's M&G Recovery fund does. It is a perfectly valid, time-honoured approach.
But it is not what Buffett has done, and it is not what we choose to do.
The absolute ideal would be to buy something at the price of one, and then in 20 years' time it is worth 50. That is the ideal investment. Who cares if it fluctuates a bit during the course of that?
What about the aspect of owning stocks "forever"?
There is a bit of north-western US humour in that. But I think Buffett was deadly serious, actually.
As everybody knows that stockmarkets are volatile, everybody believes the ideal way to deal with that volatility must be to persistently be selling at the top and buying at the bottom; it must stand to reason that because it is volatile, the best thing to do is to treat the volatility. That is fine, except no-one has worked out how to do it.
Actually, what Buffett says is the best investment is one that you never have to sell… that you could hold for a lifetime.
The absolute ideal would be to buy something at the price of one, and then in 20 years' time it is worth 50. That is the ideal investment. Who cares if it fluctuates a bit during the course of that?
Let us talk about Fidelity's Peter Lynch. He said a couple of five baggers every decade is enough. "In my investing career the best gains usually come in the third or fourth year, not the third or fourth week" was his line.
The first thing I got from Lynch was this idea of finding out what your wife is buying at the supermarket. That is valuable investment information. It is probably more valuable than your in-house economist telling you that M3 money supply is expanding by 6% next month.
To actually know when your wife says, "I have just been to M&S and this season's fashion is rubbish".
That is a more valuable piece of investment information than a piece of macro gibberish.
Train: We will hunker down with our holding in Pearson
And what Lynch says in his books is so true, that the amateur private individual can be just as successful observing the world and looking at what is working and what is not working, as the guys sitting in their ivory towers playing around with their black box, statistical trading machines.
Neither Michael Lindsell nor I are under any illusion about what we do. We do not think we have solved the answer to the investment challenge. We know we are fallible, we know that every investment approach is fallible.
So how long do you hang on to an investment that is not working?
We have never been able to work that out. So, at times, to our intense annoyance and frustration and sometimes to our clients' intense annoyance and frustration, we have just tried to be as purist about this as we can be.
I think of a business like Reed Elsevier, which in 2013 actually worked for us. But we have been persistently nibbling away at an investment in Reed Elsevier, probably for ten years. And for nine out of the ten years, it has been disappointing.
A lot of other investors would have just thrown in the towel - maybe correctly, frankly, who knows. But - and I am not saying it makes us better, maybe it makes us more dull - as long as the intellectual case that we were investing in, so far as we can tell, remains intact, we will keep biting the bullet and adding to the holding.
Neither Michael Lindsell nor I are under any illusion about what we do. We do not think we have solved the answer to the investment challenge. We know we are fallible, we know that every investment approach is fallible.
All we think we can do is try and stick to a set of principles, in as pure a way as we can, accepting that there are times when we will do things that are stupid, because we have stuck to those principles.
When do you know that something is a truly exceptional idea?
You can't. Maybe it comes from experience, I don't know. If you let ideas proliferate, you are much better off just buying an index tracker. You are just wasting your time if you have got 75 half-a-percent holdings, or whatever.
You are not doing anything, it is not worth it. You are just guaranteeing mediocrity.
The concept now of diversification has almost strangled investment portfolios. Would you agree?
There are cheap and effective options available to investors who want to get access to the average share in the UK stockmarket, and those are quite compelling.
But those of us who claim to be active managers and have the effrontery to charge the fees we do (although our fees are certainly low by the standards of the industry, but nonetheless, we are charging more than a tracker) I feel it is utterly beholden upon us to offer some potential value, for that extra fee the client is paying.
For us, that comes from backing our judgement with a relatively small number of names.
Intelligent Investors
Written by Lawrence Gosling and including interviews with more than 20 leading UK fund managers, the book is priced at £20 and the full cover price will be split between two charities: CHICKS and Place2Be. To purchase a copy, please email him at [email protected] or visit www.justgiving.com/givingworksimf
