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Kyle Grieve (21:32)

Alright, 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 choir, 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 has 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 forecast a 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 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, 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 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 spin off? 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 growth 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 1/2 percent. 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 one and a half percent 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 versus value, I just tend to gravitate towards Charlie Munger's take, which is that all intelligent investing is value investing. Acquiring more than you are 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 PE of 1, a PE of 30 or PE 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, Aaronaceous 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 forced 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'd try to understand the difference between current and long term debt and have a very clear understanding of what financing costs are 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, that's very good information, because if debt investors aren't willing to pay par, then there's a very good chance the company's equity will be worth significantly less than it's currently valued at. 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. You know, companies like Moody's S and 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 gonna be pretty safe. But, you know, 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 gonna 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 you know, 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. You know, 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 is 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 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 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 to £113 billion. 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 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, you know, growth might be hampered to some degree. These are the types of companies that I kind of like. You know, 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 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 depositor 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, you know, given his position as a large institution, 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 will be left will 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 a Spanish conglomerate during the Gogo years called Taurus Hostensch, he learned that the CEO was accompanied by two bodyguards everywhere he went. 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 their 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 imitable 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 tip694 where I break down how to do scuttlebutt and sleuthing on a business. Now, the next theme 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 cash flow statement for him. 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 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 cash flow generation is in a variety of different types of businesses. For instance, the cash flow 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 cash flow is actually producing more cash than a no growth business with high free cash flow. 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 cash flow 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.

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Kyle Grieve (44:27)

Alright, back to the show. So a business I own like Topicus is a great example here. If I look at Topicus reported free cash flow 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 cash flow 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 increase 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. You look at free cash flow 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 cash flow return on investment CF roi. 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 would 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 5 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 prefer the option of business trading at 5 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 know, 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 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 he wanted 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 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 him 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 required 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 and 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 whole 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 startup 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 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 are 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 the 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 rarer than slow and steady changes, so a considerable surprise can still be anticipated beforehand, albeit on a shorter timescale. Just realize that significant change 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 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 price 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 it. 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 want 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 Isoft 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 key points that I had was don't fall for story stocks 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 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 team 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 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 rational mrkts 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. Thank you for listening to tip. Make sure to follow we study billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by investors. The are Podcast network.

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