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This is a book about Peter Cundill’s investment approach. I first heard about Peter during a talk by Micheal Price at the London Value Investor Conference in 2013. He recommended the book so highly that I ordered it straight away and read it a couple weeks later.

šŸ’” If the video below is unavailable then it has been made private by the owner šŸ‘€ (sorry!)

Peter kept a journal for many years, in which he wrote notes and kept pieces of annotated articles he cut out of news papers. He had well over 200 of these notebooks. This book is the first attempt at summarising Peter’s notes. Here is an image of the notebooks:

Below are a few quotes from Micheal’s talk:

I bought 100 copies of this book, I fell in love with it. In my office there is box these books and whenever somebody asks me about investing I give them a copy of this book.

One of these people wrote Michael a thank you letter saying “the value of this book is in the comfort of knowing you can re-read it when you are in the middle of the investment process”.

Michael agrees:

“Behind my desk in New York, I’ve got the value investing book and every now and then some old annual reports or Buffett letters and you can re-read them. This is one of those books you can pick up and in every chapter get something you can apply today. This book is a treasure.”

I usually annotate books while I read them and try to jot down a few thoughts just as I finish the book. Here’s what went through my head when I closed the book:

Read because highly recommended by Michael Price at a YouTube conference. I enjoyed the book, has funny anecdotes and makes investing look mortal. Normally it’s a blackbox phenomenon.

Here is a picture of Peter Cundill (he seemed pretty outdoorsy)

Chapter 1: The Eureka Moment

What was revelatory in this chapter was surprisingly simple. A share is cheap not because it has a low price earnings multiple, a juicy dividend yield, or a very high growth rate, all of which may often be desirable, but because analysis of the balance sheet reveals that its stock market price is below its liquidation value: its intrinsic worth as a business. (Page 4)

He rightly came to regard the entire period that preceded the epiphany moment - when the penny, so to speak, dropped - as a learning curve involving a great deal of hard labour acquiring the skills which make it possible to read a balance sheet with real understanding and a forensic attention to detail. These of course, are the tools of the profession, but what seems to be common to nearly all great investors is an attitude of mind that in some measure derives from family background and circumstances. (Page 4)

He survived the crash of 1929, by his own admission largely because he had very little money to lose. (Page 5)

He paid attention to Frankā€™s remark that the investment business was a gamble and, if he were going to be a gambler, he would do well to have a professional qualification to fall back on, should the need arise. (Page 6)

What I am beginning to perceive is that investors tend to follow trends and fashion rather than taking the trouble to look for value. (Page 8)

He had inadvertently stumbled upon a classic net-net: a company whose share price was trading below its working capital, net all its liabilities. (Page 9)

Peter became well known as an inveterate traveller who would routinely clock up well over a hundred thousand miles a year in the quest for bargains in international markets and especially for his habit of making a special effort to visit whichever country had had the worst performing stock market in the previous 11 months. (Page 10)

Chapter 3: Launching a Mutual Fund on Value Principles

I hate people who are imprecise and even more those who are opaque or quite deliberately evasive: they just create mayhem and disaster in the world around them. I do believe in change and that an element of risk-taking is necessary adjunct of growing any successful business, but it has to be measured and controlled and its extent clearly understood. (Page 17)

It is awesome how a single character flaw, in this case an overwhelming capacity to obliterate inconvenient facts, has led to complete self-destruction. Frank has so many admirable qualities but that flaw in combination with a certain degree of sloppiness and imperfect integrity have simply eaten away at an otherwise fine man. As a result of all this I have become even more acutely aware of the vital importance of good housekeeping, attention to detail, and the dangers of self delusion. (Page 18)

Peter was an investment theoretician and philosopher. (Page 19)

The essential concept is to buy under-valued, unrecognized, neglected, out of fashion, or misunderstood situations where inherent value, a margin of safety, and the possibility of shareply changing conditions created new favourable investment opportunities. Based on my studies and experience, investments for the Venture Fund should only be made if most of the following criteria are met:

The share price must be less than book value. Preferably it will be less than net working capital less long term debt.

  • The price must be less than 50% of the former high and preferably at or near its all time low.
  • The price earning multiple must be less than 10 or the inverse of the long term corporate bond rate, whichever is less.
  • The company must be profitable. Preferably it will have increased its earnings for the past 5 years and there will have been no deficits over that period.
  • The company must be paying dividends. Preferably the dividend will have been increasing and have been paid for some time.
  • Long term debt and bank debt (including off-balance sheet financing) must be judiciously employed. There must be room to expand the debt position if required. (Page 23)

Chapter 5: Going Global

Country: Sweden

In spite of Peterā€™s willingness to concentrate a substantial percentage of the Value Fundā€™s resources into a single market in which, at any given juncture, there might be a plentiful choice of value opportunities, he had taken the view early on that he would be prepared ā€œto put money into anything, anywhere, provided that the downside is measurable and acceptable and the chances of a good profit appear to be better than 50%. I will not take gambles but, it is part of my job description to be ready to take very carefully calculated risksā€. (Page 45)

Peter made it a habit to go for a run in any city he would visit.

In late 1977, Peter arrived in Stockholm for the first time, did his customary exploratory run round the city, and called on the securities analysts at the Bank International. (Page 46)

Investment: Volvo

Notwithstanding the Swedesā€™ depressed attitude toward their domestic stock market, a month later Peter had done enough work to satisfy himself that Volvo was a genuine net-net opportunity and he began a buying program. From this moment on, neglected, obscure, and misunderstood overseas markets were increasingly to become a much-exploited investment specialty of Peterā€™s, yielding rich rewards over the years and adding an invaluable dimension to the fund that often significantly enhanced its performance, especially in periods when there was a scarcity of value opportunity in North America. (Page 47)

There was nothing ā€œad hocā€ about the way in which Peter addressed the process of international value investment. In every instance it had to be firmly based on a clear understanding of local accounting practices and how those might differ from accepted standards in North America. (Page 47)

Peterā€™s attitude was ā€œvive la differenceā€; if a balance sheet was hard to penetrate it was not just a challenge but an opportunity because the difficulties actually represented a ā€œbarrier to entryā€ even for the experienced professional investo and undoubtedly excluded all but the most sophisticated private investors. (Page 47)

The other aspect, which Peter considered to be a vital component of a successful international strategy, was building carefully constructed networks of locally based professionals who had a thorough understanding of value investment principles and would instinctively recognize a security that would potentially fit the Cundill Value Fundā€™s investment criteria. Creating a network like this involved dozens and dozens of calls, many of them largely unproductive; finding kindred spirits was rather like planning for gold, but the precious commodity gradually appeared over the years and became a very powerful adjunct to the pure numerical research. (Page 47)

Chapter 7: A Decade of Success

Annual Report

In 1984, the Cundill Value Fund celebrated its tenth year of operation under Peter’s management. The result for the year was an appreciation of 6%, which might have been considered disappointing by contrast with the 44% gain it had enjoyed the previous year, but, since this compared with a 4% decline in the Dow Jones and a 6% decline in the Toronto Stock Excahnge, Peter still had reason to be well pleased. The fund had virtually doubled in size over the year to $126m, so that it could no longer be considered just a small “hot shot” affair, relying for its performance on an ability to invest in the type of small, illiquid, contrarian securities that were out of the question for bigger funds. Peter took the opportunity to review the fund’s success in the Annual Report for that year:

We have now completed 10 years using the Graham and Dodd approach to investment. This period has witnesses a compound return of shareholder’s equity of 26% per annum. We have learned much during the past 10 years:

  • The value method of investing will tend at least to give compound rates of return in the high teens over long periods of time.
  • There will be losing years; but if the art of making money is not to lose it, then there should not be substantial losses.
  • The fund will tend to do better in slightly down to indifferent markets and not to do as well as our growth-orientated colleagues in good markets.
  • It is ever more challenging to perform well with a larger fund. With increased size the diversification means that no individual investment, whether a gain or a loss, will have a dramatic effect on the unit price.
  • We have developed a global approach to investing. As a result, we have a far broader range of securities to choose from than any purely domestic or North American fund.
  • We have developed a network of contacts around the world who are like-minded in value orientation.
  • We have gradually modified our approach from a straight formula valuation basis to one where we try to buy securities selling below liquidation value, taking into consideration off-balance sheet items.
  • THE MOST IMPORTANT ATTRIBUTE FOR SUCCESS IN VALUE INVESTING IS PATIENCE, PATIENCE, AND MORE PATIENCE. THE MAJORITY OF INVESTORS DO NOT POSSESS THIS CHARACTERISTIC. (Page 57/58)

For all my emphasis on the virtues of patience in value investment it has to go hand in hand with minute attention to the detail, with conviction and determination, otherwise patience is just futile endurance. Oscar Wilde said that “consistency” is the last refuge or the unimaginative, but this is not the same as “routines”. I believe that routines can actually be a support, rendering the imaginative process more effective in action - preventing the kind of superfluity of ideas that promotes dithering and constipates action. (Page 59/60)

Peter’s global approach to value investment had taken distinct shape over the Value Fund’s first decade. Through his travelling and his growing reputation he had succeeded in building up an enviable network of contacts who understood his investment concept; from John Templeton in Nassau, who had invested $5m in the fund and Nathaniel de Rothschild in Paris, Michael Milken and Peter Ackerman at Drexel Burnham in Los Angeles, as well as Irving Kahn and Mike Price in New York, Niels Taub and Jim Slater in London, Don Kennedy in San Francisco, and Chris Ondaatje and Sam Belzberg in Canada, and this is far from an exhaustive list. (Page 60)

The Cundill Conference

The Cundill Conference had by now become a fixed annual event; a forum at which Peter’s friends, colleagues, and business associates could meet once a year in a stimulating environment that was both private and quite informal. The format was well conceived. The opening morning was invariably an investment discussion devoted to a specific topic, such as Chapter XI corporate bankruptcy for example, and although each session was led by an expert, it was always open to the floor, which had the effect of promoting lively discussion amongst a gathering of some of the best professional minds in the business.

External speaker of very high quality were engaged to address the conference lunches on subjects that bore no direct relation to the world of finance. Notwithstanding, they were popular and well attended, with very few people being tempted to “slope off” in private gaggles, and the speakers often succeeded in stimulating Peter’s own thinking along useful lateral paths. The food and wine at the conferences was always first class and there was usually a trip to the theatre followed by a dinner at one of the top restaurants in the host city.

The second morning soon came to be known as “Pete’s Morning,” where he would take the floor at about 9:00 am in shirtsleeves, wearing a short-sleeved pale blue cashmere sweater, and proceed, in his own inimitable, rambling style, to hold the audience’s attention for a full three hours with investment stories, case studies, and his particular brand of distilled wisdom. From time to time he would call on someone from the floor to elaborate on his theme or support an argument with further expert knowledge. (Page 61/62)

Chapter 9: Investments and Strategems

Value investing

Down draughts of that kind tend to be regarded as “gifts from heaven” for disciples of Ben Graham and value investors tend to hold significant proportions of cash at most times, so that they are in a position take advantage. Of course, no true value investor would claim to be able to predict the swings of the market and would never make any attempt to time either buying or selling on the basis of other people’s market predictions.

However the value discipline has an intrinsic tendency toward the accurate prediction of major trends. In purely practical terms, when the stock market is at or near a peak, there are likely to be very few, if any, bargains to be had an securities actually selling below liquidation value will be even scarcer. There is, therefore, a naturally induced bias towards selling and building cash during such periods, when investments within a value portfolio reach and surpass book value and continue upward to become statistically overvalued. This is not to suggest that it makes the selling judgement straightforward or easy for the value investor - in fact it probably militates towards selling too early and often towards buying too early as well. What it does do, however, is to considerably reduce the likely volatility of the portfolio and bolster the margin of safety, reinforcing the potency of the dictum that the secret of making money over the long term is not to lose it. It led Peter to a conclusion to which he frequently returns in his president’s letter to the Cundill Value Fund shareholders:

The value method of investing will tend to give better results in sligthly down to indifferent markets and less relatively sparkling results in a raging bull market. What matters, however, is that the method will provide a consistent compound return in the middle teens over very long periods of time.

(page 76/77)

Portfolio management

As was often the case, Peter was taking a hyper-critical attitude to his performance. The Value Fund’s was outstanding and 1986 was simply proving to be an unavoidable hiatus. With a dearth of shares that qualified under strict value criteria, the temptation was always to lose patience and compromise, a temptation to which Peter very rarely succumbed. However, cash kept building up relentlessly in the fund as the markets rose to dizzier and dizzier heights and the holdings became statistically “overvalued” and, therefore, subject to automatic pruning. A lot of self-discipline was essential to avoid straying from the value framework and in Peter’s vase this was always accompanied by a good deal of soul-searching.

Peter’s strictures about the proliferation of individual shares in the portfolio was one that consistently worried him because experience had convinced him that concentration was almost always an important factor in achieving superior performance. But in this instance the criticism was not entirely justified. The Value Fund’s top ten holdings still represented 30% of assets and cash stood at a little over 30%. What occurred was that a number of companies in which he had intended to build up a full position had run away in price before it had been possible to accumulate a normal-size holding and there were quite a few other smallish holdings that had been introduced by way of having an initial “look and see”. However, resting on laurels was never part of the Cundill psyche. (page 82/83)

Chapter 10: Surviving a Crash

Automatic selling

By the time the crash finally happened in October Peter was more than well prepared in the Value Fund, which was holding over 40% of its assets in short term money market instruments. But, as he said at the board meeting in November, this positioning was not the result of a deliberate decision to build up cash because, although he had anticipated a crash, he could not have predicted its exact timing. The enlarged cash position was actually the result of the increasing number of securities in the portfolio that had been attaining prices considerably in excess of book value, consequently qualifying them for an automatic sale unless there were overriding reasons to hold on to them. (page 87/88)

As I watched events unfold I have come to the conclusion that computers actually don’t do much more than make it quicker for investors to react to information. The second problem is that having the information in its raw state on a second by second basis is not at all the same thing as interpreting and understanding its implications, and this applies in rising as well as falling ones. Spur of the moment reactions to partially digested information are, more often than not, disastrous. My impression of the last week are that most people in shock need to share their gloom and doom, to reassure themselves that they are not out there on their own, and so it feeds on itself. (page 90)

Advice to individual investors

My best advice to individual investors can readily be summed up in two closely linked precepts. Be patient and don’t be greedy. (page 92)

On the subject of the ‘fallen angels’ of stock markets that occupy so much of our detective work as value investors, I try to keep in mind Oscar Wilde’s comment that “saints always have a past and sinners always have a future” so no investment should be ruled out simply on the basis of past history. (page 95)

Synchronicity begins where pure chance ends, with one event leading to another, like a chain reaction, but all brought about by the initial event which cannot be predicted or explained. In other words - don’t waste your time. Just have patience and make sure you’re confident about the margin of safety in each investment. (page 96)

Chapter 11: Distressed Corporate Securities and Defaulted Sovereign Debt

Balance sheet analysis

Distressed corporate debt and the debt of companies under Chapter XI bankruptcy protection was a field in with which Peter was already thoroughly familiar and it had provided him with some stellar returns in the 1980s. […] It fitted perfectly into his Graham and Dodd framework because the departure point in researching distressed debt is always the balance sheet. What one needs to determine is whether, as the organisation or the liquidation, proceeds in an orderly fashion rather than a panic sale, the sum of the parts, or the rump of the business, is worth more than the debt at its discounted price. (page 97)

[While] it was not in the end a loss in absolute terms, on the basis of the “time value” of money, the emotional wear and tear that it caused, and the man-hours wasted, it was a dismal result and had dragged down performance. The lesson, however, was thoroughly absorbed and Peter acknowledged that patience and stubbornness are not necessarily the same things, although an element of stubbornness has to be an essential attribute of all successful value investors. What provides a vital balance is a willingness to reanalyse and reappraise all assumptions and calculations throughout the process. (page 99)

Alpha and time value of money

Another feature of distressed debt that Peter was quick to recognise is that its trading price bears practically no correlation to the general direction of either the stock market or the bond market. It is almost entirely determined by the condition of the company alone. The only external factor that may have an influence is the overall direction of interest rates but, unless there are extreme changes, even this seems to have little impact. The result is that such investments provide a lot of what is technically referred to in a portfolio as alpha, a measure of the risk-adjusted return on any investment. Such a measure tries to determine whether the return on an investment is sufficient to justify the exposure. Clearly, if one can eliminate most of the stock and bond market exposure, the answer is likely to be yes.

The final aspect of distressed debt that Peter was early in appreciating was that once the bad news is out and the price has fallen, if the analysis demonstrates to one’s satisfaction that the company if going to survive, or that it can sell enough valuable assets to settle with its creditors at an appealing level in relation to the price at which the debt can be purchased, then downside risk is minimal.

The “x factor” is “the time value of money.” In simple terms this means that the longer one is obliged to hold an investment, the higher the end return needs to be to justify it - 10% in a month is a better return than 100% in two years. (page 100)

[…] prices fell even more steeply and Peter set to work to look at the situation in detail from an economic standpoint. What emerged from his analysis over the next few months […] (page 103)

Chapter 13: Per Ardua ad Astra

The early 1990s were bedevilled by a succession of disappointing investments. (page 121)

Peter confided to his journal:

I am off balance at the moment - not in harmony. The problem is partly professional. I feel sort of stuck - no triumphs, only little glimpses of light, which have so far kept me on a level, as it were compensating for the mistakes. I am working just as hard as ever, but seemingly not so productively. I think I may be preparing for a fierce challenge.

Professionally everything is going wrong; [Peter lists a few macro economic changes]

I find myself thinking about buying things with $250 million of cash reserves and a good many net-nets about, although world events, plus the economic uncertainties could in reality spell “crash”. I am alert both to the danger and the opportunity and can’t decide which it is. I need to put my mind in park and think intuitively. No formula works forever, it needs to be in continuous review and development. I need to be receptive to new ideas and not just dismiss them out of hand. Keep looking for the spark. Think about how you communicate - how to set about sparking off other people and how to make it easier for them to spark you off.

I think I should be optimistic. There are plenty of statistical bargains available in the world. Everyone else is now depressed and highly pessimistic. Ought I to continue to be cautious - it isn’t what the numbers are now telling me, but I’m finding it hard at the moment to ignore the sentiment around me. Sometimes a flippant remark allows the spikes of reason to penetrate the brain. I should be reading plenty of poetry, if for no other reason that it appeals directly to the intuitive side of the brain.

Christmas celebrated at the Canyon Ranch resort in Arizona provided a moment of catharsis. There was the routine of Christmas Eve, work and family phone calls in the day, and then chicken in puff pastry, the recitation of the annual “grace” and Peter’s “state of the family finances” speech in which he articulated fears and his hopes, after which he felt a certain release and fell quietly to sleep in front of the fire, before creeping off to bed. He was the first up in the morning and was able to read beside the Christmas tree for a couple of hours, sipping coffee and imbibing the peace of the sleeping house.

But the mood had not entirely lifted and the next night he woke in the early hours in a cold sweat, worrying about the business and his ability as an investment manager.

He wrote down two significant quotations in his journal. The first is from Nietzsche’s Beyond Good and Evil:

“Gaze not too long into the abyss, lest the abyss gaze back at you.”

It is followed by the opening lines from Dante’s Inferno:

“In the midst of the path of life I found myself in a dark wood, in which the right path was obscured. I cannot express how hard it was to find myself in this untamed forest, so bitter and tenacious was it that the mere thought of it renews my terrors.”

(page 122/123)

Chapter 14: The Perfect Match

One feature that appears to be common to most of the great investors is that they are proselytisers, exhibiting a general willingness to mentor and instruct “disciples”. [Peter] has always been eager to share his knowledge even, in a sense, to evangelise. The result s of this were not only “Pete’s Mornings” at the annual Cundill conference but a steady stream of speaking engagements at business schools, investment seminars, and the like, at which he would not only expound theory but was fully prepared to share the details of his real experience, both the good and the bad.

In the context of his own fund management business this openness and willingness to talk about the investment process to all and sundry, provided that they evinced a genuine interest, resulted in an eclectic and creative group of employees within Cundill Investment Research Limited.

This entity had been set up in the early 1990s to support Peter in the analytical process and it evolved over the years into an organisation that encouraged lively debate on solidly grounded research work. In due course several members of the team attained the status of portfolio manager, in particular Tim McElvaine, who runs his own fund management company, and Andy Massie, who remains with Mackenzie Cundill and manages the Mackenzie Cundill Value Fund.

However, Peter’s attitude to any form of “collegiate” decision making was made very clear in an article in the Outstanding Investor’s Digest in 1988:

To my knowledge there are no good records that have been built by institutions run by committee. In almost all cases the great records are the product of individuals, perhaps working together, but always within a clearly defined framework. Their names are the door and they are quite visible to the investing public. In reality outstanding records are made by dictators, hopefully benevolent, but nonetheless dictators. And another thing, most top managers really do exchange ideas without fear or ego. They always will. I don’t think I’ve ever walked into an excellent investor’s office who hasn’t openly said “Yeah sure, here’s what I’m doing.” or, “What did you do about that one? I blew it.” We all know we aren’t always going to get it right and it’s an invaluable thing to be able to talk to other who understand.

(page 133/134)

Chapter 15: Entering the Big League

Problem with buying early and selling early

We dined out in Europe, we had the biggest positions in Deutsche Band and Parisbas, which both had big investment portfolios, so you got the bank itself for nothing. You had huge margin of safety - it was easy money. We had doubles and triples in those markets and we thought we were pretty smart, so in 1996 and 1997 we took our profits and took flight to Japan, which was just so beaten up and full of values. But in doing so we missed out on some five baggers, which is when the initial investment has multiplied five times, and we had to wait at least two years before Japan started to come good for us.

This is a recurring problem for most value investors - that tendency to buy and sell too early. The virtues of patience are severely tested and you get to thinking it’s never going to work and then finally your ship comes home and you’re so relieved that you sell before it’s time. What we ought to do is go off to Bali or some such place and sit in the sun to avoid the temptation to sell to early.

(page 139/140)

The need for a catalyst

In point of fact Peter’s seemingly precipitate move into Japan was not predicated simply on the numbers. He had long since learned that, while it is the numbers that provide the ultimate margin of safety, without some form of catalyst markets ignore value for frustratingly long periods of time.

Chapter 16: There’s Always Something Left to Learn

Appointing a devil’s advocate

The worst investment we’ve ever had was Cable & Wireless, which had built up a large cash pile through the sale of telephone companies in Hong Kong and Australia and their mobile telephone business in the UK. They were well negotiated, judicious sales. What they had left was a stand-alone operation in the Caribbean, which still exists, and they were in the fibre optic business that was blowing cash. So we said, look they’ve got cash, they’ve got a valuable, viable business and let’s assume the fibre optic business is worth zero - it wasn’t, it was worth less than zero, much, much less! Their accounting was flawed to say the least and they became obsessed by a technological dream. In this respect it was reminiscent of Nortel and that should have caused me to think twice.

I talked to John Templeton about it afterwards and he took a worse hit than us. He said “this is why we diversify, if you are right 60% of the time and wrong 40% you’re always going to be a hero, if you are right 40% of the time and wrong 60% you will be a bum.” I think he probably put it more elegantly than that!

But there’s one more thing. We had put a huge amount of time and energy into that one and we were willing it to save itself and, on the face of it, it could have. What we needed was a dissenter in the team - a contrarian among contrarians, lateral thinker watching out for the left field. On that occasion there wasn’t one. So my thought is, if there’s no natural sceptic on an investment maybe it would be wise to appoint one of the team to play Devil’s Advocate anyway.

(page 158)

Chapter 21: What Makes a Great Investor

Characteristics of most great investors

From the huge ‘corpus’ of Peter’s writing - the journals, the investment notebooks, the thousands of memos and research notes as well as transcripts of speeches - it seemed that it would be a worthwhile exercise to try to distil what, in the final analysis, Peter himself believes constitute the characteristics that are common to most great investors. They are given in more particular order and it does not seem that Peter has ever sought to prioritise them either. Nevertheless, there are two characteristics that appear in his writings and speeches with greater frequency than all the rest.

Insatiable curiosity

“Curiosity is the engine of civilisation. If I were to elaborate it would be to say, read, read, read, and don’t forget to talk to people, really talk, listening with attention and having conversations, on whatever topic, that are an exchange of thoughts. Keep reading broad, beyond just the professional. This helps develop one’s sense of perspective in all matters.”

Patience

“Patience, patience, and more patience. Ben Graham said it, but it is true of all investment disciplines, not only value investing, although it is indispensable to that.”

Concentration

“You must have the ability to focus and to block out distractions. I am talking about not getting carried away by events or outside influences - you can take them into account, but you must stick to your framework.”

Attention to detail

“Never make the mistake of not reading the small print, no matter how rushed you are. Always read the notes to a set of accounts very carefully - they are your barometer. You need sound simple arithmetic skills, not differential calculus. They will give you the ability to spot patterns without a calculator or a spreadsheet. Seeing the patterns will develop your investment insights, your instincts - your sense of smell. Eventually it will give you the agility to stay ahead of the game, making quick, reasoned decisions, especially in a crisis.”

Calculated risk

“Be prepared to take risks but never gambles. Value investors are often perceived as taking the safe investment route and that is true. But the time scales required for a value investor can be contradictory. Holding on to heavily discounted stock that the market dislikes for a period of five to ten years is not risk free. As each year passes the required end reward to justify the investment becomes higher, irrespective of the original margin of safety. Equally for the growth specialist, speculating that a company in a favoured market, with negligible current earnings, will in due course enjoy exponential growth is not risk free. On top of which there is no margin of safety. Either could be regarded as gambling, or calculated risk. Which side of that scale they fall on is a function of whether the homework has been good enough and has not neglected the fieldwork”

Independence of mind

“I think it is very useful to develop a contrarian cast of mind combined with a keen sense of what I would call ’the natural order of things’. If you can cultivate, there two attributes you are unlikely to become infected by dogma and you will begin to have a predisposition towards lateral thinking - making important connections intuitively.”

Humility

“I have no doubt that a strong sense of self belief is important - even a sense of mission - and this is fine as long as it is tempered by a sense of humour, especially an ability to laugh at oneself. One of the greatest dangers that confront those who have been through a period of successful investment is hubris - the conviction that one can never be wrong again. An ability to see the funny side of oneself as it is seen by others is a strong antidote to hubris.”

Routines

“Routines and discipline go hand in hand. They are the road map that guides the pursuit of excellence for its own sake. They support proper professional ambition and the commercial integrity that goes with it.”

Mens sana in corpore sano

“I know that there are successful investors who are supremely unfit and don’t give a fig. For myself I have found that my exercise routines have contributed immensely towards giving me the mental resilience to get through the tough times - and there always are rough times. I also believe that engaging in competitive sport has taught me to temper my competitive instincts with common sense and only to attempt what I sincerely think is possible - that works professionally too. About 50% of my time is spent reading and running is useful for digesting it all. I run almost everyday, but I hope not to the point of obsession. I have been known to have the odd dry martini now and then! But I am convinced that there is a strong link in temperament between elite athletes and elite investors.

Scepticism

“Scepticism is good, but be a sceptic, not an iconoclast. Have rigour and flexibility, which might be considered an oxymoron but is exactly what I meant when I quoted Peter Robertson’s dictum always change a winning game. An investment framework ought to include a liberal dose of scepticism both in terms of markets and of company accounts. Taking this a step further, a lot of MBA programs, particularly these days, teach you about market efficiency and accounting rules, but this is not a perfect world and there will always be anomalies and there is always “wriggle room” within company accounts so you have to stick to your guns and forget the hype.”

Personal responsibility

“The ability to shoulder personal responsibility for one’s investment results is pretty fundamental. This means that if you lose money it isn’t the market’s fault, it isn’t some broker’s fault, and it isn’t the fault of your research department or anyone else. It is in fact the direct result of your own decisions. Coming to terms with this reality sets you free to learn from your mistakes.

Reading again

“There are a few books - really not that many - which I believe are indispensable reading for every serious investor in whatever facet of investment practice they may favour:

(pages 185-189)