Being aware of your idiosyncrasies is one key step to becoming a better investor, alongside learning how to avoid making mistakes – or at least how not to repeat them.
The following five books taught the Fidelity UK team, which collectively manages about £5bn of assets under management, just that, as well as how to avoid value traps, the role of uncertainty and how to make the most of how your brain works.
Alex Wright, lead manager of the Fidelity Special Situations funds and the Special Values trust, centred his selection around the idea of outsiders. His first pick was The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike Jr. He describes eight different business leaders who have taken radically different strategies to their peers.
“These leaders, at least early in their career, were generally regarded with scepticism by the financial markets, which expected more conventional behaviour,” he said.
“However, it is often only by being really quite radically different from those around you that you can achieve outsized success. I have very much observed this outsider mindset in controversial CEOs, at quite successful founder or founder-like run companies I am or have been invested in. Mark Dixon at IWG, Mike Ashley at Sports Direct and Michael O’leary at Ryanair are three key examples.”
He also found The Dyslexic Advantage: unlocking the potential of the Dyslexic brain by Dr Brock Eide and Dr Fernette Eide “immensily interesting”.
“Both myself and my eldest son are dyslexic, and it was immensely interesting to read how the differential workings of the dyslexic brain, whilst clearly making some traditional things (like reading and spelling) harder, also gives you greater ability at things like pattern recognition and spatial awareness and imagination,” he said.
“Indeed, in the modern business world, and I believe in fund management, it actually gives you an advantage, rather than a disadvantage, as is traditionally believed – very much in keeping with the view of ‘the outsiders’, being and acting differentially is a key virtue.”
Aruna Karunathilake, lead manager of Fidelity UK Select and Fidelity’s Sustainable UK strategy, chose The Dhando Investor by Mohnish Pabrai.
The author is an Indian-American technology entrepreneur turned value investor, who, just like Warren Buffett, Charlie Munger and others, has shown it is possible to generate reasonable returns while keeping risk low.
The book uses the example of the Patels, from Southern Gujarat in India, who used this approach to generate wealth after emigrating to the US in the 1970s.
“The main concept is you need to buy good assets when they are trading at distressed prices,” said Karunathilake.
“Risk is low as you are buying good assets (which in the case of the Patels were motels during the oil crisis) when uncertainty is high (occupancy was low as people weren’t driving due to high oil prices) giving them the opportunity to buy those assets at attractive prices when taking a longer-term view. We try and apply these principles when managing the UK Select fund – taking advantage of uncertainty to buy good, low risk businesses at attractive prices.”
Jonathan Winton, lead manager of Fidelity UK Smaller Companies and co-manager of Fidelity Special Situations and Special Values, recommended a book by colleague Joel Tillinghast, Big money thinks small: Biases, Blind Spots and Smarter Investing. Tillinghast joined Fidelity in 1986 and became a portfolio manager in 1989.
“He is someone I have admired since I started at Fidelity [as an analyst in 2005] and this book is an accumulation of the knowledge that he built over his career. In his own words: ‘This book is about succeeding in investing by avoiding mistakes’,” Winton said.
“Whilst this sounds obvious, it is not the approach many take, which can have dire consequences for returns. From avoiding companies with too much debt, to paying too much for the shares, to staying away from what you don’t understand and management teams that you can’t trust.”
“The book also highlights the behavioural traps that are so easy to fall into, such as a lack of emotional awareness, the role of uncertainty and not learning from mistakes. The section on avoiding value traps is also important for value investors like myself to keep top of mind.”
Lastly, Karan Singh, co-manager of Fidelity UK Select and lead manager of Sustainable UK, went for Quality Investing by Lawrence Cunningham, Torkell Eide and Patrick Hargreaves – the latter two are portfolio managers at AKO Capital.
“The book succinctly describes the virtuous cycle of value creation when consistent cash generation is reinvested at high incremental returns on capital,” Singh said.
“In addition to explaining the key competitive advantages or ‘moats’ most quality investors will be familiar with, they also discuss several ‘patterns’ that quality businesses exhibit such as ‘friendly middleman’ (middleman endorsing a product to someone else paying for it e.g. kitchen installer) or ‘toll roads’ (niche suppliers that are immaterial to a company’s cost base but critical to the operation e.g. Tate & Lyle’s ingredients going into a yoghurt) which are often less recognised.”