Best & Worst Positions from Anthony Bolton's Portfolio/Funds

In my previous blog, i listed some advices from Anthony Bolton who worked as fund manager at London, Fidelity for decades. In this blog, i list some of his best and worst bets between 2000 and 2007. I think, these example bets from his portfolio will be useful to understand dynamics of long term investments.

Year	Best	Worst
2000	Autonomy	Merrant
	Celltech	British-Borne Oil
	Safeway	Compel
	Johnson Matthey	Scotia Holdings
	Ellis & Everard	Albert Fisher
	Gallaher Group	Allied Leisure
	Bank Of Ireland	Cookson Group
	Wembley	Enodis
	Iceland Group
	Reed international
2001	ICAP	Railtrack
	London Stock Exchange	Carlton Communications
	Arcadia	Iceland Group
	Inchcape	Novar
	Balfour Beatty	Enodis
	Safeway	Elementis
	George Wimpey	4 Imprint Group
	De Beers	SVB Holdings
	Gallaher	British Airways
	Carillion	Laird Group
2002	Credit Lyonnais	British Energy
	Harmony Gold	Cable & Wireless
	Galleger Group	SSL Intl
	Amlin	Big Food Group
	Enterprise Oil	Bulmer HP
	MMO2	Cadiz Inc
	Bank of Ireland	Royal & Sun Alliance
	SOCO international	Carlton Communications
	George Wimpey	Oxford Glycosciences
	Kiln	Cookson Group
2003	Cable & Wireless	Goshawk Insurance
	Big Food group	SOCO Intl
	WS Atkins	Tullow Oil
	NTL	Kiln
	Carlton Communications	Hiscox
	William Hill	Wellington U/W
	MMO2	Management Consultancy
	Mothercare	Beazley Group
	Somerfield	De la Rue
	Body Shop	Tenon
2004	Cairn Energy	ITV
	MMO2	Rank Group
	Celltech	Proteome Sciences
	London Stock Exchange	BG Group
	Carlton Communications	Big Food Group
	First Calgary Peteroleum	Aquarius Platinum
	Pendragon	Royal & Sun Alliances
	Allied Irish Banks	Reuters
	Orkla	Shire
	Land Securities	NTL
2005	Cairn Energy	GCAP Media
	BG Group	ITV
	Statoil	William Hill
	Amlin	Marconi Corp
	British Energy	London Stock Exchange
	Roche	NTL
	Standard Chartered	Provident Financial
	C&C Energy	SMG
	P&O Nedlloyd	Minerva
	SOCO Intl	Asia Energy
2006	ITV	Sportingbet
	Microfocus	Isoft
	British Land	Rank Group
	Mecom	GCAP Media
	Expro International	BSkyB
	Shire	Reed Elsevier
	BG Group	Highland Gold
	Amlin	888 Holdings
	Astra Zeneca	SMG
	British Energy	Asia Energy
2007	Bayer	Premier Foods
	BG Group	Rank Group
	Electrcie de France	GCAP Media
	Nokia	Premier Farnell
	Reuters	SMG
	J Sainsbury	BP
	Reed Elsevier	British Land
	Xansa	Johnson Services Group
	Statoil Hydro	Erinaceous Group
	Vodafone	ITV

Summary

2000-2007	Autonomy	Sportingbet
	ICAP	Rank Group
	Gallaher Group	ITV
	Cairn Energy	GCAP Media
	MMO2	SMG
	Amlin	Premier Foods
	Balfour Beatty	Isoft
	George Wimpey	Cookson Group
	BG Group	SSL Intl
	Safeway	British-Borneo Oil & Gas

Pricing European Options by Black-Scholes Model

In my previous blogs, price of european call and put options are estimated by Monte Carlo Simulation and Binomial Model. In this blog, these options' prices are estimated by Black-Scholes (BS) model. BS model is more optimal pricing model than previous two methods. Actually, Monte Carlo simulation and Binomal model aims to approximate BS model.

Price of european call and put options is estimated as follows by using BS model:

where
S: Asset price
E:Strike price
D: Divident
r:Interest Rate
Sigma: Variance
t:Current time
T:Strike time
N(x): Normal Cumulative Density Function

Below sample C# and Matlab source code of Black-Scholes Model without any divident contribution is listed.

1:  % Matlab Source Code  
2:  % Estimatation of European Call and Put Option by Black-Scholes Model  
3:  % denizstij (http://denizstij.blogspot.com/),  
4:  % Sep,2009  
5:  asset=230; %S  
6:  strike=210;%X  
7:  volatility=0.25; %sigma  
8:  r=0.04545;  
9:  time=0.5;  
10:  d1=(log(asset/strike)+(r+(volatility^2)/2)*time)/volatility/(sqrt(time));  
11:  %d2=(log(asset/strike)+(r-(volatility^2)/2)*time)/volatility/(sqrt(time));  
12:  d2=d1-volatility*(sqrt(time))  
13:  eu_call_option_price= asset*normcdf(d1,0,1)-strike*exp(-r*time)*normcdf(d2,0,1)  
14:  eu_put_option_price= -asset*normcdf(-d1,0,1)+strike*exp(-r*time)*normcdf(-d2,0,1)  

1:  using System;  
2:  using System.Collections.Generic;  
3:  using System.Linq;  
4:  using System.Text;  
5:  using CenterSpace.Free;  
6:  namespace Denizstij.Finance.Pricing.EuropeanOptionPricingByBlackScholes  
7:  {  
8:    /// <summary>  
9:    /// Estimates European Call and Put options by using Black-Scholes model  
10:    /// denizstij (http://denizstij.blogspot.com/)  
11:    /// Sep-2009  
12:    /// </summary>  
13:    class EuropeanOptionPricingByBlackScholes  
14:    {  
15:      // CenterSpace.Free.NormalDist to estimate normal cumulative density function  
16:      // by CenterSpace Software (http://www.centerspace.net/resources.php)  
17:      private NormalDist normDist = new NormalDist(0, 1);  
18:      // Price estimator  
19:      public List<double> estimatePrice(double asset, double strike, double volatility, double intRate, double time)  
20:      {  
21:        double d1 = (Math.Log(asset / strike) + (intRate + Math.Pow(volatility, 2) / 2) * time) / volatility / (Math.Sqrt(time));  
22:        double d2 = d1 - volatility * (Math.Sqrt(time));  
23:        double eu_call_option_price = asset * normDist.CDF(d1) - strike * Math.Exp(-intRate * time) * normDist.CDF(d2);  
24:        double eu_put_option_price = -asset * normDist.CDF(-d1) + strike * Math.Exp(-intRate * time) * normDist.CDF(-d2);  
25:        List<double> prices = new List<double>();  
26:        prices.Add(eu_call_option_price);  
27:        prices.Add(eu_put_option_price);  
28:        return prices;  
29:      }  
30:      static void Main(string[] args)  
31:      {  
32:        EuropeanOptionPricingByBlackScholes pricing = new EuropeanOptionPricingByBlackScholes();  
33:        List<double> prices = pricing.estimatePrice(230,  
34:             210,  
35:             0.25,  
36:             0.04545,  
37:             0.5 // In terms of years  
38:          );  
39:        System.Console.WriteLine("Call Option Price:" + prices.ElementAt(0)); // £30.741  
40:        System.Console.WriteLine("Put Option Price:" + prices.ElementAt(1)); // £6.023  
41:      }  
42:    }  
43:  }  

Lessons -- Investing Against the Tide by Anthony Bolton

Followings are lifelong lessons’ of Anthony Bolton who delivered record level return on investment funds at Fidelity for decades. These are elaborated in more detail in his latest book, “Investing Against the Tide: Lessons from a Life Running Money”

Companies

• Start by evaluating the quality of the finance
• Will it be here in ten years’ time and be more valuable?
• Is the company in control of its own destiny?
• Is the business model easy to understand?
• Does the business generate cash?
• Remember, mean reversion is one of the great truism of capitalism
• Beware company guidance
• Use part of a company meeting to talk about other companies
• If you have any doubt about a company, follow the cash

What to look for in management

• Integrity and openness are most important
• If you have any question on company or trustworthiness, avoid the company
• Do they have a detailed knowledge of the business strategically, operationally and financially?
• Are the objectives and incentives of managements aligned with shareholders?
• Do the management’s trades in the stock conflicts or confirm their statements?
• Remember, people rarely change, invest in managers you trust

Shares

• Every stock you own should have an investment thesis
• Test this regularly and if no longer valid sell
• Look at a share the same way as if you were buying the whole business at the price
• Forget the price you paid for shares
• Keep an open mind and know the ‘counter’ thesis
• Think in terms of levels of conviction rather than price targets
• Don’t try to make it back the way you lost it
• Consider six factors before you buy a share
  v The quality of the business franchise
  v The management
  v The financials
  v Technical analysis of the share price history
  v The valuation against history
  v Prospect for a takeover of the company
  

Sentiment

• Rate perception as important as reality
• Successful investment is a blend of standing your own ground while listening to the market
• Short term, the stock market is a voting machine, rather than a weighting machine
• Sentiment extremes, regardless of the underlying attraction of a share, can suggest major opportunity or risk.

Constructing a portfolio

• Position size should reflect conviction
• Don’t spend too much time on past performance attribution
• Your portfolio should as nearly as possible reflect a ‘start from scratch’ portfolio
• Don’t pay too much attention to index weights
• Make incremental rather than large moves
• Never become emotionally attached to a holding
• Investment is about making mistakes; win by not losing too often
• Sell if the investment thesis is broken, if a stock reaches your valuation target or if you find something better
• If in doubt about a holding or a possible new holding compare it directly against the most comparative stock that you own.
• Keep a balance between being on top of what you own and spending enough time looking for new ideas.

Risks

• My biggest mistakes have nearly always been companies with poor balance sheet
• One loses the most money on highly geared companies when business conditions deteriorate
• Remember that bad news doesn’t travel well
• Look at a share differently if it has performed well for several years; stocks with big unrealised profits in them are vulnerable in set backs
• Avoid ‘pass the parcel’ stocks – overvalued stocks with momentum - where investors hope there is more to go and they can sell them before the music stops

Financials

• Always read a company’s announcements and information in the original – don’t rely on a broker’s summary
• Carefully read the notes that accompany accounts – key information can be hidden in the notes

Looking at valuations

• Don’t look at one valuation measure, especially just a PE multiple
• Buying cheap shares gives you a margin of safety
• Valuation anomalies are more likely in medium-sized and small companies
• Look at today’s valuation in the context of at least twenty-year historical valuations
• Buying when valuations are low against history substantially increases your chance of making money
• Never forget absolute valuations
• Remember that as a bull market progresses, valuation methods typically get less conservative and vice versa

Takeovers and takeover targets

• Buy companies that have a M&A angle
• Big companies are less likely to be taken over
• The shareholder list can often carry clues about potential takeover candidates
• Be sceptical of being able to predict very short term M&A targets

Favourite shares

• At the heart if my approach is buying cheaply valued recovery shares
• Favour unpopular shares
• Does a targeted company have a new management team with a clear and detained recovery plan that you can track
• You may have to buy a recovery stock before you have all the information
• Some of my best calls were in stocks that felt uncomfortable to buy
• Look for stocks with asymmetric pay-offs where you may make a lot of money but your downside is limited
• Value stocks outperform growth stocks in the long term

How to trade

• Delegate to a skilful trader and give them reasonable autonomy
• I only set tight limits on a minority of my trades
• Know when to be aggressive and know when to let the market come to you
• Avoid giving round number limits – this is what most other portfolio managers do
• Be patient - most stocks give you a second chance
• A block is normally the cheapest way to deal in size

Technical analysis

• The first thing I look at is the share chart
• Use technical analysis as a cross-check to your fundamental views
• Find an approach that works for you and then stick to it
• More useful for larger stocks
• Run profits and cut losses

Market timing

• Consistently successful market calls are very difficult to make
• If you’re a private investor, take a long-term view. Don’t put money in the stock market that you will need in the next three years
• Never underestimate the fact that the market is an excellent discounter of the future
• Don’t be afraid to go against the general mode of the market
• Markets will react to expected positive or negative events in anticipation of those events.
• Consider what is being assumed in share prices, rather than what the outlook is like
• In the mature stages of a bull market, prune back your holdings of more risky stocks
• Be most on your guard after a long upward move of four to five years