If you have been receiving my newsletter for some time you may have noticed that I am very fond of articles written by Tim Price Director of Investment at PFP Wealth Management in London.
Tim was kind enough to agree to an interview where he talked about his investment philosophy, mistakes and explains how you can invest with a focus on capital preservation.
Here’s the interview (emphasis mine).
How did you get started in investing?
Tim Price: I ended up in the financial markets by accident. Having read English at university, my original intention was to work in the media. But the recession under way in 1991 meant ‘any port in a storm’.
By a bizarre twist of fate that I suspect is unlikely to be replicated by any English graduates this time around, I ended up as a bond salesman working for a Japanese bank. From there, I worked my way up into more credible organisations, ultimately got bored of the bond market, and moved into portfolio management for wealthy individuals which is where I’ve worked for the last decade or so.
What type of investor are you? Value, growth, both?
Tim Price: Primarily driven by value, but with an open mind. I’m also interested in more than just equity investing, so my opportunity set includes debt instruments, uncorrelated assets and real assets in all their forms.
How would you describe your investment philosophy?
Tim Price: Utterly focused on capital preservation and low risk, real returns.
The scales fell from my eyes when I read Peter Bernstein’s magisterial ‘Against the Gods: the remarkable story of risk’ (Click link for Amazon page) back in 2000.
This is a must-read for any active investor.
Bernstein includes a section on Daniel Bernoulli (who appears to have been the first ‘behavioural economist’, and I distinctly recall the advice.
If you are managing money for wealthy people, “the practical utility of any gain in portfolio value inversely relates to the size of the portfolio”. In other words, if you have a large pot, don’t lose the money!
This is very similar in essence to Warren Buffett’s advice: Rule Number 1 – don’t lose money. Rule Number 2 – see Rule Number 1. This doesn’t mean simply hiding in cash – real returns as we know are negative there; but it’s excellent advice in order to concentrate on downside risk as much as on upside potential.
The trouble with the investment industry is that it’s intensely focused on returns, and insufficiently focused on risk.
If more people acted sensibly with other people’s money, the history of the financial crisis might have been radically different, and nowhere near as severe.
How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?
Tim Price: This is a very good question. I don’t think there is any one answer.
I think you require an open mind, and it helps to have lots of contacts and to have known and maintain a contacts list of some excellent investors. I think as long as you’re open to ideas, you’re unlikely to go badly wrong. “Fortune favours the prepared mind.”
In terms of screening, we constantly screen the equity market for ideas. Bloomberg is an excellent resource in this respect. Screen by Altman Z Score (our preferred metric for sensible stock analysis) and also screen by P/E, forward P/E, dividend yield, forward yield, and debt to assets – that sort of thing.
And of course it makes sense to have some sector preferences. For classic defensives we know where to look: the likes of pharmaceuticals, tobacco, utilities, and global consumer staples.
Beyond that I have some pet themes, particularly in energy support services and infrastructure.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Tim Price: We allocate across four asset types: high quality debt; high quality equity; uncorrelated assets (systematic trend-following funds in our case); and real assets (currently a heavy bias in favour of the monetary metals, gold and silver, and related investments).
If we identify a great actively managed fund with quality managers, we’re willing to allocate up to 10% of a client’s portfolio. We obviously need to have huge conviction in the fund, the theme and the manager. If we identify great stocks, we’ll allocate up to 2% of a portfolio to them.
Lather, rinse, repeat.
It may sound simplistic, but diversification by asset and by holding is always the best defence against accidents, ignorance, overconfidence or anything else.
Do you follow any key risk-management guidelines in managing your portfolio?
Tim Price: As per my answer above, diversification comes first. After that we maintain ‘soft’ stop losses. The best advice in this business is to cut your losses and let your winners run.
Describe some of your most notable investment mistakes and successes and what you learn from them?
Tim Price: Not following our own guidelines as identified above.
One of the best stock investments we made was around 1999 / early 2000, into a US savings and loan called Washington Mutual (sadly now defunct).
At the time, it looked disastrous – the price chart was a classic ‘top left to bottom right’ (of the page) howler. The stock had been badly beaten up by being so conspicuously ‘old economy’ during the dotcom boom. But Barron’s Magazine pointed out that the company had had something like 17 consecutive quarters of rising dividends, and that the most recent quarter had been a company record.
And the P/E was around 3.
As a value investor, you just had to buy it. We ended up tripling or quadrupling our money over the next 12 to 18 months. It felt uneasy going in, but the fundamentals were compelling.
At the time it was a contrarian trade – although actually it was just a classic value opportunity.
Sometimes you need guts to follow through. And don’t ignore the financial media – you can find opportunities anywhere!
How did you get involved in writing an investment newsletter?
Tim Price: I enjoy writing and I enjoy trying to understand what drives markets.
Doing both is simply a joy. I’ve been writing about the markets since I started in the early 1990s, and I couldn’t give up now even if I wanted to.
I also believe that the discipline of writing helps to understand certain aspects of the investment world – it forces you to come to a conclusion.
I can’t write like the FT’s Lex column (“on the one hand.. and on the other”) – I require a firm conclusion and I suspect so do most investors.
How is writing an investment newsletter different managing individual portfolios?
Tim Price: Not so different. But you’re not entirely in control – if you make recommendations about multiple investments, you don’t know which ones will strike a chord with readers, or when.
Tim, thanks for your time and insights, I am definitely going to read Against the Gods again.
To read what Tim has to say about the investment world each week you can sign up to the RSS feed of his newsletter here: The price of everything – Tim Price’s weekly newsletter