Some methods of investing appear to be polar opposite to each other. For example, at Equilibrium we have investments in two UK funds which are at contrasting ends of the investing spectrum.
On the one hand, the Lindsell Train UK Equity fund holds just 22 stocks which they aim to hold for the long term. It rarely, if ever, trades. In fact on a meeting with the fund manager, Nick Train, at his office this week he told us he had just bought his first new stock for four years!
Nick Train looks for good quality companies which he thinks can grow their earnings at rates much higher than the market believes. This is a similar approach to Warren Buffett - buy good companies and hold them forever. The price you pay is not of too much concern if the company can grow faster than the market.
On the other hand, the Miton UK Value Opportunities which we also hold is ALL about price. They buy stocks that they think the market has undervalued having calculated their own view of what the company is worth. They will then sell when the shares hit that target price. This fund has a much higher turnover of stocks.
The two funds take almost opposite approaches but both have fantastic performance. There is no right or wrong in investing and many different approaches can work. Often they work better or worse at different times and it is our job to find the right blend.
What they have in common is that they both seek to profit from market inefficiencies. In other words, the irrational behaviour of other investors. Miton looks for short term inefficiencies whilst Lindsell Train look for long term inefficiencies.
There are other ways of profiting from market behaviour. Volatility trading, where we buy equities on the dips and sell when they recover, is a simple way of trying to profit from emotional over-reactions.
More directly, as volatility increases so does the potential return of defined returns products. These structured products offer a fixed rate of return provided the market is above a given level on a specified date. They are offered by investment banks who are able to achieve the returns through options on that market. As volatility increases there appears to be more uncertainty of the index level being achieved, and so higher potential rates of return are available on defined returns.
Yesterday Neal Foundly and I made a trip to London to take the opportunity to visit a couple of the investment banks at Canary Wharf. The amount of building there is extraordinary, with various parts of the old docks being drained to make way for new skyscrapers and massively overpriced flats (sorry I mean apartments).
The contrast with the understated Lindsell Train offices tells its own story. On the one hand the investment banks trade on volatility and excitement. On the other hand, the way Nick Train runs money is understated and (dare I say it) dull and boring. Neither is right or wrong.
We tend to prefer our portfolios to be dull and boring but volatility is a fact of life in the stockmarket. We therefore need to be able to adapt and find ways to not only protect portfolios against market dips, but find ways of profiting from them.
The content contained in this blog represents the opinions of Equilibrium investment management team. The commentary in this blog in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader.