A new book by investment guru Richard Oldfield does the impossible
– it banishes the mysteries of fund management, says Sarah Modlock
For City whizz kids the idea of missing their daily fix of the Financial Times and Wall Street Journal is unthinkable. For mere mortals, financial news is more likely to come from the occasional scan of the money section of a Sunday newspaper or a quick glimpse at their credit card bill. Rarely is there an industry expert who has the time, inclination or courage to write a bare-all view of investing with the aim of demystifying a sector that is perceived by many lay people as a black art. With his new book Simple But Not Easy, Richard Oldfield, chairman of Oldfield Partners, has done just that.
Published in June this year, it is positioned as ‘an autobiographical and biased book about investing’. True, it is Oldfield’s take, but then it is a ‘take’ well worth reading. Over 200 or so pages he brings to life aspects of financial management which are often dull or strewn with jargon and therefore inaccessible to investors. Plain language and plain speaking used throughout is punctuated with humorous illustrations and anecdotes, quotes, mneumonics and even poems and rhymes. You can also discover the delights of the ‘Savoy dinner’, ‘Rip van Winkle investing’, ‘Venables rating’ and the ‘Bernstein paradox’.
It’s impossible not to warm to Oldfield’s style, which is brilliantly insightful and self-effacing in equal measure. He has spent 30 years at the top of his game as an investment manager but has also been seeing, evaluating and appointing other managers over the last decade. This experience is at the root of the book although he has deliberately chronicled some of his own blips, errors and howlers in the opening chapter to put readers at ease and help them learn from his mistakes.
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Ultimately, he believes that investing does not have to be scary. ‘Hence the title of the book,’ he says. ‘It’s not complex unless you get into derivatives, but the rudiments of cash and bonds and property are not complicated and people with a bit of money should not feel nervous about it when they can easily get on top of it and make decisions which will benefit them.’
Everything from how to choose a manager to valuation, benchmarks and the perils of index-hugging is unshrouded in Oldfield’s financial Babylon. He delves into the importance of an investment firm’s culture and has wise words and examples about how geographical – as well as psychological – distance from the markets is healthy for decision-making. An elegant base near Victoria ensures that Oldfield’s firm remains away from the frenzy.
‘I don’t like the City as a place,’ he explains. ‘There is no real life. You don’t see people going to Sketchley or wheeling prams. Perpetual (now part of Invesco Perpetual) based itself in Henley and I think the geographical distance provides perspective. The Edinburgh fund managers have it too. Then of course there is Omaha, Nebraska, where Warren Buffett is based. Of course a lot of fund managers want to be like Warren Buffett. He sits in a room with no machines, decides often extremely quickly where to invest and then just does it. So I do believe that distance is a good thing. You can avoid being subject to peer pressure.’
One section of the book that has raised more than a few eyebrows details Oldfield’s views on hedge funds. His position is not just unfashionable but for many, controversial. Has he experienced any backlash? ‘Yes, I have. There are one or two people who aren’t too pleased with the hedge-fund section. But I don’t retract anything I wrote about hedge funds. There is a passage in the book which sets out the arithmetic of what the average hedge fund can be expected to achieve and nobody has taken me to task on that. If there is something wrong with it I would be interested to hear it.’
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Oldfield is concerned that hedge funds present so many hurdles for investors who may be doing things they are not used to, such as shorting. ‘With hedge funds you’re pushing a huge boulder uphill and strong managers will cope with that, but the average manager is going to get squashed by the boulder.’ He cites the high fees as another problem. ‘I feel very strongly about that, but I am not polemically opposed to hedge funds. In fact, I’m all for finding good people. What I am against is the concept that you can diversify your portfolio if you put 10 or 12 per cent in a bucket which you mark ‘hedge funds’ and then just aim to fill the bucket. You can end up with something very indifferent and moreover find that they are not really producing the goods at the time when they are needed.’
Before the hedgies among you dash out to cast your eyes over the crucial words and numbers, Oldfield is keen to emphasise that there is a place for hedge funds: ‘The point I do make repeatedly in that chapter is that I’m talking about the average hedge fund and I completely accept that there are lots of brilliant hedge-fund managers. But the trouble is working out who they are. It’s also very difficult to get access of course, as a lot of them are closed.’
Refreshingly, in addition to guidance on when to fire your investment manager and why bad performance is a bad reason, there is a chapter that looks at how to be a successful client. This is a concept often overlooked: the client’s responsibility to themselves is easily forgotten. But it does exist. Look out for the delicious tale of ‘Rodney’, the naughty client whose behaviour is an example of what not to do.
There is also a clear desire for investors to feel close to their money and have some fun with it, beyond conventional asset allocation. Oldfield believes that money should also be invested in a quirky way, which can be rewarding both financially and emotionally. He highlights Flemings as being particularly good at this, most recently through investments in Cuban nickel, Moscow property and African gold.
The book has a natural flow which makes it easy to read. But it would also prove useful for reference purposes beyond the first reading and is ideal for anyone who wants to understand the basics or is slightly nervous about investing.
At the moment there are no plans for a sequel. Oldfield’s work within his own firm and also as chief executive of the investment committee at his alma mater, Oxford University, looks set to keep him more busy than ever and no doubt ensure his endless supply of wit and wisdom.
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Simple But Not Easy by Richard Oldfield is published by Doddington at £15. Copies are available from quality bookshops or orders can be placed by email: simplebutnoteasy@oldfieldpartners.com
My Motorola howler is exactly the opposite sort of howler, and more scarring than any other investment mistake of the last 10 years.
Motorola in 2002 was a cheap stock. Its share price was little more than the book value of its assets, which usually implies undervaluation since stated value of net assets in a company’s accounts is normally less than their market or fair value. It had depressed earnings but it was not too great a leap of imagination to think that it could improve its operating margins significantly.
We bought the shares at a price of $15 in June 2002. The share price fell. We bought some more. We were patient. We waited. There was no improvement. We waited longer. Finally, when the share price reached $8½, we gave up. We lost our bottle and sold.
Almost immediately the share price recovered. In fact its low, during this whole period, was $7.71, only just below the price at which we surrendered. There was no coincidence in this. The bottom in a share price cycle is the moment at which there is the greatest unhappiness of the greatest number. What this demonstrated is that we were rushing through the exit at more or less exactly the moment that most other people were.
Within a few months the reasons for the share price recovery became apparent. The key to Motorola had become its mobile telephone handset business. They ranked third in this, behind Nokia and Samsung Electronics. At the time that we sold the holding Motorola’s share of the world handset market was around 12½ per cent. They then started to produce models which, in this intensely fashionable business, hit the spot. Even with my untutored eye I could see that their clam-shell models (and later the extreme slim Razr models) were much cooler than the rather chunky things which Nokia continued to produce. Over the next four years Motorola’s share of the handset market rose to over 20 per cent. At the end of 2006 the share price was $20½, compared with the $15 at which we had bought and the $8½ at which we sold.
This is an extreme and particularly depressing illustration of something which happens quite often. If people invest in shares which look cheap, in companies with essentially sound businesses but scope for improvement which accounts for the moderate valuation, they have to be patient.
In such shares there is generally no catalyst immediately visible which will give a quick result. If there is such a catalyst – a major outside shareholder agitating for change, for example, or new radical management – the chances are that it is already reflected in the share price to some extent and the valuation will not be so moderate. But patience is tough. (After all, the original meaning of patience is suffering.) When the going gets tough, the less than tough get going. It is frustratingly easy to give up on a share after either dreary performance or downright awful performance, just at the point at which everyone else gives up, and just before it finally turns.
One day in the early 1980s, I had to go to Cambridge by train to talk to undergraduates about investment management as part of my employers’ recruitment programme. Equipped with a first class ticket, I wandered down the platform at Liverpool Street Station looking for a first class compartment. There was none to be seen. I walked almost the whole length of the train. Just before the furthest carriage, I gave up, convinced that I must have missed it. I turned round and walked all the way back until I found a platform attendant, who told me that the compartment was in fact in the very last carriage – just after the point at which I had reversed.
This struck me instantly, and ever since, as a marvellous allegory of investment. So often investors are tempted to give up, and too often do, just before the thing for which they have been hoping happens.
When the going gets tough, the less than tough get going.
