Equities  

Book review: The Manual of Ideas

Even after 33 years in the investment industry I am still reading “how-to” books on the subject and I recommend that you read as many as you can too; particularly those by or about the great money-managers

The cost of such books – money and time – is quickly amortised against their value for an investor. You never know whether one will throw up a winning stock tip, or completely change your way of thinking about the investment challenge. And John Mihaljevic’s compendium on value investing, his “The Manual of Ideas” certainly repays its reading.

We can not expect too much – as Mihaljevic acknowledges: “No treatise on investing can ever spell out how to make a decision on every potential opportunity.” But he goes on to claim, with some justification, that “throughout this book we have sought to share insights into making sensible investment decisions.”

Let me give you some examples of his sensible insights that carried most weight with me.

“We find it quite fascinating that investors seem to appreciate assets in their personal lives but place greater emphasis on income when it comes to their personal portfolios.” This is why: “Asset rich companies occasionally trade well below replacement value.”

“Some of the biggest mistakes in investment decision making have involved fast-growing companies with large market opportunities.”

“You almost never come across fraud at companies with little or no debt. If a bad person is going to try and steal some money, they will logically want to steal as much as possible.”

Meeting company managements is overrated: “Investors rightfully fear they could be unduly influenced by articulate CEOs whose skilled salesmanship may have little to do with the actual prospects of a business.”

Some investors shy away from tricky-to-deal in shares, but: “Illiquidity is not business risk or industry risk, so the intrinsic quality of an investment opportunity is rarely diminished by illiquidity.”

“Raw and debilitating fear compels many investors to avoid specific investments at any price, effectively causing the price mechanism to break down.”

I’m going to give a concluding quote, which summarises Mihaljevic’s pragmatic approach: “The valuation we are willing to ascribe to a business represents one of the few areas of complete control in our investment process. If a security fails to meet our required price, we may simply keep our capital allocation to that security at zero.”

This is true and useful. Investing is always “difficult” because it involves predicting what is unknown about the future, but by holding firm to those aspects of the decision-making process that are more rather than less verifiable, like valuation, we can improve our results.

Nick Train is investment manager of the Finsbury Growth & Income Trust