Little time is needed browsing the non-fiction section of a bookshop to notice that the market for ‘how to’ books has exploded.
Whether one wishes to be a master of mindfulness, a champion of chess or simply return to the weight of 20 years ago, the book buyer is spoilt for choice. A new addition to this list is John Kingham’s The Defensive Value Investor, a how to book of investing in shares.
The book is aimed squarely at the private investor who may have invested in collective vehicles such as Oeics and investment trusts and who is keen to invest in the shares of individual companies. His book is very clearly written, has a number of interesting case studies, is packed with a plethora of rules of thumb and contains a great deal of common sense.
Mr Kingham has clearly spent a lot of time reading about investing – Graham, Buffett, Greenblatt and Templeton are all quoted - and has also tried to take lessons from each of his investments. As with all investment strategies he states that his is always evolving.
His desire to keep learning is admirable, but I wonder if it can result in an overly prescriptive approach. The book finishes with three pages of checklist items which he details through the book and which he explains have developed as a result of his investment journey.
A possible consequence of finding fault with each investment made is that the investor is left looking for the perfect investment. While this sounds ideal, I see two major and connected drawbacks: a ‘perfect’ company is often just a company which has not yet tripped up, but history tells us probably will, and when it does, the consequences can be painful as the shares will have been pushed unjustifiably to a very high rating.
Kingham is keen to study a company’s long-term earnings and dividend payments, but makes no comment whatsoever on its abilities to generate cash. He openly talks about his poor investment decisions in Balfour Beatty, Serco and Tesco and takes lessons from each, but omits to highlight that the profit and loss and cashflow statements were giving very contrasting messages at his time of purchase.
While a big fan of checklists, I do wonder if Mr Kingham’s list is rather unwieldy and it certainly has areas of contradiction. For example, one rule states ‘sell a company if the dividend for the latest financial year falls to zero’, whilst another highlights, ‘Don’t just sell because a dividend cut or suspension is announced’.
And when looking at parts of his portfolio from 2015 published in the book, it is clear that given dividend suspensions in Serco and RSA that it is the second rule which is not always (immediately) followed.
I particularly enjoyed Mr Kingham’s chapter on value traps and how to avoid them. He details 18 questions an investor should ask and although the answers will always be subjective the responses definitely provide a prospective investor with pause for thought. Inevitably, there is a question pertaining to the presence of a moat (surely we must be at or around peak Buffett), an investment Nirvana which I believe is far rarer than we are generally led to believe.
Mr Kingham’s track record so far (his website shows his performance since 2011) has been strong relative to the FTSE All-Share Index and has clearly been aided by the tailwinds of strong mid-cap performance and high investor demand for the ‘quality’ companies which he now appears to favour.
However, to really understand and analyse an investment style, it is imperative it is studied through a whole investment cycle. I wish Mr Kingham the best of luck in the future with maintaining or even improving his impressive track record; it will be interesting to see how the Defensive Value style works in somewhat tougher periods.
Alastair Mundy is head of value of Investec Asset Management