At this time of year a number of investors are happy to share their hopes and fears for the year ahead. We have pointed out in previous commentaries that there is little science and even less accuracy in these forecasts. Commonly, these forecasts are accompanied with more precise forecasts of timing (‘tough first half, but better second half’) as if the primary question is simply not exacting enough.

As we have said before, we do not get involved in such pointless competitions. Firstly, we know we would be wrong and secondly we don’t really understand the market’s obsession with calendar year returns.

The time we have saved on this pointless exercise has allowed us to conduct some navel gazing on our investment process. It is very noticeable that many of the best investors over a number of decades share at least two characteristics: patience and low portfolio activity. As contrarian investors we realise we are often guilty of buying too early and selling too early. While neither of these are sins in themselves – after all Baron Jacob Rothschild when asked how he had become so rich commented:  “I made fortune while selling always a little too early” - we wonder if we could improve our process by not always being SO early. The institutional imperative which demands continual outperformance probably increases one’s desire to deal as does the extraordinary amount of (useless) information to which everyone has access.

The ability to patiently wait for only the best ideas is not easily gained but pays great rewards (Baron Phillipe Rothschild, clearly from a family who both invested well and were eminently quotable, once exclaimed that the time to buy was "when there is blood in the streets.”)

Some people wonder if our focus on patience and low turnover (we aim to hold our stocks for between 3 and 5 years compared to an industry average of between 6 and 9 months) is the correct method given the speed with which markets move in the modern era. While this is a relevant question this ‘speed’ should not be confused with ‘distance’. For example, the equity markets have taken 9 years (‘distance’) to de-rate to their current levels from their valuation peak despite some intermittent bouts of extreme volatility (‘speed’). This is true for stocks too: think the steady decline and de-rating of formerly successful companies such as ITV and Rentokil – more a grind than a collapse.

None of this is easy to carry off (thankfully, otherwise we would be unemployed) but we continue to try and learn from our and others’ mistakes. Sitting on our hands, waiting for the right time to act and then avoiding selling too early are just some of our New Year’s Resolutions.

 This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities including Temple Bar.

For more information on Temple Bar visit www.templebarinvestments.com

When things take a turn for the worst, it is important not to become too emotionally attached to our losers. We need to bear in mind that some things may have happened since we purchased the shares to make us reconsider our position or perhaps we may have simply performed some poor analysis. As share prices fall our process requires us to revisit the stocks and determine whether we still have conviction in our original view. At this point we have the opportunity to buy some more, sell some or just hold onto what we’ve got.

In the same way that we must avoid emotional attachment, we must also be wary of letting the heat of the moment affect our thinking. Being a contrarian is easy if you can time your entry point to perfection. However, it is rarely that straightforward – indeed it is usually the case that a reasonable amount of pain needs to be felt before a purchase comes right. Clearly, unless you are truly masochistic, this pain is no fun but it does ensure that many investors do not become lifetime contrarians.

Even if it was roughly the same amount of pain each time it might be easier to bear; but that too would be too easy. At different times of a market cycle investors react differently to bad news. For example, as the bear market accelerated in 2002 and early 2003 investors became desperate for ‘visibility’ and much less willing to give companies and their management the benefit of the doubt. As the market bottomed bad news almost became an attraction for investors as it brought expectations of corporate activity.

We are asked many questions as we speak to investors: Where’s the market’s going? Where will the market be at the end of the year? Where are interest rates going? Often our honest answer on these (and similar) questions is ‘we’ve got absolutely no idea at all’. Some investors see this as a total abrogation of our duties while others can’t believe we don’t have a well thought out and articulated idea.

It is notoriously difficult to predict market movements over relatively short periods. Perhaps we should just join the talking heads and offer our opinion in the hope that it will be forgotten if we are embarrassingly wrong but that we will be lauded for our foresight if we are correct. However, this seems both dishonest and a complete waste of time. In general, the questioner will get a far higher quality answer by flicking a coin.

What about seemingly more meaningful questions such as the future direction of short-term interest rates? Once again, history tells us that the majority of strategists get these questions wrong the majority of the time; but putting this aside we often wonder what the questioner would do with the answer even if we were to provide one. Markets are not so straightforward that they always react in the same way to an economic variable (and even if they were, that arbitrage would soon be competed away).

In a similar vein, we even take an agnostic view of those macro-economic variables that would seem to be relevant to how we build our portfolio. For example, we are often asked why given the ‘obvious’ pressure under which the UK consumer is currently suffering, why on earth we would be overweight so many consumer stocks.

As contrarians, we are only attracted to stocks after they have already fallen significantly. By the time these stocks enter our universe they have already have an embedded consensual view priced into their valuations. Therefore, if the consensus view is that the outlook for consumer spending is poor then this will already be discounted in the price. Therefore, for the shares to fall even further, the outlook would have to deteriorate even more than the consensus believes. Secondly, a number of companies in which we have invested have opportunities to improve their profitability by internal actions rather than rely on an improvement in the economic outlook.

Finally, if the consumer is really in as weak a position as the consensus believes, then interest rates will soon be cut very significantly which we assume would make the consensus very bullish.

We would rather build a portfolio with a reasonably large number of individual stocks each moving in their own share-price cycle in preference to having one macro-economic view which then needs to be reflected in all of the individual holdings. We believe the latter greatly increases the risk in the portfolio as performance can rely greatly on the accuracy (or otherwise) of a very variable variable.

Of course it is possible that in building up a portfolio through a series of individual stocks we could unknowingly expose ourselves to large risks. However, our natural reluctance to take very large positions in either stocks or individual sectors protects us from this risk and ensures we always have a well diversified portfolio of stocks.

In a market where the forces of value and momentum are moving to historic extremes, it is fascinating to watch the bulls and bears on the bank sector argue their corners. Not surprisingly, the bull corner is less crowded than it was one or two years ago. The lexicon of a bank analyst has exploded in the last six months alone and a research note is incomplete without mention of SIVs, conduits, collateralized loan obligations, collateralized bond obligations, Alt A mortgages and so on.

Analysts who were previously bulls and who had highlighted low price earnings ratios and high dividend yields as attractive are now spooked by the write offs and impairments the banks have had to take on these esoteric assets which they hold. In fact, it is quite easy to paint an apocalyptic view of the future with further write-offs eating into the balance sheets of the banks to such an extent that their long term survival would be in doubt.

We are often asked questions such as: have we seen all the write-offs? How much worse could it get? Are these write-offs fully discounted in bank valuations yet? The only answer to all those questions is that no-one knows. Write-offs (and their half-sister impairments) are based on a large number of assumptions and these assumptions can produce massive differences.

Imagine a pool of sub-prime mortgages. To calculate a potential write-off, one needs to assume how many customers are likely to move into arrears, how many of these will ultimately default - and therefore see their house repossessed -  and how much the houses will be sold for once repossessed. An auditor can check the assumptions used in the model and take a view as to whether they are ‘sensible’. He may possibly even be able to take a view on whether they are prudent. However, he has no ability to tell if they are correct.

One possible short-cut is for banks and their auditors to take their lead from market valuations of assets similar to those which they are trying to value. While this may appear an attractive approach, many commentators would claim that market prices – which are usually based on indices – are being affected by both panic selling of similar assets and the use of the indices as a hedging instrument (as nervous holders attempt to hedge their overall exposure).

It is no longer just sub-prime mortgages, and the derivative products borne from them, whose value is in doubt. Better quality residential mortgages, commercial mortgages, investment grade bonds, high yield bonds and leveraged loans have also been wrapped up, repackaged as bonds and sold to a wide variety of investors. And all components of all of these packages are falling in value.

It is therefore not surprising that analysts formerly bullish have now changed their tune. They highlight ‘lack of visibility’, ‘lack of faith in management’ and ‘lack of potential catalysts’ as reasons for their new-found bearishness. The implication is that any sensible investor should wait for improved news and a line to be drawn under the write-offs before dipping one’s toe into the sector.

While this approach sounds intuitively appealing, it is one which is of less value in the real world. Only history will tell us when the write-offs ended. Obviously management could try and call the bottom at some point but surely investors would be unwilling to take their word – after all, many feel they have been badly misled by similar words in the past. The stock price bottom is by definition reached at the point of maximum bearishness. But once again this is something that can only be measured with hindsight. Instead, we believe it is vital to look for clues that we are there or thereabouts as history tells us that huge price increases are possible before any good news becomes apparent.

What clues are we looking for? With banks earnings so volatile and their balance sheets under such pressure, we believe that short-term earnings and dividend measures are of very limited use. Our preferred alternative is to compare the share prices of the banks with their net assets. Historically, banks have traded at multiples of their asset value. This recognized their high levels of profitability which itself reflected the oligopolistic nature of the sector.

Some banks such as Bradford and Bingley have traded below their asset value while others such as HBOS are fast moving towards theirs. However, these valuations are obviously low for a reason; investors have very little confidence in the asset values. This is hardly surprising given the highly geared nature of banks’ balance sheets.

For example, HBOS has, according to Deutsche Bank, assets of over £500bn on its balance sheet compared to approximately £18bn of tangible equity. Clearly a little stressing of a spreadsheet can generate some scary write-offs which can quickly eat into the tangible equity.

We are therefore left in a position where we (and no-one else) can speak with sufficient certainty to be confident that the banks balance sheets are big enough to take everything that is currently being thrown at them. Perhaps, the write-offs will bring one, or even a number of banks around the world, down. This is possible but is clearly a worst-case scenario. And if followed to its natural conclusion anyone looking to invest with greater certainty should never invest in a bank.

However, we are not that apocalyptic. We do though believe it is important to be selective and hold just three banks : HSBC – for its balance sheet strength; HBOS, as we believe many of the market’s fears over its ability to fund its loans are overdone and Lloyds TSB as we believe the weakness of many of its competitors in the mortgage market will allow it to significantly increase its market share.

This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities including Temple Bar.

For more information on Temple Bar visit www.templebarinvestments.com

We are often asked whether investing in out of favour equities is as low risk as other investment styles. After all, say the doubters, stocks can stay out of favour for some time. Even worse a few of them may go bust. And perhaps even worse than that, it is claimed that it is possible to lose a lot of money by continually averaging down and buying more of these ‘losers’.

Let’s look at each of those points in turn. It is true that stocks can stay out of favour for some time. However, most out of favour stocks do pay a decent dividend (as the price has fallen, the yield has increased) and therefore the investor receives useful compensation for waiting. Of course, most portfolios are well spread across a number of companies and sectors, all of whose share prices are driven by different factors. It would therefore be surprising if they all remained out of favour simultaneously. Of course, despite this diversification, in some periods out of favour stocks are tarred with the same brush (think ‘old economy’ stocks during the internet bubble) but we would argue this simply provides investors with more bargains than usual.

(The opposite of staying out of favour for a long time is perhaps worse. After all, it is only about a year since some clients were wondering if private equity, by purchasing unloved companies, were stealing all our best ideas! It would appear that for the time being at least we can all stop worrying about that threat!).

Although investors tend to remember the out of favour stocks that lost most of their value (e.g. Marconi) this is perhaps an example of selective memory. It is very easy to be emotionally scarred by bad experiences and therefore believe that that an occurrence is actually far more common that it is. The list of out of favour companies which have been restored to full health is much longer than the failures. However, the successful stories are far less exciting and traumatic and therefore appear to lose prominence in investors’ minds. We have a number of simple checks with which to try and limit our exposure to financially strained companies; we tend to avoid those built hurriedly via acquisition, through the use of debt and with little long-term history.

If most out of favour stocks do eventually perform well over a complete holding period and few go bust, then any worries regarding averaging down should be minimised. In fact, averaging down will work as a positive. What it is important to do is to avoid becoming obsessed with stocks or building an unnecessarily dogmatic approach towards a company’s prospects. If a share falls after we have purchased it, we always revisit the arguments for buying it. Have we learnt anything new which we should build into our analysis or is our assessment of fair value unchanged? Remaining flexible, willing to admit mistakes and knowing when to stop averaging down all minimise the risks of investing in out of favour stocks while ensuring we have full exposure to an investment style that has produced good returns over the long term.  

Sometimes, many natural ‘value’ stocks become relatively expensive. Investors searching for yield typically target companies with a number of positive characteristics – good historic dividend growth, high dividend cover, strong balance sheets and stable businesses. However, this theme may become overcrowded and thus offer little in the way of value. At these times, we are happy to wait patiently for outstanding opportunities rather than be forced into second-best alternatives. We are also very aware that trading attracts costs and is not always as successful as intended. As Tweedy, Browne a very successful American asset management outfit has noted:

‘Investment managers and analysts tend to be energetic, intelligent, well-educated, highly paid and self-confident individuals. Great traits in most lines of work! However, it appears that it is very

difficult for people with these traits to do very little, to not make lots of buy and sell decisions, even though a detached view of the empirical data…..may suggest that the best course, the most rational decision, would be to sit tight and do nothing.’

In our search for value, we are focusing on some long-term underperforming stocks which we believe investors are viewing with an undue degree of caution, perhaps because they may have sustained significant losses for them in the past? Or maybe the market views the industries in which these companies operate as risky or declining or see the company’s management as poor? Perhaps recent trading statements have indicated a lack of immediate visibility in the operating conditions? Whatever the reason, we believe in many of these situations the shareholders are being adequately compensated for the uncertainty and that, as the future becomes clearer, more potential investors will be attracted.

Investing in out of favour stocks would be much easier if there were dependable identifying characteristics of either the companies or the share prices. For example, it would be lovely to think that Directors buying shares in their own companies or companies buying back shares was a foolproof approach to pinpointing share price lows. Similarly, it would be lovely if there was a certain feature on a share price chart or a valuation indicator such as price earnings ratio or dividend yield which was consistently useful.

Unfortunately and not surprisingly no consistent approach has yet been found for successfully avoiding all falling knives whilst embracing fallen survivors.

Because of this, many investors prefer to wait for catalysts. This might be better trading news, the arrival of new management or a certain stockbroker to turn more bullish. We have found these indicators similarly frustrating as typically they just result in paying a higher price for the share with no guarantee that fundamentals have really changed for the better.

So if no-one rings a bell or waves a flag at the bottom and there is no foolproof method for picking the winners from the losers, what is our approach?

Firstly, we prefer to assess what the long-term profitability of the company is and decide what the market would be willing to pay for that level of profitability. However, we then need to try and assess the probability of the company making those profits. There are typically two stumbling blocks for this approach: the risks that a company might be unable to trade through its tougher times because of a weak balance sheet and the risks that our assessment of long-term profitability is significantly wrong.

UK house builders offer a useful case study at the moment. Clearly the UK housing market is horrible at the moment but historically if we had waited for the arrival of a clear improvement in trading news that would have proved much too late to buy the shares. We are tempted to buy the sector. Undoubtedly, trading news will get worse from here, we may see land values being written down quite significantly and company management may become more negative. However, the shares have already discounted a lot of bad news and some shares in the sector trade at below their asset values but against that we know the industry is cyclical and good times will ultimately return. And historically in those good times, the market has been happy to pay a large premium to asset value for the shares.

This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities.

Managers’ Reports currently run the risk of looking absurdly out of date only hours after they have been written. In general, we are waiting to see more blood on the streets before we spend the cash we have. What could cause this? Well, any number of factors clearly – most of which are continually highlighted in the financial press – but we would add three more: the announcement of poor inflation data around the world would, we assume, really kick nervous bond markets in the teeth and, in one move, take away the most important crutch for equity weightings; any loss of confidence in the China story; and mounting fears of a consumer lead recession in the US

The sub-prime mortgage crisis in the US made it to the front pages of the financial press in August and the related difficulties of Bear Stearns, the US investment bank, were analysed in depth. We will spare the reader the very dull technical details surrounding the arcane subjects of mortgage securitisations, collateralised debt obligations and equity tranches. Instead we will make just a few pithy observations.

• Many commentators have warned investors to watch out for any deterioration in ‘liquidity’. While ‘liquidity’ has many definitions, the most relevant seems to be related to the availability of debt

• One possible, and even probable, consequence of the sub-prime crisis is that there will be fewer buyers of mortgages wrapped up and magically turned into bonds

• Another consequence is that the Federal Reserve has warned banks in the US to tighten up their lending criteria when providing mortgages to customers

• Both these points suggest there could be significantly less debt, or at a minimum less growth in debt in years to come

• However, despite this likely deterioration in ‘liquidity’, market commentators are not recommending panic. Instead they talk about the problem being ‘contained’. When should we panic?

• It seems very unlikely that Bear Stearns are the only holder of mortgage securitisation vehicles suffering. Who else is taking the pain? Other large US banks? Hedge funds? Insurance companies? Pension funds? Barclays? This is a very opaque market and the bodies may be discovered in very strange places

• With many sub-prime and prime mortgages customers in the US (and in the UK) only just resetting to higher rates, having been on attractive 2 year fixed rate mortgages, higher interest rates are still to have their full effect on the sub-prime crisis, the housing markets and the economy overall

We also have one extra point to make about possible contagion from sub-prime assets to other asset classes.  Most commentators assume the contagion will be minimal as there is no direct economic link from sub-prime assets to, say, high yield bonds and that with corporate balance sheets in rude health, fixed interest markets may well have over-reacted to a very specific problem. This argument may be spot-on (in which case assets such as high yield bonds are screaming buys). However, we believe what’s more important than spotting an economic linkage is to be aware of any factors which might link financial markets.

For example, picture a hedge fund holding an array of fixed interest assets ranging from derivative products of sub-prime mortgages, high yield debt, payment in kind notes (‘we can’t pay you now but we hope to pay you later’) and so on. Post the blow up in sub-prime assets, the fund manger may receive a call from his bank questioning the value of his collateral and requesting the repayment of some debt. The hedge fund manager can liquidate the sub-prime assets but may find them too lowly valued or illiquid so may have to sell an alternative asset on the portfolio. Repeat this exercise across a plethora of hedge funds and very quickly, ‘contagion’ can set in. Of course, one could argue that providing the fundamentals have not changed, the fire sale of unaffected assets might create a buying opportunity. This might be correct but a) that assumes they were correctly priced previously and b) ignores quite how much buying of these assets has been carried out with borrowed money and therefore how big the potential supply could be.

For us, despite the best efforts of the great and good to identify the worst case scenario for the sub-prime crisis, it is all effectively one big guessing game. However, investors continue to remain relatively confident that the problem can be ‘contained’. Let’s hope they are right.

There has been a great deal of coverage in the media over the ‘phone-in scams’ which have been uncovered at various TV companies. The most commonplace appears to have been to encourage viewers to phone-in - for a fee and in an attempt to win a prize - even after the competition officially closed. We will never know who in these companies did and didn’t know about these practices, but it is worthwhile trying to understand some of the motivation for them. Executives of both listed and private companies (and even publicly owned organizations) are rewarded for good performance, typically relative to some benchmark. In addition, management of companies listed on the stock market have usually guided investors to expect a certain level of profitability and there is great pressure to meet or even beat these expectations. It is not too hard to imagine that as advertising revenue has declined for ITV in recent years that they have been forced to find a number of ways to avoid disappointing investors and phone-in scams were possibly one of them.

We have been long term holders in ITV, believing that the fears over the structural decline of terrestrial TV channels were overdone and that the company had brought some of the damage on themselves by stinting on spending on new programmes. We thought that this forced the knock-on effect of encouraging advertisers to spend their budgets on other mediums. Ironically, we also believed that if the TV regulator could be persuaded that ITV’s problems were mainly structural, then some of the harshest regulations that work against ITV could be lifted or lessened.

The recent appointment of Michael Grade as Chief Executive of ITV gives us increased confidence that high quality programming is central to the new strategy and together with our views on a better regulatory backdrop we are hopeful we have now seen the worst of the company’s share price performance.

It is interesting to return to the subject of earnings disappointment. For many years Northern Rock has been regarded as a quality play in the bank sector: a low cost operator with good management, consistent earnings growth and a strong consumer franchise. For these reasons, the bank’s shares have generally been more highly rated than those of its peers.

However, Northern Rock was recently forced to downgrade investors’ profit expectations. Part of the downgrade was due to the bank having sold a large number of fixed rate mortgages to customers without having locked in place the necessary funding to guarantee a good level of profitability on the mortgages sold. When interest rates moved sharply higher, the bank found themselves in the uncomfortable position of having to lock in much less attractive funding rates than originally expected.

Obviously, the management of Northern Rock have not admitted they lost a bet on interest rates but that is certainly one way the facts could be interpreted. Why would they do this? Well, Northern Rock’s consistency of earnings over the last few years has earned them the right to trade at a higher rating than other UK banks. Their ‘earnings visibility’ has been lauded. It was vital that this record of consistency was not lost.

The reduction of profit forecasts triggered a swift share price reaction and was accompanied by comments that ‘earnings visibility is now low’. That may be true and isn’t really surprising for a highly geared financial institution (the average bank has the ratio of £100 of loans made, backed by £5 of its own money, generating approximately £1 of profits – with that combination how can visibility be anything but low?). The real problem for the Northern Rock share price was that in moving from almost £11 at the end of May to under £8 by early August, it surrendered its ‘quality premium’ as it moved from being perceived as a well run company to something more average.

This is a good example of why we are reluctant to pay a premium for management quality. That quality can be transient and, if it proves to be so, can result in significant share price falls. Instead we would prefer to be in companies perceived to be run by poor management (but not ‘dodgy’ management). Perhaps the management isn’t poor and the market perception is wrong? Perhaps, poor or not, they will hit a run of good luck soon? Or perhaps they are poor and will be replaced? And perhaps the assets, sales, market share and franchise of the company are far more important to the value of a company than a management team just passing by?

We currently have no exposure to Northern Rock

This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities.

Hello and welcome to the first entry to my new blog, where I aim to provide Temple Bar investors with an insight into the investment decisions we take. In this first entry I talk about some of the underlying principles behind our investment philosophy.

In general, the job of a contrarian investor is to buy the shares of unloved companies which the market believes have structural issues which will in all likelihood prove hard to overcome. The expressions we typically hear at our time of purchase are ‘this industry is in structural decline’ or ‘the business model is broken’. Typically our job is to search for reasons why this may not be the case and/or to ascertain how much bad news the share price has already discounted.

Over the years we have discovered that the market typically over-reacts to some short-term news – who remembers when the tobacco stocks were going to be litigated out of existence or the tenanted pub companies were going to be marginalised by their larger competitors in the managed pubs? Things change, supply and demand moves back into equilibrium and views extrapolated into the future are shown to be seriously misguided.

However, it is wrong to give the impression that we are particularly confident when we make our purchases. While fund managers like to give the impression that they can forecast the future with great accuracy, the truth is that their forecasts are purely reasonably well informed guesses (whether they like to admit it or not). Therefore, we do not stand in the way of these ‘falling knives’ with 100% certainty we will be proved correct – and history sadly shows we are not 100% correct. Instead we stand in their way knowing that ON AVERAGE we should be ok. Looking back at some of our successes, it is clear that there was more than a bit of luck involved. However, that is an important part of our process. We try to buy at reasonably distressed valuations. At these levels, news has to continue to be bad to drive prices lower and any good news (forecast or otherwise) should prove positive.

Clearly it is our job to remain objective and unemotional when other investors are panicking but we still have feelings and therefore are often sympathetic to the concerns that other investors might have. Rather like parents waiting anxiously for their teenage kids to get back from the pub in one piece, we worry about our holdings: are regional newspapers in terminal decline (Daily Mail)? Are CDs a thing of the past or at best a commodity often bought cheaper at Amazon or Tesco (HMV)? Can the price of tracksuits and footballs possibly get any lower (JJB)? And is anyone likely to be watching Emmerdale in 10 years time (ITV)? In fact, in all likelihood such stocks shouldn’t be on our portfolio if they didn’t cause us some concern.

However, not everything we do is about investing in stocks that other investors believe are ‘value traps’. Another expression we often hear when we are buying is: ‘It’s cheap….but I can’t see what’s going to make it go up’. As if this job isn’t hard enough already, we’re now apparently expected to find cheap shares, correctly identify the reason it’s going up (the ‘catalyst’) and pinpoint the time during when it will happen.

It isn’t clear whether this belief in ability to time entries into the market with such precision is driven by over-confidence or the demand of clients (and sometimes colleagues and bosses!) to continually generate performance. Whatever the reason, instant gratification is in vogue and investors have no time or space for deadbeats on their portfolio. The consequence is increased turnover (‘I’m selling it, it’s dead money for six months’) and heightened focus on short-term performance (‘I’m performing well this week’).

This is nothing new. ‘The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel they must take home some money every day, as though they were working for regular wages’. This quote comes from an investment classic ‘Reminiscences of a Stock Operator’ written by Edwin Lefevre in 1923!

Our equity portfolio has evolved over the last four years from one predominantly focused on the ‘I can’t see why you’re buying that stock’ holdings to the ‘I can see why you’re buying that stock but I wouldn’t just at the moment’ holdings. That probably gives us greater confidence in the prospective returns of the portfolio but clearly with no view on how long it will take to generate those returns!

We finished making our bed earlier this year and other than pushing a few pillows around have nothing to do other than lie in it. We remain big bulls of the largest stocks in the market and have been happy to further top-up the likes of BP, Royal Dutch Shell, GlaxoSmithKline and HSBC in weak periods. Other than that portfolio activity remains very low.

This article is not investment advice or a recommendation to buy any share or fund mentioned directly or indirectly, and should not be relied on in making any investment decision.

Please note that the opinions expressed in the above article are the opinions of the author alone, and do not necessarily represent the views of Investec Asset Management or its associated companies.

Investec Asset Management, or any of its associated companies or employees (including the author), may hold positions in any of the securities mentioned in the above article or in related securities.