Investment tips from Anthony Cross to generate sustainable long-term returns
To win this battle, one needs to have a clear set of investment rules that can help them make the correct investment decisions, he says.
With over 20 years of experience at Liontrust Asset Management under his belt, Cross remains among a few managers who have spent more than 2 decades in a company.
“I am a great believer that this is a really long game. If you quietly build your investment returns and your own brand, eventually people will recognise that and start to put money with you. It can take a long time. Often people jump about too early when they should have stayed put,” he said in an interview with a financial website.
Anthony Cross joined Liontrust in 1997 after a stint with Schroder Investment Management as an analyst.
Sharing his views on what changed during his two decades of investing, Cross says managers now get access to information a lot more easily, which has levelled the playing field to a great extent. “Information is now released fairly to everyone, so we have just as good information as the bigger fund houses,” he said.
When asked what investors should look for in a company before investing, Cross says they should try to spot businesses that can compound growth over time.
“Any company we invest in must demonstrate either strength of intellectual property, strength of distribution network or high contracted recurring income of at least 70 per cent of turnover,” he says.
He feels one should invest in companies that have spent a lot of money on research and development, have often built superior world-class products that are easily protected, and sold them throughout the world.
During his career spanning over two decades, Cross developed a number of simple investing rules and beliefs which, if followed by investors, can help them deliver strong returns and avoid big mistakes in investing.
Let’s look at some of these rules.
- Avoid making emotional investment decisions
Cross says investors often fall in the trap of making emotional decisions while investing rather than remaining patient and unfazed by the market noise.
People often rush into buying decisions and show impatience while executing a trade in times of market volatility. On the other hand, while making a sell decision, people react in the opposite way and are not willing to sell easily even if their investment has gone sour, as it hurts their ego and they get into denial mode.
“No one likes to crystallise a loss and selling will underline that an intellectual mistake has been made. Denial is frequently the default response, leading many investors to continue holding the stock,” he says.
Cross says if one can create a set of investment guidelines which can be followed every time, then that can help make better investment decisions and one would be able to avoid emotional judgements.
“When a company we are invested in encounters difficulties, we need to judge whether it is suffering from a general industry downturn or whether we should be questioning its long-term possession of competitive advantage. If there is evidence that its competitive advantage is undermined, it is better to sell,” he says.
Cross says it is quite difficult to predict macroeconomic events successfully, as exogenous economic shocks are unavoidable and unpredictable.
He says it is better to concentrate on the selection of companies capable of outperforming over a business cycle rather than predicting macroeconomic outcomes.
“The Covid-19 pandemic has really illustrated that some events with huge economic significance can’t be predicted or pre-empted by investors. During such a crisis, as in all others, it is important to focus on a company’s ability to trade through a downturn and its potential to emerge on the other side in a position to take advantage of any subsequent upturn,” says he.
Cross is says investors should look for companies that have the ability to maintain prices and profit margins in a crowded and competitive market.
He feels if investors can spot such companies with high pricing power, then they should prefer to invest in them during periods of economic uncertainty, when consumer confidence and spending is low.
He says one of the clearest and simplest ways a company can possess substantial pricing power is through the value of a brand. “In simple terms, a company can maintain prices and protect profit margins in the face of competition or cost inflation. In more jargonistic terms, we would say that the company’s demand is relatively price inelastic,” he says.
Cross says investors often make the mistake of relying on one-dimensional valuation metrics. Although some of the valuation tools like price/earnings (P/E) ratio are quite simple to use, they also have their limitations.
“While it is easy to calculate and very intuitive, price/earnings (p/e) ratio’s most obvious limitation is that it is only as good as the ‘e’ – the earnings estimate used. Earnings are hard to forecast. Because we should look for companies whose barriers to competition allow strong earnings to be sustained for longer than is expected, actual earnings often transpire to be higher than the forecasts used in p/e ratios. This means a company’s shares may be less expensive than a p/e ratio suggests,” he says.
Cross advises investors to make full use of their valuation toolkit exploiting the strengths and recognising the weaknesses in order to make better investment decisions.
- Conduct in-depth examination of valuation metrics
Cross says it is better to buy a company with characteristics of high quality such as good cash flow returns on capital invested than the ones that look attractive on a simple valuation metric.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”, he says. He feels investors should carry out an in-depth examination of valuation metrics to identify key business characteristics in a company so that it becomes easier to make investment decisions.
“Some companies possess intangible assets that act as barriers to competition. This should allow them to sustain earnings growth, which will serve to erode ‘expensiveness’ and generate good long-term share price returns,” he says.
- Buy high quality companies
Cross says investors should aim to buy high-quality companies with defendable barriers to competition.
He feels investors should watch these companies very carefully to make sure the barriers remain intact and the financial performance is as expected.
Cross says there are certain sectors of the market that are more likely to possess the competitive advantage characteristics that investors try to identify in companies.
But he feels if a company or whole sector fails to provide the competitive edge that investors are looking for then they should be happy not to own them.
- Pick long-term ‘outperformers’
Cross says professional and amateur investors both struggle to consistently play ‘winners’ in the short term.
“By attempting to pick consistently the best-performing stocks over any particular short time period (a week, month or quarter, for example) – the equivalent of trying to play a winner in a game of amateur tennis on every point – one might pick a few stocks that shoot the lights out, but it is likely to come at the cost of a number of failures,” he says.
He feels the best approach investors can follow is to pick stocks that they believe will outperform in the long term. “The best approach is to keep things simple, play your own game, concentrate on your defences and avoid the costly losing shots… or in more conventional investment terminology, pick stocks that you believe will outperform in the long term,” says he.
(Disclaimer: This article is based on various interviews of Anthony Cross)
Source link
