I’ve been re-reading Benjamin Graham’s seminal book on investing ‘The Intelligent Investor’. It was first published in 1949 and is possibly even more relevant today than it was then. In the commentary by portfolio manager Jason Zweig he refers to the short-termism of UK and US investors. Various studies have shown the average holding period for stocks by fund managers is anywhere between 3 months and a year. Jason sums it up nicely by saying that it’s as if managers “were studying their stocks just long enough to learn they shouldn’t have bought them in the first place, then promptly dumping them and starting all over”. Just as we cannot escape them in life, sadly we cannot escape mistakes in investing. We can, however, act to minimise their impact and the probability of them happening.
Here at LGT Vestra when looking at stocks we try to identify companies that have the ‘right stuff’ that means over the longer term their historically high profits can be maintained into the future. We think of 10 years or more. Benjamin Graham’s best pupil was Warren Buffett who surpassed his teacher in becoming the world’s most successful investor. Warren describes wanting to own a business that’s surrounded by a wide and deep ‘economic moat’ which makes it hard for other companies to ‘storm’ the moat and make off with the high profits the company is making. It sounds an easy thing to identify, but there are countless examples of moats that have been stormed and the castle ransacked leaving nothing but a burnt out shell of a building.
One of the best (or worst) examples of recent years is the mobile phone company Nokia. It seems almost impossible to believe now but as recently as eight years ago the company had 40% of the global mobile phone market share. They no longer make phones so they currently have a big fat zero of share. How come? What happened was that the Apple iPhone and then Google’s Android operating system were invented. Nokia’s management appeared to be in complete denial by developing three separate smartphone operating systems at the same time. By the time they launched their own smartphone a few years after the iPhone it was too late. Nokia’s castle was burning and Apple and Google had built their own castles with wide moats. When we identify a business we like and we’ve analysed the moat and concluded it’s wide and deep we’re constantly on the lookout for any signs that the water levels are receding. It’s right to be a little paranoid. After all, it’s your money we’re investing in these castles.