Keith Ashworth-Lord is regarded as one of the foremost authorities on the investment philosophy of Warren Buffett and Charlie Munger and a keen student of the teachings of Benjamin Graham and Philip Fisher.
Invest in the Best concentrates on the investment style of Business Perspective Investing, as practiced by Benjamin Graham and Warren Buffett. It takes the reader through the realisation that the thought process involved when buying shares in a company is no different to buying the company in its entirety.
Ahead of Invest in the Best’s release, Keith Ashworth-Lord was kind enough to answer some questions for ValueWalk about the book and value investing in general, as part of ValueWalk’s Value Fund Interview Series.
Keith Ashworth-Lord’s career spans over thirty years in equity capital markets, working in company investment analysis, corporate finance and fund management. In recent years, he has won four stock picking awards conferred by Thomson-Reuters Star Mine.
Interview with Keith Ashworth-Lord author of Invest in the Best [Pt 2.]
RH: There are a lot of books out there on Warren Buffett's investment style and how that style can be replicated, what makes Invest in the Best stand out from the rest of the pack?
KAL: The book is written by a Fund Manager who unashamedly set out to replicate Buffett’s approach in the UK market. I am a practitioner, not an author. Invest in the Best puts my approach in the shop window and it is an approach that has been spectacularly successful for me over 15-20 years. A unique feature of the book is the detail into which it goes; packed full of real life company examples.
RH: I know this is a broad question but what are the qualities investors should be looking for when trying to identify the best Buffett-Graham companies?
KAL: First and foremost, companies that have an ‘economic moat’. That means something special that keeps them protected from the incursion of competitors seeking to drive down their excess returns to the cost of capital. That something special is often the skill set of the employees, brand pricing power or intellectual property rights. Secondly, I look for businesses with decent growth prospects, that are earning high returns on capital and converting those returns into strong free cash flow. As a consequence, these companies tend to have strong balance sheets. Lastly, I am looking for management that acts with the owner’s eye. Allocation of capital is the foremost task of management and I like to see managers that try to reinvest retained earnings in projects that offer organic growth and high returns on the investment. I also approve of smaller bolt-on acquisitions, where appropriate, but I abhor empire building mega acquisitions. Too often they add no value for shareholders. If managers have a surplus of capital that they are unable to invest profitably, then I want to see it handed back to shareholders.
RH: Based on your research and experience, what would you say is the most common mistake investors make when they try to follow Buffett’s style?
KAL: To be a successful investor like Buffett requires very few things. Foremost among them are discipline and patience. For me, discipline comes from investing only from the perspective of a businessman. You must stick to a proven methodology and avoid style drift. Patience, however, is the not-so-slight matter of how you are wired. And that is where most investors come unstuck. They just can’t help buying into something they really like, even if the price they are paying is a full one in relation to the value (economic worth) that they think they are getting.
RH: The fund you manage -- The Sanford DeLand UK Buffettology Fund -- is a consistent top quartile and mainly top decile performer. What would you attribute this outperformance to….what makes the fund stand out from its peers?
KAL: It is the investment methodology that leds me to invest in the best companies around. And to make sure I’m doing so at the right price with a decent margin of safety between price paid and value received. Lastly, it is resisting the temptation to sell to take a profit. I only sell if: (a) I’ve got in wrong; (b) the story has changed significantly; or (iii) I have no cash and want to invest in another company. Sixteen of the 28 constituents of the portfolio have been there from the first two months. Having the investment activity of a sloth means that in 2014, I added 2 new companies and sold 2 others (3 if you include a take-over). In 2015, it was 2 in and 2 out (one again a take-over) and this year it has been 1 in and none out. Too many fund managers are gung-ho; always trading in and out of positions and trying to time the market. I don’t do that and it shows.
RH: Buffett is known for his ultra-long holding periods and lack of diversification, two traits that are almost impossible to replicate in the short-term fund management industry. How do you overcome these challenges in your fund? What’s the fund’s turnover and average position weighing? Do you think these limit your performance?
KAL: The fund management industry is indeed short-termist. I think one of the reasons is this ridiculous judgement of performance in quarterly (or even annual) periods. Activist fund managers may indeed achieve some short-term performance enhancement but it is almost certainly detrimental to the long-term performance. Of course, career risk is a threat to those who don’t own their own fund management businesses. That’s why you get index hugging and portfolio zoos with far too many holdings in them. This temptation to diworseify and over trade is bad but at least its practitioners don’t stand out from the crowd. Remember, no single lemming ever got a bad press! Over the last 12 months from Jul-15 to Jun-16, my portfolio turnover as been 3%, which equates to an average holding period of 33 years per company. Typically I will invest 3% of the fund as an initial holding position. At the moment we have 5 companies that account for over 4% of the fund each. Being concentrated and inactive HELPS my performance, not limits it.
RH: Do you have any tips for investors who want to replicate Buffett's strategy, but don’t know where to start (assuming they’ve already bought your book)?
KAL: Get yourself out to Omaha for the Berkshire Hathaway AGM and soak up the atmosphere. Talk to all the like-minded investors who make the annual pilgrimage to Woodstock for Capitalists. Read all Buffett’s teachings in his many Letters to Shareholders that are available on the Berkshire website. Lastly, switch on to the quality of companies and switch off the noise of markets.