When it comes to value investing, less is more. Merryn Somerset Webb talks to Jeroen Bos, investment director at Church House Investment Management.
Back in 2006, I wrote a column in The Sunday Times about my trip to see Warren Buffett perform at his Berkshire Hathaway shareholder meeting in Omaha. It was an excruciatingly awful occasion. But it did come with one interesting moment – the question and answer session.
The (deeply sycophantic) questions all related to his method. How, the audience asked and asked, could they be as brilliant, as rich, as successful as Buffett? Their guru answered all the questions in much the same way. There is, he said, no “secret priesthood” of secrets that the experts know and we do not. There is no one complicated trading system, chartist bumf or pricing model that works. Getting it right – and making money – is just about finding and buying cheap stocks with good fundamentals and holding on to them. You don’t even need to be much of a numbers whizz to win, just more of one than the next guy: as Buffett said at the time, and no doubt has said a hundred times since, if you are being chased in the woods, “you don’t need to outrun the bear, just the other guy”.
At the time I was interested in research on female traders. Studies appeared to show that in general women do better than men when they invest. Why? The answers from the academics suggested that they do more research than men; they ask more questions; they invest in businesses they understand; and they hold for the long term.
These are all good things. But after the Omaha meeting, they also sounded just like the things that Buffett says he does. My conclusion then? That we might all benefit from adding a few stereotypically female characteristics into our investing patterns. But that “Warren Buffett doesn’t need to bother: he clearly has the temperament of a woman”.
It is an idea that appears to have gained ground in the last five years. A book by LouAnn Lofton has just been published: it is called Warren Buffett invests like a girl and why you should too. She is, she tells the Daily Mail, referring to “his temperament or the way he manages his emotions while investing”. I’ll be interested to read the book. That’s partly because I’m interested in new research on this kind of thing. But it is also because I am no longer convinced by its premise.
The real secret of women’s success
Since my own flirtation with the feminine side of Buffett I’ve noted two things. First, the most comprehensive study on gender differences in investment returns (by Terrance Odean from the University of California) shows one main thing: that almost all the difference in returns between men and women came down to trading costs – men traded more so their costs were higher and their returns lower. The more you trade the more you lose. Second, that all the studies look at non-professional female investors. There are, as far as I know, no studies showing that professional female fund managers regularly outperform male fund managers.
These things combined made it clear what the key factor in the male/female divide is. It is time. Surveys regularly prove that men have more spare time than women – one last year from the Organisation for Economic Cooperation and Development (OECD) showed men having more than half an hour a day more leisure time than women. A Lastminute.com survey a few years ago suggested the average British man has six hours a day of ‘me’ time. Women have under half that. She does 14 hours of housework a week; he does two. He spends 18 hours a week hanging out with mates; she spends six.
That’s why men knock around trading in and out of silly stocks and driving up their transaction costs. When feminism has finally finished its job and women have the same amount of spare time to fiddle around on computers in the evening as men do, odds are we’ll trade as much as men and find that our performance is much the same as theirs.
The point is that Buffett doesn’t so much invest “like a girl” as like a middle-aged woman with three kids under five, a full-time job and a fight over drop-off parking to win with the Parent Teachers’ Association at her children’s primary school. The fact that he doesn’t have the children, other job, or PTA to deal with just tells us – should any of us be in any doubt – that behind his fake folksy exterior lies a core of steel. He outperforms both male and female professional investors not because he is a bit of a girl, but because he finds value and then has the discipline to hang on to it once it is in his portfolio.
A genuine value investor
I had this in mind when I met Church House Investment Management’s deep-value investor Jeroen Bos last week. He outlined his investment strategy to me. I asked him what he did all day. “Remarkably little,” he said. That’s what I like to hear. Almost all the fund managers I meet tell me that they are value investors. They only buy things at the right price; they have a special method they use for figuring out what is cheap and what is not; and they buy to hold.
Jeroen is one of the very few I’ve ever believed. Why? First, because when he says he only buys cheap stocks, he means really cheap stocks. He doesn’t muck around with p/es of 15 times or price-to-book ratios over one. Instead, for a stock to catch his eye, it has to be trading at below the value of its net working capital (its very liquid assets minus its debt). He likes, as he puts it, to buy at a price that means that, “if I were to liquidate the firm tomorrow, I would get more money back that I paid for it… I want to get more assets than I paid for.”
Second, he works with conviction: his portfolio doesn’t hold more than 30 stocks and normally has 20-odd alongside a pile of cash looking for an opportunity. Third, he has a very good record: he currently runs a small offshore fund that’s returned just over 60% to investors over the last five years. The FTSE All-Share has returned 20% over the same time.
Buy uncomfortable shares
So what kind of stocks are we talking? Stocks that have fallen 80%-90%, that are “basket cases” everyone else has given up on but which, along-side the insurance offered by cheapness, offer a glimmer of hope; stocks that might have a catalyst for recovery somewhere in their near future and that have a management keen to find that catalyst; stocks that everyone else rates a sell; stocks that make most investors feel “uncomfortable”.
Right now there are 570 stocks in the world that Bos feels fit his criteria and a mere 30 in Britain (which is partly why he gets to do remarkably little). Recent successes include Armour Group, a security company that saw its shares collapse after one of its main competitors behaved badly in Iraq. Bos bought it trading at a discount to the value of the contracts it had on the go – at 30p – and saw it taken over by G4 three months later at 80p.
Then there is French Connection, the high street no-hoper he bought at 29p (our own David Stevenson tipped this at roughly the same time – we hope you bought in). He hoped that the chairman and chief executive, Stephen Marks, would make its recovery his pre-retirement “swan song” – he did. More recently Bos picked up Moss Bros at 27p (it is now 36p). Other stocks he holds and would buy again today include Bovis Homes, Gleeson (MJ) Group, Ambrian Capital and Waterman.
How does he find the stocks? It is “bottom up and research-dependent and disciplined and patient”. It is also “absolutely return orientated”. Bos has, quite rightly, no interest in “what the rest of the market is doing”, in sector allocations or in trends. He also only buys established companies that “have shown they are actually capable of making money and generating a cash flow” – no biotech companies that have never brought a product to market. There is “virtually no turnover” in his fund. Positions go when they get taken over, when the share price goes over the net asset value (NAV) and he takes his profits, or when they fail – ie, the margin of safety falls below his deep-value criteria.
The perfect trust for the time-poor
I like the sound of all this, so I’m pleased to tell you that Church House and Bos are hoping to convert his current offshore fund into an investment trust (Trade and General Investments), which we will all be able to buy. It will have a relatively high fee (1.5%, plus a performance fee), which I am not that keen on. However, if Bos continues to offer “virtually no turnover”, what investors lose on fees they may well win back in low trading costs – and, should deep-value work as it always has, long-term capital gains too.
The new trust should launch in July. Don’t buy it for the short term – it needs at least a five-year view (it will be small and relatively illiquid as well as holding assets that will need time to come good). Don’t buy it if you want a yield. There probably won’t be one. But do buy it if you are a harassed, middle-aged mother with spare capital looking for a home, where neither it nor you will be bothered much by its manager.
Who is Jeroen Bos?
Jeroen Bos is an investment director at Church House Investment Management. Bos has worked in the City for more than 25 years and most recently for Seilern Investment Management Ltd. He was a director of Panmure Gordon & Co Ltd from 1989 to 1999.
He holds a diploma in economics from Sussex University and is a member of the Chartered Institute for Securities & Investment. Jeroen is the investment manager of the CH Deep Value Fund.