The ten golden rules for stocks investing
The ten golden rules for stocks investing: Do they still hold true?
Experience matters in investment management, with each
crisis teaching something new about markets,
Hugh Young believes that the 10 golden rules he laid
out a decade ago have helped him navigate this crisis and the subsequent
recovery,
The recovery continues to throw up exciting
opportunities among small cap companies,
Investment management is a business in which
experience matters. Each cycle, crisis, boom or bust helps investors learn and
prepare for the next one.
A decade ago Hugh Young, manager of Aberdeen Standard
Asia Focus investment trust, sought to distil his experience into '10 golden
rules for equity investing' to help investors benefit from the wisdom of his
thirty-five year career.
In a recent fireside chat, he revisited these
principles, asking whether they hold true today as the world grapples with the
pandemic.
The principles emerged from Hugh's experience of
managing capital across the globe. These 10 golden rules, which Hugh says have
emerged as much from his mistakes as his successes, are:
- Demand fair treatment of shareholders ,
- Be mindful that companies are about people, not assets,
- Remember, balance sheet strength is critical,
- Understand what you’re buying ,
- Be wary of over-ambition,
- Think long-term,
- Benchmarks are just measuring
devices,
- Take advantage of irrational
behaviour,
- Do your own research,
- Make sure that any competitive advantage is
sustainable.
Hugh admits: 'They've often come from things we've
missed, things we had not focused on. They evolved over time and the finer
detail continues to evolve, even if the principles themselves remain the same.'
While the pandemic has been unique in many ways, for
financial markets, it shares many of the characteristics of previous crises.
Hugh says: 'In detail, crises can be very different.
In overall effect, however, they bear remarkable similarities. At the depths of
despair, it's often the time to be closing one's eyes and investing, much the
same as extremes of exuberance are often time to take a bit of money off the
table... Broadly, crises tend to be similar, even if in detail they affect
different sectors.'
As such, many of the principles that have guided the
Aberdeen Standard Investments investment philosophy have proved important
during the crisis.
Balance sheet strength, for example, is 'the rock on
which businesses are built. It can be difficult to appreciate that until the
waves come.'
In many cases, Hugh says, a strong balance sheet has
been the difference between survival and failure. It has also allowed good
companies to continue investment and emerge stronger as their competitors have
struggled.
As the world recovers, he believes the principle of
'people not assets' will help companies make the most of opportunities: 'It's
easy in our business to distil everything down to numbers and avoid people or
cultural issues as too difficult. We've held companies in our portfolio for 10,
20 even 30 years.
'We understand the motivations of the people behind
the companies and their culture. That's exceptionally important in long-term
sustainability and those companies that emerge as winners.'
It is a similar consideration for corporate governance
and sustainability. Hugh says that governance has improved greatly since he
first started investing in Asia.
However, it remains a young market and investors need
to be wary. Asset management companies in general, and Aberdeen Standard
Investments in particular, have become a lot more active over the years,
adopting long-term investment principles and speaking out on issues such as
governance.
Companies will need ambition to emerge from the
crisis. However, he still believes investors need to guard against management
teams that appear to be over-diversifying, moving into areas where they have no
expertise.
'It's understanding the people, the talent and the
skills behind this diversification.'
Equally, the pandemic has accelerated change and
investors need to be alert to areas that are potentially challenged by new
technology.
While Aberdeen Standard Investments is fundamentally a
long-term investor, believing that company management teams need to be given
time for their ambitions to be realised, Hugh also emphasizes the importance of
staying on top of change.
A global perspective is useful Hugh says: 'If you
focus on one part of the world, the danger is that you miss what's going on
elsewhere. That's what we've found useful about being joined up globally. Often
you have warning bells – from the US or Europe, for example – that a business
you thought was great in Thailand or Korea is in fact facing challenges from
elsewhere.
'Technology is now around one-third of the Aberdeen
Standard Asia Focus portfolio. There remains plenty of activity among Asian
small cap technology companies with a buoyant IPO market and abundant
innovation.
This includes companies such as Momo, the 'Amazon of
Taiwan', now the largest holding in the portfolio. Hugh says this has been one
of the major beneficiaries of the pandemic with an acceleration of trends such
as internet shopping.
The risk to markets from the virus may be waning,
potentially prompting a focus on more traditional risks – and there are plenty
of them: the reversal of fiscal interest and monetary stimulus, higher rates,
inflation, geopolitical tensions.
'There's a lot to worry about, but, you could be
paralysed and do nothing and keep your money under the bed. Instead we look
thoroughly at companies and try and find those businesses that can navigate
these risks,' Hugh says.
'Companies have survived the crisis better than we
would have expected. Many have acted very responsibly. We are finding new ideas
all the time, with small cap companies doing some great things. We still
consider this the most exciting part of the market.
'Hugh emphasises that he is still learning from every
twist and turn of markets. He says: 'We want to identify companies with as wide
and deep a moat as possible. As we know from history, moats can be breached,
humans are ambitious and when they see strong returns, that's where they go in
to attack. Our process is as much about trying to avoid mistakes as picking all
the winners.'
Companies selected for illustrative purposes only to
demonstrate Aberdeen Standard Investments' investment management style and not
as an indication of performance.
Risk factors you should consider prior to investing
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The value of investments and the income from them can fall and investors may
get back less than the amount invested.
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Past performance is not a guide to future results.
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Investment in the Company may not be appropriate for investors who plan to
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The Company may borrow to finance further investment (gearing). The use of
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