Wednesday, September 6, 2017

Tillinghast, Big Money Thinks Small

Joel Tillinghast, the sole manager of the Fidelity Low-Priced Stock Fund from its inception in 1989 until 2011, when six co-managers were added, has been an outperformer. A $10,000 investment in his fund when it launched would have been worth almost $300,000 in 2015, versus roughly $74,000 for the Russell 2000 and $104,000 for the S&P 500. So it’s definitely worth listening to what he has to say in Big Money Thinks Small: Biases, Blind Spots, and Smarter Investing (Columbia Business School Publishing, 2017).

Tillinghast’s book is a cornucopia of investing wisdom, some acquired as a result of the inevitable mistakes, which he readily shares.

One bit of wisdom, which is not commonplace, is that Tillinghast focuses on a business’s distinctive character rather than its business strategy or positioning. “Most companies lack a strong character. This does not mean that they will be poor investments—only that they are less apt to be exceptional.” As examples of character, Tillinghast writes that, to him, “Apple seems smart, elegant, and occasionally quirky but otherwise easy to get along with. GEICO is honest, thrifty, and good-natured.”

He lists six things that make him nervous: companies that must lie to stay in business, tiny audit firms, inside boards, glamorous rollups, financial firms, and sunny havens.

Ascertaining the value of a stock requires assessing the four elements of value: profitability or income, life span, growth, and certainty. This is no easy task since these elements “reflect regular patterns of social behavior,” not the laws of physics. “Elevated profitability reflects a product that buyers want that, for whatever reason, they cannot get elsewhere. Longevity is shortened by periods when the immediate demand for a company’s product falls. … Growth reflects either substitution away from a competing product or a product that allows users to do something that they could not do before. Certainty reflects contracts and the general inertia of institutions and human behavior.”

Tillinghast provides case studies to illustrate his points, of which the above are but a tiny sample.

I suspect that most retail investors will be overwhelmed by the amount of work that Tillinghast puts into his investment decisions. They can still learn from his book, even if it’s not to turn their money over to shysters. But for those investors, retail and professional alike, who enjoy research and careful thinking Big Money Thinks Small is an engaging guide.

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