Investment - Thisim, Thistledown Investment Management

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Investment is risky. This makes many investors cautious. They feel secure holding cash and bonds. But are they? This security comes at a price. Cash and bonds provide low long-term returns as shown by numerous studies. They also provide little protection against inflation. Equities are riskier than cash or bonds in the short term, but have provided better long run returns in the past as well as some protection against inflation.

‘Don’t put all your eggs in one basket’ is common sense. But have too many baskets and it is difficult to keep track. The academics Elton and Gruber showed that adding extra holdings to a portfolio produces little reduction in risk once there are about 30 holdings. We believe them and have around this number of holdings. There is also evidence that by taking different sorts of risk investors can enjoy ‘a free lunch’ of lower risk and higher return. We invest therefore in different industries and countries.

Active Management
Many people, particularly academics, doubt that investment managers can beat index funds. They believe in the Efficient Markets Hypothesis (EMH). We agree that most managers do not beat index funds, but do not believe the EMH. Why? Because we believe that valuation matters and we aim to buy undervalued assets.

Never buy expensive markets
The evidence is strong that the valuation of markets determines future returns. Simply; investing in cheap markets is more profitable than investing in expensive ones which seems obvious. It is, but investors frequently forget it. They pile into expensive markets, the internet bubble; then shun cheap markets, witness the panic of October 2008.

Never buy expensive equities
The same evidence that applies to markets applies to equities. Buying cheap equities has led over time to better returns than the average. This is what we try to do. But, we do not do this mechanically. We pay close attention to the financial position of the company, the strength of its franchise and to the long term outlook for the company. We want to have a ‘margin of safety’ to protect against unexpected events.

Investors act irrationally
The Dalbar survey of investors in the United States suggests that investors make very poorly timed decisions when investing. They tend to buy near the top and sell near the bottom. The result; the average investor misses most of the extra return equities should provide. In fact they might be better keeping their money in the bank. We hope to help you avoid this fate by trying to act rationally on your behalf.

You should not invest in equities for short periods. But how long must one hold equities to improve on the low risk investment stance? There is no simple answer to this. Barclays Capital, reviewing the history of returns in the UK, show that after five years equities beat cash three quarters of the time. There are times, however, when even after twenty years the low risk policy wins. We invest our own money with a five-year view and believe that by buying cheaply we have less chance of enduring a twenty year wait to beat cash.

Our objective is to increase the income from the fund at or above the rate of inflation. We believe that our method of investing should lead to this outcome, without any guarantee. If we achieve this we believe also that we will beat the FTSE WMA Stock Market Growth Index. This index seems the best proxy for the returns you could expect from our competitors. However, we do not manage the fund with one eye on the competition. This is a common practice but it leads managers to follow the consensus and the consensus is usually 'in the price'.

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