Investment - Thisim, Thistledown Investment Management

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Investment

Aim
We invest most our savings in the fund and live off the dividends. We aim to increase these dividends at or above the rate of inflation. We believe that our method of investing should lead to this outcome without any guarantee.

Risk
Investment is risky. Risk worries investors. They feel secure, holding cash and bonds. But are they? Their security comes at a price. Cash and bonds provide low long-term returns, as shown by numerous studies. They also offer little protection against inflation. The value of equities is
more volatile than cash, but the reward for this volatility has been better long-run returns and some protection against inflation.

Diversification
Don't "put all your eggs in one basket" is common sense. But have too many baskets, and it is challenging 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

Timing
You should not invest in equities for short periods. But how long must one hold equities to beat keeping money in the bank? There is no simple answer to this. Barclays Capital, reviewing the history of returns in the UK, showed that after five years’ equities won three-quarters of the time. There are times, however, when even after twenty years, cash in the bank 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 returns.

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. 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.

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 agree with EMH. Why? Because we know 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. 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. We aim to buy cheap equities. 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.

Competition
Investment is a highly competitive business, but we do not manage the fund with one eye on the competition. Watching the competition is a common practice, but it leads managers to follow the consensus, and the consensus is usually "in the price".

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