The importance of 'no'

The ability to say 'no' is what distinguishes the true investor from the phoney, who is more like a broker - someone who will always say 'yes', an attitude that's closely linked to the fact that he's not using his own capital on his ideas. More important, saying 'no' shows confidence in an independent point of view; it reveals a capacity to think for oneself, to set one's own targets and boundaries; it demonstrates the power to resist the fashions, fancies and illusions that consume financial markets so much of the time.

If Bearbull is good at anything, it is this ability - accompanied by a willingness - to say 'no'. I accept one of its important consequences: that, in saying 'no', I will reject opportunities that turn out to be money makers. I'm comfortable with that, chiefly because it also means I'll reject situations with which I'd be unhappy or which I didn't fully understand. If a good few of them end up as losers, so much the better (not that I can know which ones they will be at the time I make my rejection).

Indeed, as I ponder another year of decent returns from the Bearbull Income Portfolio, I would suggest that saying 'no' is the major factor behind the fund's success. Okay, that may partly be a comment on my inability to find other explanations. But this saying 'no' - declining questionable opportunities - chimes nicely with what star US fund manager Seth Klarman was telling us in the magazine last month (14 December 2012) - that the first rule of good investment is not to lose money and the second rule is not to forget the first. The best way to observe these rules is to buy and sell (especially buy) only when you are very confident. Assess as many opportunities as you can, but act only when you are convinced.

Yes, comes the cynical response, under those circumstances you can't make many mistakes because you don't make many decisions. That's not strictly fair. A decision not to invest is just as much a decision as one to invest. Yet it must be true that the scarcity of disasters in the Bearbull income fund is linked to my reluctance to deal. I tempt fate to say it, but we must go back four years to find the most recent disaster - a 45 per cent loss sustained in two months on shares in instruments maker Renishaw (RSW) that I had to sell when the company temporarily axed its dividend. And this dealing reticence is revealed by the fact that 2012 was an average year for activity. I dealt five times (three buys; two sells), the same number as 2011. In 2010 I dealt just three times and my busiest year was 2005 when I phoned my broker - grab your seat, now - all of 12 times.

Obviously, you can't be ultra fussy about what to buy without having the tools to come up with sensible valuations. What the tools are and how to use them is the meat and drink of many Bearbull columns. Suffice to say here that what they do is provide the data - hugely approximate though it is - that can help give you the confidence to reject the market’s blandishments and occasionally to say: 'okay, the price is right'.

There is nothing particularly clever about the process. Then again, successful investment is more about applying discipline and restraint than harnessing intellectual horsepower. But the point is, use sensible models, apply discipline, say 'no' far more than 'yes' and, given time and some luck, a portfolio can produce the sort of value that the Bearbull Income Portfolio now achieves. It has turned £100,000 into over £350,000, £106,000 of which is distributed income, and it is now fairly steadily generating income at the rate of £10,000 a year.

I would like to say that achieving this is incredibly difficult and that you must read Bearbull religiously if you are to have any inkling of what's needed. But that would be disingenuous. The point is, anyone can do it. Say 'yes' to that proposition.