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How to spot quality amid the wreck and ruin

Fund manager Peter Seilern shares his secrets after nearly 50 years of experience
How to spot quality amid the wreck and ruin
  • Only the Best Will Do was published in 2019
  • Peter Seilern’s focus on ‘quality growth investments’ is a straight-talking alternative to any market lunacy

If you consider Peter Seilern anything short of a rock star you are in dire need of an education. Sure, his writing style is drier than my Grandma’s baking, but gobble up this Austrian fund manager’s first book and you will be left with an investing philosophy that is hotter than a strudel. His book recognises that most investors lack a clear strategy and, in under 200 pages, offers a practical solution.

Peter Seilern started his financial services career back in 1973. In 1989 he founded Seilern Investment Management, whose global, American and European funds as well as his closed-ended global investment trust have generated material returns for investors. After excluding fees, the Seilern World Growth Fund has generated a return of 145 per cent over the past five years, 50 per cent ahead of the benchmark.

According to Seilern a successful investor is someone who “makes a strenuous effort to avoid the pitfalls of the majority”. That’s a particularly interesting point when placed alongside the current Tesla and crypto bandwagons. Seilern takes little interest in traders or speculators with ambitions to “make money quick”, and affirms that the greater one’s patience, the greater the chance of success.

In order to understand the characteristics of a successful investor, Seilern illustrates the deadly trap frequented by many average investors. This is to see risk in terms of what happens to the value of investments from day to day, or week to week. The average investor will become distracted by short-term variations, the causes of which more often than not turn out to be either ‘transitory or irrational’. It is the type of thing newspaper and television headlines pick up on, tempting you away from a sensible strategy.

Seilern observes that many average investors are addicted to activity. No announcement or event passes without them wanting to make adjustments and such indiscriminate chopping and changing can easily gnaw into the value of a portfolio. The past year or so has certainly seen some maniacal decision-making from inexperienced investors. The book warns against these rookie types, likely to be heard describing the stock market as a ‘casino’.

Seilern would rather we think of our shares as we do our house. This is, to observe and supervise, checking the meter reading from time to time, but not changing paint colours every other week. It is in ignoring popular opinion that successful investors can stay focused on the important stuff: the fundamentals of a business – its profits, cash flow and balance sheet. If the fundamentals are deteriorating and management is incapable of rectifying the situation, it might be time to abandon ship. Being a quality growth investor requires more than just the courage to stick it out, but the courage to change one’s mind and to sell, even at a loss, if this prevents any further damage.

In a slightly diva-esque moment, Seilern comes up with his own ‘10 Commandments’ of quality growth investing:

  1. Scalable business model
  2. Superior industry growth
  3. Consistent industry leadership
  4. A sustainable competitive advantage
  5. Strong organic growth
  6. Wide geographic or customer diversification
  7. Low capital intensity and high return on capital
  8. A solid financial position
  9. Transparent accounts
  10. Exceptional management and corporate governance

That list suggests that it takes a lot to please Seilern – well, too right. Inexperienced or overly sentimental investors get drawn into risky gambles far too often, overlooking factorssuch as absurd management and the potential to expand geographically no further than a strict perimeter in rural Moldova.

As a result of his ‘commandments’ Seilern never invests in banks because the balance sheet is always unclear. He also avoids automobile manufacturers because they require a huge amount of capital on a regular basis. Airlines are equally unpredictable, as are start-ups and IPOs, which is why no such company appears in the Seilern portfolio.

The ruthlessness of Seilern’s investment technique means the pool of potential companies for his portfolio is slim, as the title of his book reveals, Only the Best Will Do. But for many investors, especially those seeking to get rich quick or protect their returns from sudden market volatility, the approach can seem stressful. If only a handful of companies tick the boxes, are there enough to fill a well-balanced portfolio? Yes, undoubtedly with careful analysis and a clear adherence to the strategy. And if in doubt, there are many well-researched, sensibly invested funds in the UK that can offer decent diversification.

For a lot of investors today, it can be tempting to get drawn into popular narratives and put money behind what is ultimately just an exciting promise. Seilern prefers to keep two feet firmly on the ground. In summary, his writing debut says: apply common sense, stick to concrete reality and everything will be groovy. Rock on Peter Seilern.