Rule 3: Don’t be dogmatic
Not everyone with successful track records is known for instilling rigid discipline into their investment processes. Whereas some favour sticking to tried-and-tested formulas, others such as fund manager James Henderson prefer to adapt depending on the circumstances. Therefore, being flexible is a good trait to have as an investor.
“There are no particular disciplines that will work. Things keep changing, patterns change, so you can’t be dogmatic,” he says. As a value investor with a goal of buying troubled, underappreciated companies on the brink of recovery, Mr Henderson’s main philosophy is built around acquiring shares in equities with low price-to-earnings ratios.
Like many of his peers, he aims to buy low and sell high, a strategy that also requires stomaching a little pain along the way. That includes unfortunate moments when a company warns on profits.
Such scenarios often trigger widespread panic and sell-offs among the masses, while simultaneously opening up opportunities for bullish observers to purchase stocks at big discounts.
Many in the investment world contend cheap shares, particularly the widely researched blue-chip ones, are inexpensive for a reason. Yet value investors such as Mr Henderson assert the market often fails to price in the recovery potential of struggling companies, particularly as plenty sold their stakes at a loss without thinking rationally about the longer-term potential.
After numerous years in the game, the manager of four funds, including Lowland Investment Company and Henderson UK Equity Income & Growth, has developed a penchant for identifying companies showing early signs of a turnaround.
Sometimes these much needed operational changes, described by Mr Henderson as periods of self-discovery, occur when a new management team is installed.
Rule 4: Learn from your mistakes
One of Mr Henderson’s biggest success stories came from a hunch the appointment of Mike Humphrey as chief executive of Croda in 1999 would bring the maker of surfactants, which are used in ingredients for cosmetic creams, lotions and dietary supplements, back to the top.
His faith in the specialty chemical firm’s back to basics strategy turned out to well founded – the shares rose sharply from roughly £2 to £22 during Mr Humphrey’s 13-year tenure.
But Mr Henderson spent more time dwelling over his decision to cap his holding at 2 per cent. This ended up being one of his big regrets, and a catalyst for him loosening his conservative approach in later years when buying a stake in Senior. Unfortunately for him and his clients, the depressed oil price and truck market have since weighed on the aerospace, military and vehicle components manufacturer’s shares.
