What 20 years of investing has taught me

James Thomson is one of the UK’s most successful investors. He is celebrating 20 years at the head of Rathbone Global Opportunities - one of the most successful funds for small investors. We asked James to look back on his career and impart some of what he’s learned. 

I cut my teeth in the Dot Com crash.  That was the big theme of the day, but it was quickly deflating. While it was a false start, it was also a fuzzy foreshadowing of big changes to come. Big changes in terms of market dominance but also investment strategy.  

Value investing had been the only game in town for decades. Buying mispriced securities that were trading below their intrinsic value – turnaround, recovery, and special situations – that had a temporary interruption in their fundamentals but a valuation that created a margin of safety investors could rely on.  

The dot.com bubble challenged that investment strategy. Scientific valuation analysis was thrown out the window.  FOMO – fear of missing out – took over and the underperformance of many famous fund managers forced them either to abandon their principals - or stay the course and suffer terrible underperformance and withdrawals. With hindsight, both of those strategies were wrong.

The great business model change

During the bubble growth was rewarded, and shareholders encouraged growth at any price. Scale and success were measured in terms of clicks and eyeballs – now we know it has to be judged in terms of profitability, resilience and returns on capital.  

It was still an era where business models were built around the one-off sale - the licence fee, the big contract award, the potential of going into exotic new markets. But this was set to change and it would have enormous consequences for valuations - the shift from one-off revenue awards to subscription and platform models, particularly in the tech sector.  

Subscriptions are repeatable revenue streams that don’t require constant reassessment and purchase decisions by the customer. The shift to a subscription model – recurring revenue as analysts call it - was really the turning point for businesses like Amazon, Adobe, Microsoft and even Rightmove in the UK. For Amazon it wasn’t just selling one-off books, it was the launch of Amazon Prime, the membership that created stickiness and repeat purchase combined with the simplicity and convenience of the platform. These companies achieved a permanent re-rating that was simply too expensive for ‘value’ managers.   

The US market embraced this business model change. Many investors wonder why the US sits at such a premium to the rest of the world. GDP growth in the US has been higher than Eurozone GDP growth for 75% of the 111 quarters the Eurozone has existed. And it’s probably more resilient to shocks - only 15% of jobs in the US today are in cyclical sectors compared to 35% in the post-war period.  

I think the greatest misunderstanding in stock markets has been that many US growth companies were expensive, but not overvalued. An anathema to many value managers but a painful one, because these capital light, mission critical, long duration growth companies have dominated market returns for the past 20 years. 

Financial crisis - the greatest lesson

Then came the financial crisis. My fund performed poorly but, with hindsight, it was the probably the greatest learning experience of my career.  

It was clear that pre-2008 the fund was too adrenaline filled, too many economically sensitive companies. Even though we were diversified by country, sector and size, the economic sensitivity created a high level of correlation – they all fell as a group during the worst of the crisis.  

The only good calls we made were after the crisis. In 2009 as we started to emerge we made two good calls. The first was to start buying stocks. Companies like Rightmove, Amazon and Visa, and some less well-known businesses like Rational, a German commercial oven maker, that have delivered 1,000-2,000% returns since. And the second was to adapt our investment process and really think about managing risk, so we were never put in that position again.  

We needed a defensive bucket in the portfolio to reduce risk. Less economically sensitive companies that had greater resilience during dislocations – stocks in healthcare, consumer staples, and essential services. Today that includes beer, spirit, drinks and catering companies, healthcare equipment, grocery & essentials retailers, I’ve got a pest control company and a garbage collection company. All foils to the pro-growth part of the portfolio.  

During dislocations, these are usually the best performers in the portfolio, although they clip the upside in roaring bull markets. More than 20% of the fund is dedicated to these sorts of investments. 

Post-crisis - a world of excess

The zero-interest rate policy following the crisis, and the reassurance of stable and low inflation, created a period of super normal returns in some corners of the financial markets - a breeding ground for excessive risk-taking for those who didn’t bear the scars of the Global Financial Crisis (GFC) and the Dot Com bust.  

It also ushered a period in dramatic dispersion of returns dependent on the fund’s strategy. While there was a sharp rebound in economic activity post the GFC, it never felt like a permanent shift in growth. This was probably because debt levels were already very high, and each additional dollar of new debt meant a lower incremental return. It felt like we were always flying close to stall speed.  

Ironically this is an environment in which growth investing thrives. Investors flock to growth when growth is hard to find. And it led to the underperformance of capital-intensive sectors like commodities – mining and oil & gas. These sectors perhaps benefit most when growth is widespread, pressuring supply and putting upward pressure on prices.  

I realised these sectors don’t suit a resilient and repeatable growth investor and we avoided the downdraft of commodities and other low growth or pure cyclical sectors.  

The power of instinct

Backing growth instead took risk-taking, sometimes with few quantifiable forecasts. It took instinct. Instinct isn’t a word investment professionals like to use because it sounds imprecise but that’s often what is required.  

I remember a meeting with Amazon in 2009 or 2010. Those were the very early days of AWS - Amazon Web Services - probably the most important cloud computing company in the world. Fund managers are used to being spoon-fed with forecasts, hard evidence and data but every question was met either with ‘we don’t know’, ‘we can’t say’ or ‘we won’t say’. There was steam coming out of the ears of the analysts around that table but Amazon didn’t care. They wanted to look after the customer, not the ego of the fund manager. 

Some would have you believe that this job is all science – I think it’s mostly art combined with common sense, adaptability and the healing power of time.  

Buying where others fear to tread

We have invested when some managers felt a valuation is simply too high. There’s always been an embarrassment factor for professional fund managers who buy stocks near their highs. Luckily, I’ve been so embarrassed by so many mistakes over so many years that I’ve lost that sensitivity.  

Sometimes valuations appear high because the earnings have been underestimated. Or the market is willing to put a higher multiple on higher quality earnings and growth. It’s a trap not to invest just because you didn’t get in early – to be the first to spot an opportunity. Some of our greatest investments had already gone up a lot before we bought them, including Nvidia about five years ago. Recent success doesn’t always mean that you’ve missed it. Nvidia was our worst performer in 2022 and our best performer in 2023. 

You have to live with the inconsistency, the potential for short term underperformance, and embrace a long-term mentality if the structural investment case is intact. Some sniggered that we came in too late, but in fact the best was yet to come. What seemed like a ceiling, was in fact just another floor.  

Learning from mistakes

There are many instances, of course, when we’ve got things wrong. For the past 20 years, about 40% of all my decisions each year have been wrong. Every year we have a company Christmas party and we have to guess what the best performing single stock will be over the next year. In 20 years I haven’t won that competition once and yet my fund is ranked number one in the sector.  

This isn’t about predicting individual stocks, it’s about creating a balanced portfolio with lots of shots on the goal. Luckily the right choices have overwhelmed the wrong. When I do get caught out, I try to learn from it. You shouldn’t throw in the towel for fear of making mistakes.  

But you never forget those mistakes. Perhaps my greatest was a stock that I didn’t buy - Apple.  I met with the management in 2007. As luck would have it, the day after the launch of the first iPhone - no more auspicious moment for someone doing my job to spot the greatest consumer electronics earthquake of all time. But all I could think about was what a nasty piece of work the guy I met was. The greatest mistake of my investment career and a great lesson - that this is not a popularity contest and these management teams don’t have to be my best friends.  

The next 20 years?

There will be different problems to face but I’m always impressed with the adaptability and resilience of our businesses. Yes, economic growth is slowing but the pace of change only gets quicker. It took 90 years to sell 500 million cars. It took 20 years to sell 500 million PCs and mobile phones but it took just 6 months to reach 500 million users of ChatGPT.  

A few months ago my mother asked me if she should sell her investments and wait for conditions to get better.  A bit upsetting because my fund is her largest investment.  

My advice to her was that if she really had a long-term view and doesn’t expect to need that pot of money within the next 5 years, then I believe equities, particularly my growth equities will deliver outstanding returns.  

More on the Rathbones Global Opportunities Fund

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Rathbones Global Opportunities Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.