Anthony Bolton, one of Britain’s most famous stockpickers, delivered market-beating returns for 25 years as the manager of the Fidelity Special Situations Fund. He claimed that “all you need to outperform is a few winners and to avoid the losers – try to win by not losing too often. A hit rate of 60% is good”.
This article describes a set of five criteria that, if met, should greatly reduce companies’ chances of becoming losers and raise the percentage of winners in your portfolio. We will examine each of them in turn, giving examples. A company meeting these criteria is said to have solid fundamentals.
Past performance is revealing
Sound past performance is important since it bolsters confidence that a company can continue to do well. By sound performance we mean profitable growth for several years, with both profits and cash flow expanding.
However, beware of companies whose growth is based on acquisitions unaccompanied by organic growth, and be particularly sceptical about large acquisitions trumpeted as “transforming” the business. They can prove to be expensive errors. Many companies pay dividends as well as showing growth. If so, it is important that the dividend is well covered by after-tax profits. Well covered means after-tax profits should total more than double the dividend payout.
A second hallmark of a long-term winner is an enduring competitive advantage, often referred to as a “wide moat”. It means that a company can protect a strong position in its market from potential rivals, who would erode its
