Joel Tillinghast is a tenured Fidelity portfolio manager for its Low-Priced fund, however his name was known by few, including me, until recently. Tillinghast recently published his first book – Big Money Thinks Small last month, and was featured in a Barron’s interview in 08/12/2017 (Link here). When I first saw his interview, I found this manager interesting for his ability to consistently beat his benchmark, Russell 2000, for years with 100+ holdings. This diversified approach is very different than the “traditional” school of value investing, who advocates concentrated bets. Another impressive trait of Tillinghast’s fund is the extreme low turnover – only 9% a year. This means he on average holds each position for over 10 years!

For the sake of these special traits, I decide to pick up his book and try to see if there is anything I could learn from him.

Overall, I think it is a valuable book, especially for someone had some investing experiences and is eager for historical investing case studies. Here are my key thoughts/lessons:

• This book is probably the most information-dense book I’ve read in recent years (17 pages of index at the end filled mostly with company names). Any small section mentioning a single stock could be great case study if I research it further. Since Tillinghast has been in the industry for over 25 years, he’s accumulated tremendous company analyses, both great investments and great flops.
• For the reason above, Tillinghast had to be precise describing these history lessons. General public may not able to get the full value of the book because it assumes the readers to have sound understanding of accounting and finance. For example, in one section he talked about how GAAP accounting misses the fact that R&D (for IT or Pharmaceutical) and marketing cost (for consumer staple) could create intangible assets (thus could be capitalized), while completely expenses them. If I read this part a few years ago, I am not sure I could understand it fully.
• The reason for so many holdings in Tillinghast’s portfolio is not diversification, rather is primarily his curiosity and apt to test the boundary of his circle of competence. As a curious person, I find this resonating. However, I think it comes down to the capacity (or bandwidth) of a manager to keep tracking & continue generating ideas. Thanks to the scale of Fidelity, Tillinghast had supports from “25 dedicated small-cap analysts and 135 global analysts”.
• The book is structured in 5 major parts, which are basically Tillinghast’s investing tenets. They, according to Tillinghast, are inverted traits of all the investing failures he has observed.
  • Make decision rationally: this part mainly talked about the behavioral biases of investors and how to avoid them. He had some interesting mentioning of psychological theories by Daniel Kahneman (Nobel Laureate for Economics in 2002), who’s featured in Michael Lewis’ most recent book – The Undoing Project. Traditional Economics relies too heavily on utility theory which arbitrarily uses 0 (or financial breakeven point) as the gain-loss reference point, under Kahneman and Tversky’s Prospect Theory, the reference point for gain-loss utility is never constantly 0, rather it can change (in their so-called “editing” phase of human decision making). This is exactly why human will keep chasing bubbles because the pain from missing out on these gains (the reference point in bubble time) even considering the probability of eventually loss is too huge to bear. In other words, it is not the rational person assumption being wrong, traditional economists just never realized the impermanence of the reference point.
  • Invest in what you know: Interesting part is that, as mentioned before, Tillinghast constantly try to expand (or test) his circle of competence. Due to the diversification, trial and error on new territory will not be a problem for him, as the loss would be relatively small even they don’t work out. However, for concentrated investors, I would argue cautiously sizing the position for ideas from new territory is crucial.
  • Work with honest and trustworthy managers: It resonates to me greatly. Using Li Lu’s words, the key question for management evaluation: Does the management deserve my capital?
  • Avoid business prone to obsolescence and financial ruin: This is what I cover under “Meteorology” & “Topography” in my framework, understanding the external forces and internal positions of a company.
  • Value Stock Properly: Repeated point from almost all great value investors. Pay less (preferably significantly less) than what it worth.
• This book is valuable, to me, also for its practicality. Except for the first part (for psychological biases), the rest of the book is filled with examples how Tillinghast applied his tenets to real historical ideas. Many of them are bad investments (which Tillinghast showed how he avoided them successfully), they are naturally more intriguing to me personally.