Sticking by your convictions even when you look foolish and buying when others are selling are two key lessons that veteran fund manager Michael Lindsell (pictured) has learned throughout his investment career. 
The manager of the five FE Crown-rated Lindsell Train Japanese Equity fund said investors can get too caught up in headlines and often get spooked by falls in stock prices.
“I have learnt over time that you have got to be able to form convictions and stick by them as the market has an unerring tendency – just at the time when you have rationalised in your own mind a strongly held conviction – of causing you to doubt it through market movements and events that occur,” he said.
He said when this happens, investors need to re-examine the reasons why they invested in a stock in the first place and provided those beliefs haven’t changed then stick with it.
“It can mean that for periods of time you look a bit of a fool because the stock price, the earnings of the company or whatever it is you have hung your hat on may be going in the opposite direction,” the manager noted.
“Sometimes things go wrong and you have to admit you’re wrong but more often than not, when you are looking practically at a share price that is going down, it is an opportunity to buy more and one needs to be able to discipline oneself to do that.”
While it is impossible to know for certain if you are right, as long as you “dogmatically” continue to review the stock in most cases this can be a positive.
“Continue to buy the shares if you possibly can, respond to value and respond to conviction by increasing the size of the position,” he said.
Performance of Kao Corp over 5yrs
Source: Google Finance
While his fund has been a top quartile performer in the IA Japanese Equity sector over one, three, five and 10 years, there have been periods where some of the holdings have indeed made Lindsell look foolish, he added.
One such example is Japanese chemical company Kao Corp, which is currently the fund’s largest holding at 9.5 per cent.
“The company performed incredibly well in 2013-14 and, even from our valuation work, looked on the more expensive side of things at that particular point,” Lindsell said.
“But it consolidated for a couple of years and [then] did very well again last year. It just shows you how with time, that compounding builds up and the value builds again and off it goes.”
He added that while some managers will be clever enough and able to sell and reinvest at the right time many are not and that those sold in 2014 without reinvesting made a mistake.
As such, he said he prefers to stick with letting compounding work over very long periods of time, holding onto stocks that can have a number of years of poor performance.
“If you are looking to invest in a market you should be in it for 10 years at least and closing your eyes,” the manager said.
One stock that has paid off for investors that have invested in it for 10 years is Nintendo, the second-largest stock in the portfolio at 9.1 per cent.
Performance of Nintendo over 5yrs
Source: Google Finance
“The most obvious company for us has been Nintendo which has been a reasonably big holding in our fund for most of its history,” Lindsell said.
“It did incredibly well in 2007 when the Wii was doing so successfully and we sold quite a few shares then but retained the position in the belief that the company still had many positive prospects for out in the future.”
However, he said, what he failed to recognise quickly enough was the strength of mobile phone gaming which represented a fundamental shift in market.
“What we didn’t pay enough attention to, with the benefit of hindsight, was the fact that you could begin at that point to play games on smart phones and that was going to take up consumers’ time and the money expended on games by casual gamers,” he said.
“For a period of time people switched their attention to doing that rather than buying console games.”
However, the manager said he always retained his conviction about the quality of the business, the uniqueness of the company and the potential of the firm to deliver future returns.
As such, he continued to buy shares during the period between 2008 and 2012 when the company underperformed, getting positive returns over the last couple of years.
“There is an example of a company that we have stuck with and has been a difficult time for us and definitely contributed to our poor performance in some of those years,” he said.
Lindsell has run the £187m Lindsell Train Japanese Equity fund since its launch in 1998, during which time the portfolio has returned 521.05 per cent, versus the 213.15 and 204.77 per cent returns for the IA Japan sector and Topix index respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund focuses on quality stocks with strong intellectual property such as global brands, which allow him to gain the benefits of compounding returns over time.
Despite the strong run, the manager remains pragmatic, noting that while his style has been largely “en vogue” for much of the last decade, there will be periods it will underperform.
He said: “I am sure quality will be out of favour for periods of time – it has been in the past and will be in the future. Those are opportunities to add to our positions.
“We are not going to suddenly go and buy companies that don’t fulfil the criteria that we are seeking.
“If we stick to investing in companies that generally earn higher returns on capital we should do better over the long term and if quality is underperforming I would have thought you want to put every penny you have into that bucket.”
Lindsell Train Japanese Equity has a clean ongoing charges figure (OCF) of 0.86 per cent.