Meet Fidelity's value visionary Joel Tillinghast

Joel Tillinghast's name will go down in history as a pioneer of value investing. A highly decorated fund manager, Tillinghast was hired and trained by value investing genius Peter Lynch himself, who called him a 'one-of-a-kind investor that cannot be replicated'. Tillinghast proved his mettle as a successful fund manager at Fidelity Investments for over three decades. He managed the Fidelity Low-Priced Stock Fund that gunned out an impressive annual return of nearly 13 per cent since its inception in 1989, far outdoing the S&P 500 Index's annualised return of 10.4 per cent over the same stretch (as of December 2023).

We recently came across Tillingast's interview post his retirement in December 2023 where he spoke about his investing philosophy and stock selection process, among other things. We lay out some of the key takeaways from the chat.

On his experience with Peter Lynch

Tillinghast admired Lynch for his ability to consider and analyse several possibilities before making an investment decision. He looked up to Lynch's uncanny ability to operate with an open mind and overcome any assumptions or biases.

"Peter considered a very wide range of investment possibilities, both companies and scenarios. He always wanted current information and adjusted his beliefs accordingly. He has an extraordinarily open mind...I learned too many things to summarise them quickly. Focus on things you understand well and can adjust to. Know your own behavioural weaknesses."

Why Lynch was a fan of Tillinghast's 'unworldly analytical ability'

Like every investor, Tillinghast's investing philosophy was unique in its way, centred around data. From extracting useful information about the stability of a company's earnings to considering the opportunity costs, his research would span many metrics.

In his words, "Different people use different approaches to investing, and data is central to my approach. Every investment has an opportunity cost in terms of the roads not taken, so I always like to rank the possible choices...Mostly I'm looking at how stable numbers and ratios are over time to see whether I dare to extrapolate them into the future. Anything that bears on my ability to estimate future earnings and cash flows is helpful. Macro data can affect those forecasts, but usually my conception of the future involves rotating through a series of backdrops. There will be recessions. And booms, too."

On his stock selection process

Tillinghast suggested that stock pickers should start their selection process by eliminating companies with unclear investment prospects. He believed that great investors have the ability to detect warning signs sooner than others, which helps them avoid unnecessary risks and build a healthy long-term portfolio. Tillinghast did the same with an assist from his razor-sharp eliminating criteria when analysing potential stocks.

"I cut out industries where I have no reliable way of somewhat accurately predicting a company's earnings five or ten years from now. I cut out managements that are not trustworthy and which have a history of using capital in ways that produce poor returns. I cut out companies that can not control their destiny, either because debt is too high, or the business is an undifferentiated commodity."

On finding value

Valuation was among the most important criteria for Tillinghast before making an investment decision. According to him, buying a reasonably valued stock is crucial, as even a profit compounder is unlikely to yield significant returns if bought at expensive valuations. He thus preferred purchasing stocks trading at low P/E ratios as this would limit his downside risk.

"Low P/Es are a shortcut to high FCF (free cash flow) yields although that isn't always the case. A company with a low P/E will on average have less downside than a high P/E because it can return more cash by dividends and buybacks. For better businesses, I will pay a teens P/E. It must be an exceptional business to get me to pay a low twenties multiple. But I do hold more expensive stocks that I wouldn't buy."

On why reading and independent thinking is essential

Like all great investors, Tillinghast stresses the importance of consistent learning and acquiring new skills to become a successful investor. He believes that the more investors read, the more questions they ask, which helps them understand businesses at a deeper level. This also allows an investor to become self-reliant and develop a fresh perspective, and not depend on the research of other people to draw conclusions.

"Most successful investors do a lot of reading at all hours of the day and need quieter periods to read denser texts like 10-K's or books. When I'm reading something dense my mind often wanders to broader and narrower questions like "Did management choose this accounting principle to flatter results or because they thought it represented reality?" A lot of office time gets used in meetings with analysts and company managements...The person who did your thinking for you won't always be there when something changes. You won't know what to do! Stressful moments like this often offer the opportunity to make, or lose, huge amounts of money."

The above are the more rewarding excerpts from the interview. However, we urge our readers to check out the entire interview. Click here to read it.

Also read: Inside William Nygren's investing principles

This article was originally published on August 19, 2024.