Annus horribilis

The expression was brought to modern prominence by Queen Elizabeth II in a speech to Guildhall on 24 November 1992, marking the 40th anniversary of her accession, in which she described the year as an annus horribilis.

1992 is not a year on which I shall look back with undiluted pleasure. In the words of one of my more sympathetic correspondents, it has turned out to be an annus horribilis.

2018 has been the hardest year to read since 2011. Even 2008 was easier as there was without a doubt something going very wrong. In 2008, reading the signs and escaping the 32% fall was easy. It won’t be until 2019 that I will discover whether my extreme caution this year so far has been prudent or not. Even with caution applied we have lost 4% over the year to date. In fact, we have currently dropped below my Moderate long term target return over the last 5 years. (Shown by the blue line). We (the bold orange line) are still ahead of our peer group but it hurts to have given back any of our long term investment gains.

My more sympathetic correspondents will say “Well it’s Brexit. It’s not your fault”. But I know we all could have done better if I would have just held my nerve from June until September before I sold our Global (mainly US) shares. By September we would have captured more gains for the year before the following crash.

So what happened?

• Trump’s global trade wars.
• China’s continuing slowdown.
• The possible nationalisation of UK utility companies following the disastrous UK general election gamble of 2017.
• The oil price hike.

Just to name many investors four main concerns. But, overwhelmingly we had done so well and I didn’t want to risk those gains achieved so far. That’s why I pulled the brakes.

If I would have pulled the brakes in September we would still not have made any money but we would have been level at this point year to date.

So what happens next?

Hindsight is a great thing. It not something to dwell on though as it reduces the ability to ensure the next decisions do not become knee-jerk reactions.

I think nobody would argue that the investment short term horizon looks particularly rosy. The threats I reacted to in July still exist. All have been just kicked up the road like a can to be rediscovered in a month or two.

• The escalation in the trade wars has just been deferred.
• China continues to slow under the sort of debt problems which would dwarf the 2008 US debt crisis in comparison.
• UK politics are in crisis with the threat of an anti-capitalist government in waiting.
• Europe in the meantime is also imploding with the German stock market down more than our’s over the year. A very worrying sizeable Far Right party sharing power in Germany, forcing Merkel to stand down. Meanwhile Macron is facing riots on the streets. Populists in Italy basically showing the EU the finger. It’s not just the UK government that is looking like a “basket case’

What has all the above got to do with the quality companies that we continue to look for and invest in? Investor sentiment is the answer. Investors have fled to safety as expected, hence the falls in the markets. The babies being thrown out with the bathwater.

Going forward though, there is now so much cash on the side-lines un-invested, that should the sharp fall I have been expecting for a while happen, then it won’t be down for long. In fact it’s what we need. The cash will come back at the lower level and drive the next leg forward.

Over our investment lifetimes these bumps in the road will return from time to time. We just have to tighten our seatbelts. They are never easy to take but occur over relatively short periods when you observe the long term results.

Are you going to change your tack?

I have always tried to buy at good value and sell down when things look too expensive. That focus hasn’t changed, it’s just become more difficult to assess currently.

I won’t wish you Merry Christmas just yet as I think there is still a lot to play for before the year end and I will be writing to you again. As always if you have any short term concerns please contact me.