I wasn’t a terrible child, but I do recall my mother, when pushed to the limit, would always shout “Get up those stairs”. It meant that I was really in trouble and was certainly in for it when my father got home. Currently I’m not afraid of the phrase, during our FaceTime meetings we say it in encouragement when Lucas and I study the charts of the major indices. The stairs are our comfort blanket, but they are hopefully our early warning system.
Up the escalator but down the elevator
Very American I know. We would say up the stairs but down in the lift. That’s how the markets were explained to me. Stock-markets shouldn’t rise like a lift. If they do, the likelihood is that the rapid climb precedes a spectacular plummet. Rises should be gradual, building support at each stage of the way. They should climb the “wall of worry”. When everybody is afraid, it usually means there is no chance a bubble is forming.
BC (Before Corona) things were looking good. They weren’t climbing like a jet fighter, they were looking steady. Solid. But then panic struck. AD (After the drop) we had fits and starts to begin with, but at the moment the gradual upward progression is quite reassuring.
I’ve read many books over the years, almost all of them have been non-fiction. At times like these, all of those bits of knowledge gleamed from all of those books, hopefully do add up to something of value. Take Dr. Steve’s book for instance.
the chimp paradox – dr. steve peters
I now understand that my head is indeed inhabited by two brains. What comes next depends upon which brain is in control. The chimp brain is more primitive, impulsive, faster and stronger and so leaps to conclusions and can get us into trouble but is essential for our continued survival. Then there is our human brain which is slower, more considered, more considerate and calculating. It looks before it leaps. Often by the time it is ready to take action the chimp has already been in there and potentially broken everything. Dr. Steve has helped countless sportsmen and teams achieve their best by controlling their inner chimp. I couldn’t recommend the book enough. Then there is “The Black Swan”
Before we start let me make this clear. I like Neil Woodford. I admire his track record and his conviction. I also hate investing in funds because they can be quite opaque. I don’t invest in Woodford Funds, but I still believe Neil is very good at choosing more winners than losers and left to his own devices both he and his customers would undoubtedly prosper. But that hasn’t happened as I’m sure you have heard by now.
Neil Woodford has just pulled up the draw-bridge, locking investors in. He isn’t the first and he won’t be the last to temporarily withhold withdrawals and redemptions from a fund to protect those investors who wish to stay. However he should never have put any of his investors in the position where a suspension became necessary, after all, most shares are tradable every single day. Currently he just can’t sell the fund’s smaller, unlisted shareholdings quickly enough, to meet the requirement of the money flooding out, without reducing the returns of those investors who wish to stay invested in the fund. In my career I have had to deal with both “With (Un)Profits funds” and “Commercial Property funds” suspending or limiting redemptions from time to time. This last resort is never appreciated by those who need their life savings back. It’s the reason I don’t invest any of my savings nor my clients savings into those types of funds anymore.
It was October 2016 when I last made a lot of changes to our portfolios. Back then I changed our focus to begin to hold mainly individual UK listed shares in our investment portfolios.
This change was ushered in following the Brexit vote. With many of our long-standing overseas funds looking too good to be true following the UK’s currency devaluation, I figured all overseas funds would suffer the future headwind of Sterling gradually strengthening.
Since then the Pound has strengthened marginally, and most of our U.K. shares have done what I expected of them. Some have lost, some have won, some won big, some lost big. The chart below shows the performance of our Moderate Portfolio since we made the changes in October 2016. Overall we have won, and our returns have been higher than those of our peer group. (More about this later) Continue reading “Spring Clean”
Monday just gone, was the third Monday of January, so that makes it “Blue Monday” in the UK. The fabled most depressing day of the year. Meanwhile in the US, the exact same Monday was Martin Luther King, Jr. Day. A public holiday and a day to celebrate.
February 2nd is Groundhog Day. According to folklore, if it is cloudy when a groundhog emerges from its burrow on this day, then spring will come early; if it is sunny, the groundhog will supposedly see its shadow and retreat back into its burrow, and the winter weather will persist for six more weeks.
The film Groundhog Day was made in 1993 starring Bill Murray. You know, the main guy in Ghostbusters. The plot was simple enough and I remember it as being laugh out loud funny.
Murray plays Phil Connors, an arrogant Pittsburgh TV weatherman who, during an assignment covering the annual Groundhog Day event in Punxsutawney, Pennsylvania, finds himself in a time loop, repeating the same day again and again.
It’s nearly Groundhog Day in more ways than one. It looks like history is about to be repeated.
All that lovely growth in our portfolios that was achieved in the last 12 months has been taken away from us. Much of that loss occurring in this last two weeks.
2015 now counts for nothing. We start over again. Every doomsday merchant has been out revelling in “I told you so”. However these pundits are just like broken clocks. Even a broken clock is right twice a day.
As I have said many times before “I eat my own cooking”. When my clients lose some of their growth, so do I. I know times like this come around. The last time was in 2011. Back then I spent no time dwelling on what had just happened, I simply planned what I was to do next. Nothing changes.
Due to the generous recommendations from our existing clients, 2015 brought a dozen or so new clients. Many of my new clients however haven’t just lost some growth, they start February with less than they invested. Long term investors know that this hurts more at the beginning but does get better over your investing lifetime.
What has just happened?
The markets are not rational. They behave like any group of individuals. They behave much like kids in a playground. When a fight broke out at Farnworth Grammar School (It wasn’t ever me), every kid wanted to watch or join in. Many kids missed seeing it, the fight was usually over before word got out. But the playgrounds of our school days have changed. In today’s playgrounds, every child has a smartphone. The second a fight breaks out, all the other kids know and come running.
Investment theory demands markets are rational, filled with rational investors. I don’t buy it. I’ve never met an investor free from all biases and bad behaviours. Myself included. We can feel worried and we contemplate doing irrational things. The markets today are mostly inhabited by supercomputers that buy or sell in a fraction of a second. The computers are pre-programmed with complex algorithms, set to sell at the first sign of probable fisticuffs. One computer sells, triggering another and so on. The speed of change has become breathtaking and of course introduces much more volatility.
China’s fault, eh?
What triggered this stampede for the exit?
It would be nice to blame China but that’s not the likely answer. Their fumbling stock market is state run and closed to foreigners. A crash there maybe should only cause falls in Hong Kong.
The Chinese can’t buy our exports now, so every countries economy is now doomed?
Er, no again. Only 1% of US exports go to China, therefore the US market shouldn’t have fallen. The answer is more likely due to problems in the Middle East.
David Bowie, Glen Frey & the Organisation of Petroleum Exporting Countries
All recently dead I’m afraid. Even though OPEC refuses to acknowledge it just yet. When it kicked off in the Middle East playground in the past, it was bad news for us punters. Oil leapt up in price as production looked like it was set to be disrupted. But look now. Absolute bloody carnage and turmoil right across the Middle East but oil sits at $27.00 a barrel. It should be $127.00 based on history being repeated. $27.00 is great news for us punters now, so why have stock markets crashed?
Supply & Demand
The number of buyers versus the number of sellers always dictates the price. Saudi Arabia is skint and getting more skint every day. They are not making any money by flogging overpriced oil to the rest of the world anymore. They have the worlds largest Sovereign wealth reserves of any country. Since last year reserves have fallen by 10%. They were once regular buyers of everything, but now they are regular sellers. Many members of OPEC are in the same boat. With billions of dollars of shares, bonds and gold being sold, it’s not surprising the markets are struggling to rise and the sell computers have been triggered.
Many good companies’ shares are being given away by the oil rich (poor) nations at the moment. Needs must. Babies out with the bath water. A regular contributor to my blogs mentioned that the Al Saud family could fall this year. Many think the same.
Where’s the positive
Well computers sell first and think second. So the selling pendulum will undoubtedly swing too far, and should change when the buy side computers feel prices are now cheap enough.
Saudi Arabia and much of the rest of the Middle East has made obscene fortunes by running the cartel that kept oil prices artificially high since the 70’s. Indeed ever since my days at Farnworth Grammar School where I hardly ever got into a fight. But now the tables have turned. Every man, woman, household and business in the world is slowly becoming more profitable and saving money because energy costs have fallen. Oil prices will stay low for longer too. Interest rates will rise slower, again good for borrowers and businesses and stock markets .
Mind the gap
The world is adapting. It’s a whole new world order. The oil producing nations triggered the panic selling. There won’t be any panic buying I’m afraid. OPEC are immediate losers. We are all the winners but our benefits will take longer to be seen. But as the outlook continues to gradually look rosier for businesses, share prices will continue to rise. As everyone saves money on fuel, we will spend it, making businesses even more profitable as turnovers rise. We are currently in the gap.