Seasons Greetings

Don’t worry, I’m not one of those who stretches Christmas out over 2 months. Less “‘Tis the season to be jolly” this blog is more “‘Tis the season to make money”. In my last blog I revisited seasonality, explaining that more of our financial returns occur over the northern hemisphere winter period versus over the summer period. Team that up with year three of a presidential cycle usually bringing the best returns out of the four and we stop battling a headwind and enter a period with a tailwind.

Rebalance

As you can see we rebalanced yesterday and put some of our cash to use. Interest rates in the UK rose by 0.25% recently which will no doubt filter through to our cash held on platform soon, but we believe we can now do better than just a cash return over the coming months. Some defensive shares (not defence industry) have been let go or reduced, some on our long term watchlist have been added and some of our past and current star performers have been increased.

This rebalance reflects 4 geo-political changes that have occurred since the Spring series of equity sales.

• War fatigue. Drones have changed the face of modern warfare. Not since the days of Japanese Kamikaze pilots has there been such a step-change in delivering mass precisely targeted destruction at a reasonable cost, without the consequences of losing mass fighting manpower. (Terrorists aside) Trying to avoid this selfless destruction is costly, often running to 1000 times the cost of the weapon destroyed. The Iranians and Ukrainians have used this breakthrough to drive larger superpowers to economic submission. It may be early to say, but it seems banks will beat tanks. Peace could break out. Both the US and Russia want out of these costly conflicts. Both brought to face reality by a reluctance to expend more money. The difference in Russia’s case is they have no reluctance in expending fighting age men. Thankfully neither superpower used any form of nuclear option. By coincidence, today I’m in Nagasaki which was the target of the last atom bomb used in any war, a couple of days ago we visited Hiroshima the site of the first detonation 3 days before in 1945. The bombs destruction resulted in surrender. This time it looks like all the combatants will call it a draw, each claiming a victory of some sort. We sold Rheinmetal at an opportune time in February at 1700 euros a share. Currently it sits at just 800 euros a share. Rolls Royce remains broadly level so remains in our portfolios due to its commercial aircraft engine income and small nuclear energy reactor expertise.
• The balance of power. There has been a change in the balance of power in the US. The mid term elections are over with the Democrats taking back control of the House of Representatives and the Senate from January. After wild swings both up and down whilst investors reposition their portfolios, we can expect a quieter period for the stock markets. The next two years will be subject to less political interference in business as politicians get back to their main job, that of attacking each other. Healthcare should benefit from the swing towards the Democrats hence the addition of both Eli Lilly and Amgen into the portfolios.
• AI costs. Large electricity and water hungry data centres were the chosen battlefields for the Democrats, with a swing back to blue even in the state of Texas achieved by the stance of stopping the data centres. People are worried AI will take their jobs, especially those who work in any form of administrative role. However I doubt that neither jobs lost will be more than jobs created nor the build out of data centres will be slowed. Undoubtedly the stance was a vote winner and will be built on over the forthcoming 2 years as we move to the next Presidential election. The AI Bros. have always hedged their bets by lobbying both parties and so progress on the build out will continue. As a consequence we have elected to sell GE Vernova at a loss as some major contracts may get deferred. Move data centres in to space where nobody has a vote and there are no politicians? Maybe Elon has a point as he did with Starlink. We have bought a little SpaceEx for most portfolios which could make us all millionaires!. It’s clear AI can be used to aid drug discovery, another plus point leading to the addition of both Eli Lilly and Amgen.
• Andy Burnham. Don’t worry I’m not going to get all political again. I can’t get excited about the prospect of rejoining Europe. At the summit on November 20th “Our Andy” will defy his voting base in Makerfield who voted 65% Leave, by starting the process to take the UK back into Europe. German car manufacturing and heavy industry remains in a tailspin, brought about by the endless pursuit of Net Zero despite the rest of the world doing the opposite. Whilst the citizens of the UK continue to be threatened as “Far Right” and locked away for “hurty tweets”, left leaning civil unrest continues to engulf most French cities, spreading to Barcelona, Frankfurt, Berlin, Cologne, Hamburg, Berlin, Milan, Portugal and Belgium. An International Youth Strike has been called for November 20th. So much for the grass being greener! No, the thing Andy has done is appoint John Healey as Chancellor who delivered a nothing burger of a budget. Although nothing of substance was announced he did cancel Rachel Reeves attack on our ISA cash. Thank you John & Andy! The best news we have received in a while. We no longer need to plan for the tax charge levied on cash held in our ISAs, so high dividend yielding shares become less important than before. We can favour growth once again instead of income. St James Place have been sold at a loss (a couple of clients disliked St James Place, and they were right) and replaced with more exciting opportunities like the rejuvenated Marks and Spencers and perennial Amazon.

I think that covers most of the rebalance changes. As Warren Buffett said.

Over the years, I have made many mistakes

The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.

Timing

Is the timing good? Who knows. We have around a 50% chance of any share we buy today being higher tomorrow, however over our holding timeframes the odds move to overwhelmingly positive over 5 years.

As usual feel free to contact us if you have any questions. I’m currently away from the office on my big 65th birthday bash cruising from Japan to Singapore, but as always I’m taking emails as usual.

South Korea is amazing, expect to see some shares join the portfolio like Doosan. Japan can be beautiful, but it’s very busy, we own 5 multinationals within Berkshire Hathaway. We will visit Taiwan soon which will hopefully be at a time the Chinese military don’t also choose.