Too Good To Be True?

We have all experienced some astonishing increases in investment value recently. Instead of accepting our good fortune as long overdue, several clients have become anxious. Worried that from here our portfolios will now go down. That feeling of loss is natural and has kept us safe over millennia. Primitive man who always expected a sabre tooth tiger could be hiding behind the rock survived. Those with no fear were eaten for breakfast.

Market Timing

It would be wonderful if we knew when to tap the brakes just before the crazy driver pulls out right in front of us. Unfortunately nobody possesses a crystal ball. Whoever says they know the market is about to crash is a liar. Please don’t listen to them. Nobody knows for certain when the next drop will occur. We can theorise, join a series of dots and create a credible story. But let’s remember, it’s just a story. One of 1000 possible outcomes. Timing the market is impossible.

Unfortunately we have many setbacks we need to accept over our investing lifetimes. Our perseverance in the bad times allow us to stay the distance and benefit from these better times.

Bubbles

I’m pretty convinced Nvidia is a problem. A bubble. A company cannot be bigger than all of its customers and still grow. Without the promise of continued growth, the share price must fall and dramatically so. Recently Nvidia has engaged in a circular arrangement with a customer. Imagine I walked into a Rolls Royce dealership and said I fancy that car, (I don’t, it’s just an example) but I don’t have the money to pay for it. Would I expect Rolls Royce to say “that’s OK Rolls Royce will lend you the money if you take our car”? No. Have they made a car sale? No. They have given me the car, especially if I can’t afford to pay them back. What could possibly go wrong?

Nice analogy but am I just bitter because I sold Nvidia for us all too early. We made 18% in a short period of time but could have made much more if we would have still owned Nvidia shares today. From my standpoint I probably don’t like admitting I was wrong so I’m calling it a bubble. I’m convinced it will end in tears. On 4 prior occasions Nvidia shares have lost over 50% of their value. I’ve passed on the opportunity – it’s a bubble waiting to go pop.

“There’s a bubble in AI!” – Probably said by any man who has never benefitted from the growth in Nvidia.

“There’s a bubble in Crypto!” – Only said by those who don’t own any Crypto. Oh and regulators who don’t allow us to discuss it.

“There’s a bubble in stock markets!” – Never ever said by those who over the years have benefited from the long term excess performance of shares over bonds, cash, commercial property, gold – you name it. “Bubble” only said by those who missed out on the gains.

Investors endure the ups and downs even after the numerous car crashes that sideswipe us along the way. Such as;

• The Great Financial Crisis of 2009
• The insolvency of Greece and the close to collapse of the Euro – twice
• Brexit 2016
• Covid 2019
• Post Covid supply chain issues 2021
• Rampant inflation 2022
• The dramatic increase in interest rates 2022
• The invasion of Ukraine 2022
• October 7th pogrom and Israel – Iran war 2023
• Trump’s Tariffs 2025

I could go on, but you get the picture. It hasn’t been easy over the last 15 or so years.

Where has our out-performance come from lately?

Our recent returns arrived by exploiting media induced fear amongst our fellow investors. Not from suffering the clickbait fear subjected on us 24/7. On reflection, our investment choices all revolve around a common theme of fear. The Fear Portfolio. Maybe that has a marketing ring to it? We certainly don’t manage a greed portfolio.

We haven’t made our outsized returns by following the crowd. We are not 34% exposed to just 6 AI dependent US companies like the vast majority of savers and investors. That is what you get if your US exposure is in an S&P 500 tracker fund. We have not leapt on that bandwagon. Our portfolios have swelled by recognising there is increasing fear out there.

Fear of sticky Inflation. Fear of currency devaluation. Fear of Recession. Fear of unsustainable Government debt. Fear of War. Fear of a boiling planet.

Government debt, held in bonds and gilts – we own none. The current return obtainable is negative and will continue to be until inflation is fully under control and interest rates, especially the expectation of long term interest rates, begins to fall. Risk without return – no thanks. The UK is a debt basket case I’m afraid and the next budget won’t fix it. The US is still OK even though the debt is huge. US gold reserves have never been revalued since 1973 and so sit on the balance sheet at just $42.20 a troy ounce. The current price is around $4000 a troy ounce. US debt figures can be deceptive.

Sterling denominated investments – We only own 3 shares traded in Sterling. As the UK dives towards recession, whilst in the US GDP remains positive (3.8% in Q2), our portfolio valuations will benefit from a falling pound versus a strengthening dollar. It may look like your savings are exclusively in sterling, but the majority of our investments are denominated in dollars.

Commercial Property – we own none. Thankfully, because we now couldn’t sell any if we tried. Commercial property funds are under water. Work from home has destroyed office value. Looking across from our new offices on a Friday, we can see the carpark of the large building opposite is empty. How long will the company keep the large offices once the lease reaches its first break point. City centre retail is worthless, roads filled with charity shops, “barbers” and vape emporiums.

Banks – we invest in one investment bank only. We have no general banks that have lent huge amounts secured against commercial property. Small banks fail because debts grow as asset values fall.

Renewable Energy – we own none. Wind and solar are not viable without huge Government subsidies. It’s no wonder we endure the highest cost of electricity in the world, when we suffer over £1 billion a year that is added to our electricity bills to continue to pay for wind farm generation in Scotland that has to be shut down when it’s still windy. Disconnected because the excess electricity cannot be transported to the rest of the UK where the power can be used. We do own energy shares, chiefly a US liquified natural gas company which benefits greatly from the fact that Europe needs to import because successive governments refuse to exploit the resources under our feet. We also invest in the nuclear fuel chain.

Fear of War – We are benefitting from a realisation that there are bullies in the playground and we need to toughen up to survive. I prefer to see our investments as necessary defence expenditure rather than in financing killing machines.

Fear of Currency Collapse – The antidote is switching from cash into Precious Metals – We own lots. Today, too much I’m afraid for portfolio balance. The recent phenomenal performance means we have to sell some metals and/or miners, only a month after buying, to maintain balance in the Moderate and Cautious Portfolios. After ten years of under-performance, demand has now shot up for precious metals. Initiated by central bank buying due to depreciating cash assets, it’s only now retail investors are joining the party and driving up values. We believe prices will go much higher over time as more professional buyers enter the market. That continued growth will not be up in a straight line though. There will be setbacks as prices move too far – too fast, but we are only 12 – 18 months into our journey. The vast majority of managed portfolios have less than 4% in precious metals. That leaves a lot of fund managers that need to play catch up in order to not seriously under-perform their benchmarks. Buying Gold is the main fear trade.

All in the garden is far from rosy.

These issues, many inflicted on us by politicians, leave the man in the street exposed to anxiety. Anxiety not just of stock markets crashing, but increasing regulation, loss of freedom and increased taxation. We have avoided investments that fit political and media narratives, instead we have researched for ourselves and found investments we believe in. Obviously other investors believe in them too, hence the dramatic upswing.

Whilst fear continues, our portfolios are well positioned. Our Fear Portfolios. If optimism breaks out we will need to adapt. If peace breaks out we will need to adapt. If we don’t like the writing on the wall we will adapt.

I believe it is going to be a long economically miserable winter in the UK. As we approach the UK budget on 26th November my blogs will turn to what we expect to be mandated by the Westminster mandarins. Spoiler alert – we expect it to be awful for us and for most of our clients.

Action you can take

• As always if you would just like a chat, pick up the phone or pop by to the office to see us.
• If the media has you very worried we can always hold more cash for you in your portfolios until you tell us you are ready to go back into the full portfolios.
• If you want to shift down a gear from Moderate to Cautious or Aggressive to Moderate we can arrange that for you at any point.

Being an investor isn’t easy. Unhappy when investments fall, anxious when investments rise. Enjoy the weekend!