Update
October 15th 2023
Well, all good things must come to a close. And this was sooner and more abrupt than I anticipated. However, due to other pressing commitments. I have had to curtail the newsletter.
It has given me a great deal of pleasure in writing it. And, I hope, it gave you some food for thought. I have not produced any company updates this month. So, I will simply cover my broader market views and some points that may be of interest.
These are strange and unprecedented times. But was that not always the case? However, in monetary policy terms, we have lived through an extraordinary epoch. I know I tend to repeat it but in 2015, Bank of America Merrill Lynch produced research illustrating that interest rates in the developed world were at 5,000-year lows. Since then, Quantitative Easing (Money printing) and Modern Monetary Theory (Helicopter money) have taken hold. In my view, investing approaches that have worked in the past may need to be rethought. I believe that we are in uncharted waters. Which, ironically, may present some fantastic investing opportunities.
Each to his own, but the safest investment approach that I can see is diversification. Providing an investor is not over-exposed to any one sector/stock, it's possible to come back from a financial mishap. Over and over again, investors get seriously hurt by concentration (And leverage). Incidentally, Warren Buffett may talk about the merits of a concentrated portfolio but, from what I can understand, he never put all his eggs in one basket. While his idea of a concentrated portfolio, with a focus on large companies, is probably very different from that of the average investor. And the degree of research that he can muster will almost certainly be greater than that of the average investor. Not forgetting that Buffett is an insider from a wealthy and well-connected family. In my view diversification may not make you rich but it certainly can prevent you from becoming poor. As a rule of thumb, I would never invest more in any one stock than I could comfortably afford to lose.
As I argued last month, I am unsure whether there is room at the top for small companies to grow into. Large companies seem to have become entrenched. Should they be broken up, then the sum of their parts could well be more valuable than the whole. Around that, large companies appear to have taken advantage of low-interest fixed-rate financing while many small companies often depend on variable-rate financing. If we are in a relatively high-interest rate environment for longer than expected, then staying with larger companies may make good sense. They are also subject to much more scrutiny and better corporate governance.
That leads me to company balance sheets. A much closer examination may now be essential for investors. Especially when it comes to a company's debt profile. Although many companies have locked into fixed-interest rate deals, a large proportion of them are due to refinance in 2025/26. If rates are going to be higher for longer, this could be problematic. While, as the trading environment gets tougher, auditors may go out of their way to avoid costly litigation in the event of a corporate collapse. Reading the company's audit report could be a good idea.
For UK investors, it may also be worth considering the economic policies of a future Labour Government. Will Labour win the next election - due to be held by January 2025? Well, as I write, according to Paddy Power the odds of the Conservatives gaining the most seats in the next parliament are 4/1. Putting that into perspective, it's giving the odds of Korean re-unification (Presumably World War III) by the end of 2023 at 2/1. So, it's probably worth looking beyond the tabloid rhetoric to figure out what's likely to happen under a Labour Government. More broadly, there will be EU Parliamentary elections in June 2024 and Presidential elections in the US in November 2024. This reminds me of a comment made by a fund manager at a recent JPMorgan Investment Trust event. He pointed to the management of large-cap UK companies (With an international footprint) expressing concern about the economic outlook over the next 12 months. Although bullish longer term, they had reservations over the shorter term. For sure, in my opinion, Western democracy is largely skin deep. But there are seriously different economic approaches on offer in what seems to be an increasingly fractious political environment.
As for value investing, there appear to be too many value investors. That's not my view but Warren Buffett's. Many of the metrics and techniques that underpinned value investing were once the preserve of an elite. However, they have gone mainstream and are now freely available online. Stock prices reflect this information. While the true value of some assets, such as intellectual property, is unknown to the managers of the business. So, it's virtually impossible for investors to figure it out. That said, I have noticed that it's far easier for a large company to remain large than it is for a small company to become large. To some degree, corporate size has become a moat in itself.
Taking a broader view, I am increasingly looking internationally for investments. At the same time, I am aware that the easiest way into these markets is through a collective fund - that still makes the London stock market a valuable platform. That said, time and again, I come back to the US technology sector. Fantastic companies that have changed our lives. But take away a handful of big tech names and their stock market performances are variable. While a large proportion of US-listed tech stocks are losing money. However, taking a macro view virtually every industry is dependent on technology from airlines to mining companies. Nevertheless, removing the hype and technology is the same as any other sector in terms of financial viability. While there could also be serious question marks around the next "Big thing". For example, cloud services are supposed to be a huge area for growth. But who wants to put classified information on someone else's computer, based in another country? While the mental and physical health issues associated with looking at a monitor for a large portion of one's life are yet to come to the fore. Can people spend any more time gazing at a screen? Incidentally, my interest in the tech sector goes way back to when I invested in ICL, at a time when the sector was not as sexy as it is today. And something I have noticed is that when tech companies go bad, they can go very bad.
As I write, Gold is breaking higher and so is the USD. I have been bullish on Gold for several years. I think the global monetary system is broken and I am not convinced that the financial authorities have the stomach for "Hard money" or money tied to a limiting factor. With fiat currencies, it's too easy to turn on the monetary taps but too politically difficult to turn them off. That said, the recent rise in Gold appears to be the result of geopolitical tensions. My exposure to the metal (And Silver) is through stocks - mainly dividend-payers. And no I don't think we are going to hell in a handcart but I believe there will be a price to be paid for what has been a huge monetary experiment.
As for this newsletter, I may return to it at some point. But for now, it's goodbye. And, needless to say, I wish you well in your investing endeavours.
Just For The Record
Wonderful lyrics on this classic.
This is a bit of a contrarian view on parting.
Letting go and saying goodbye is invariably a wrench but there you go.
I couldn't help but leave on this one.
Yes, I know I have been a lucky man.
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Last updated October 15th 2023