Mark Potter

Do dead cats bounce?

3rd March 2020 by Mark Potter Leave a Comment

No idea, personally! The phrase ‘dead cat bounce’ can usually be found across the financial pages of assorted media at times like this. I hate the phase because I have a character fault of instantly visualising what words mean without thinking, so it makes me feel rather sad about a cat.

The phrase is getting an airing today because there have been promises from financial institutions, notably the IMF, to pump prime the global economy to avoid a Covid-19 epidemic induced recession. That meant markets jumped up a bit after their heavy losses, so commentators want to know if the issue is fixed (pretty obviously not!) or if this market pick up is just a short term trading behaviour – market players closing short positions, topping up holdings to lower average costs and so on. Or just not being very experienced – there as many duffers amongst investment traders as any other group of humans.

My experience is that one does not get a V shaped recovery from a set back caused by genuine, seriously threating negative events until the worst of the news and the consequent impact is more or less understood. Generally markets will move to well ‘oversold’ values (losses that are more than really justified) first and we are not in that situation yet.

Furthermore, any remedial action needs to be seen as powerful and long term.

I think neither of those two criteria are met: we really don’t know that the virus can be contained and will die out, nor have central banks got much scope to cut interest rates, buy bonds and so on. They have done all that already – the economic antibiotic/anti-viral of choice is not now so effective.

Governments have also spent their ‘rainy day’ reserve money on tax cuts and politician led (ie get me re-elected) spending in many developed economies, not least the USA and UK.

My view is that things will get much worse before they get better, but I never claim to be a prophet (I am too optimistic to be Jeremiah or Cassandra). I am looking at history and assessing probability.

If I am wrong no one will be upset as they see their portfolios revalue back up – me included.

However, if you rush out and buy stocks or funds now and I am right, and I do think history is on my side, you will be disappointed. You would lose out twice – on the devaluation of your holdings and because you have no money or less money to buy much cheaper holdings later.

In summary my personal view is that this is merely a sinking market grabbing a plank that can’t carry its weight and the risk of drowning has not gone away. Time will tell, as ever!

Watching Brief – March 2020

2nd March 2020 by Mark Potter Leave a Comment

Pottering About

Defenceless Markets?

I was surprised to see that I had already written about the implications of coronavirus a whole month ago. The dramatic market sell off we have seen in recent days reflects the fact that the spread is now accelerating, in terms of locations, even if the case numbers are increasing less in China.

Virus spread maps have become a new fascination for some

I have commented on numerous occasions since I launched this web site almost 2 years ago that markets were taking a very optimistic view about profits growth and that the emergence of a significant negative factor that would threaten a global recession would see a dramatic set back.

Whilst it has been possible and indeed profitable to ‘ride’ the momentum a little since central banks did their about turn on interest rate policy about a year ago, the advent of an ‘unknown’ could be expected to force an eventual reality check.

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Good news for portfolio builders – a market crash

25th February 2020 by Mark Potter Leave a Comment

That headline might sound a bit strange at first. If stock markets lose 4% in a day, as they did yesterday, it makes a big dent in our asset values for now.

Long term investors will know that such setbacks are absolutely normal and may continue for a while and if they have diversified portfolios because they have looked for risk control, some of the damage limitation will have kicked in anyway. For them excellent and in fact rather surprising gains at the start of this year will have been wiped out, but long term returns will still be looking pretty good.

Many of my readers are building new portfolios. It makes me nervous when people have to do that in a constantly rising market as even phased purchases are at an ever rising average cost and if a setback happens towards the end of the process, there has not been time to build a profit ‘cushion’.

So for me, a setback from what I have felt for a long time are ‘momentum’ driven values, detached in many cases from fundamental logic, is a good thing. Portfolio builders can phase money into markets at lower prices and thereby lower their average portfolio acquisition costs.

Even long term investors who read my ramblings may have raised cash over the last couple of years and if the market setback turns into a proper ‘bear’ phase, they will have liquidity to pick up some better value assets.

Monday mashup – the pale horse rides out

24th February 2020 by Mark Potter Leave a Comment

A reference that those of you with a religious education will recognise as apocalyptic, the rider on the pale horse of Revelation dispensing Plague amongst the weapons of Death. An idea that has not dated much in 2000 years.

I have been preparing material for my March newsletter but all the reference material I have on hand was researched by people looking at data for the last quarter of 2019. There is no doubt useful evidence about the usual changes of direction is asset allocation to be reviewed, but the story that overwhelms all that is obviously the Covid-19 outbreak. The question for the moment is not where to invest, but do we want to be invested in global markets at all?

I am nervous – there are strong headwinds for equities

As a teaser for my March newsletter (subscribers only), I can tell you that the basically sceptical political opinion that I have referred to in the past which in essence is that the US wants a war with China is now being adopted as an economic argument by a well regarded economist. Add to that the locus of the virus outbreak (and the unsurprising propaganda that this is CIA sponsored germ warfare – being tested outside the US for a change), one has to be concerned about the potential impact for markets that are priced on the basis of everything going well or even better than it has been.

In such a situation, I am asking myself, do I want to buy equities with cash on hand? No, to be honest. Do I want to sell existing holdings to secure past gains? A little bit, but I know very well the risks of being out of the market and being scared of getting back in until the best gains have passed one by – I am no less human than anyone else. As long as I have plenty of cash, I am happy to let the portfolio take a hit short term.

What is new is that for the first time in my long investment life I am investing in physical gold, not the actual raw metal, but using exchange traded commodity shares. These are a specialist and potentially risky asset, so not recommended for non-professionals, but there are other ways to access commodity price movements if you see the logic of using that as your diversifier on this occasion. Using funds that invest in gold miners is one way – that also has pros and cons. Something to think about?

Subscribers can call me to discuss this in more detail.

Perhaps the virus will die out quickly like SARS and MERS. I suggest you watch your portfolios more often than usual and if you are using an IFA, get their take on the issues raised. Not my standard guidance and not something that will be good for your neves as a permanent strategy, but these are unusual times.

There is some good news in that the main central banks and political powers appear willing to pump credit into the system. We will pay for that later!

Monday mashup – from Russia with dividends?

18th February 2020 by Mark Potter Leave a Comment

As financial writers for UK investors go, I can claim to be in more touch with Russia than many. I am currently sitting in my home about 120kms from the border of the Russian enclave of Kaliningrad. Gas coming into my house is from Russia. My car is often full of Lukoil petrol. My partner speaks fluent Russian and her father is now the last retired Red Army officer alive who was a survivor of the Leningrad siege. If I walk down the road to the local health spa, I will hear the Russian language spoken as much as native Lithuanian. I even speak a bit of Russian and know a few Russian jokes.

On the one hand I perceive as a resident the fierce patriotism of a nation that twice escaped Russian domination (Czarist and Soviet) after great hardship and on the other hand I know that the idea of ‘mother Russia’ as a great nation that can’t be bullied is embedded in the minds of native Russians. In fact, when talking with Russians I feel some fellow feeling about nationality, coming from a nation with similar ideas about its status.

When it comes to classical music, Russians seem to feature big time, but what about business?

That does not make me an expert on Russian investments of course. It just allows me to better understand how ordinary people well east of the City of London live and react with their economy and politicians.

It is not possible for a liberal minded Englishman to like the way the politics of Russia operates, but equally I don’t like the politics of the Gulf States and even many aspects of the USA at the moment. But it is important to appreciate that as in places like Dubai, many people in Russia tolerate an autocratic government that broadly does what it likes because they are personally getting richer and they feel some patriotic warmth from the ‘strong leader’ story.

In fact, the Russian state has much in common with the Gulf States – autocratic rule, suppression of religion other that the compulsory approved state one, brutal suppression of dissent, an endemic tolerance, even expectation of corruption and loads of oil and gas! Of course many ordinary citizens in both societies are as charming and cultured as anywhere.

Here I come to the investment point: the recent collaboration of Mr Putin with the Saudis seems to have achieved their shared ambition of keeping the oil price up.

This is a relevant point for investors in many ways, but I am making it in this round about way, because a better oil price very directly means a wealthier Russia and that wealth feeds through to the citizens and into the profits of companies that supply that large population. Investment managers specialising in Eastern Europe point out that if you invest in Russia you get both exposure to energy and financial companies that are run in a Western style and ideally not part owned by the Russian state and also a large consumer base that is getting richer. Dividend payouts from some Russian companies are healthy.

The risks of investing in Eastern Europe are many, of course. Currency, liquidity, political and transparency all jump to mind. But as my experience is that investments in this sector move in a rather different cycle to those in India, another economy with great potential for rather different reasons, an Eastern European specialist fund invested for the very long term would be a valid call for more adventurous investors or as a satellite holding for those using the core/satellite approach that I teach.

Monday Mashup – can we be un-biased?

10th February 2020 by Mark Potter Leave a Comment

The hyphen is not a grammatical slip -up, although I know there is the odd typo in my output; I like to think it puts me in the same category as The Grauniad.

I am referring to the notion of fighting those human psychological processes generally called ‘biases’. A very good fund manager at Jupiter Asset Management (he has just taken over one of Neil Woodford’s old mandates) once said he spent his working days fighting his human biases so that he would stick to his logical and tested investment training, experience and processes.

Common traits, as they have been called in a less academic way for many years and in many contexts of life, can trip up investors at all levels of experience and expertise. I have a T-shirt with the this quote from Mark Twain on it: ” When you find yourself in the majority, it is time to stop and think”.

The point is not that the majority are always wrong or that being a contrarian is a badge of good judgement, but that it is easier to ‘go along with the crowd’ so one ought to ask why are the crowd thinking that way and do we agree with it if we think objectively. The biases that drive the majority view may be many and varied and that is beyond the scope of this post (for a good introduction, search ‘Thinking Fast and Slow’).

A topical example for investors might be Tesla shares, which on any logical or intellectual basis are priced so that the slightest of upsets would result in very large losses for investors, yet professionals are still recommending purchases. In this case the main bias that makes you think you ought to join in the party is the FOMO one – the fear of missing out.

If you were asked ‘would you buy an investment that could lose 40% or more in a few days?’, I am petty sure you would say no, so objectively, you are not going to buy Tesla shares. But you may still wish you had. That is another aspect – the issue of regret.

I have one piece of advice for all investors. It is encapsulated in my guide to investing by way of a proper process and covers the early stages: know your objectives and how much you can afford to lose (your capacity for loss). After you have invested, when you are conducting reviews and when you are tempted to buy something, always run through those steps before letting the biases get the better of you! Un-bias yourself!