Its Not Harry

Comment and opinion for retail investors in the UK

Education

May Watching Brief now published

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This is the regular market commentary that I have always intended to publish.  I have altered the format completely, so it now feels much like the presentation I would have made verbally to clients if I had been reviewing their portfolios as part of their service contract when I was their IFA.  That would have fed through to any necessary fund switches, sales or additions.

This change is the result of feedback received, so I hope it useful.  I have not restricted it to Member Only this month, so non-members can see if it might be helpful and justify signing up!  Here is a link.

Of course, this cannot be the same as a full review with an IFA, because that would conclude with personal recommendations, which I do not offer.  But if you have an IFA, this will give you something to take to the review meeting, or even to prompt an extra phone call.   If you are making all your own decisions and you are a subscriber, feel free to contact me if you want to disagree, or want to see any more evidence!

 

Mary, Mary quite contrary

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Readers may have heard the phrase ‘contrarian’  with reference to a certain fund manager or investment style.  Generally this implies taking decisions that are at odds with the perceived thinking of the majority.

NotHarry has a T shirt with a quote from Mark Twain that goes something like this: ‘if you find you are one of the majority, it is time to stop and think again’.  That would suggest merit in challenging the accepted wisdom.  On the other hand the gurus of behavioural psychology point out that the ‘non thinking’ or at least not conscious thinking part of the human brain drives far more of what we do than the analytical, logical part, which makes a case for investing on what is usually called a ‘momentum’ basis, or following the herd.

The question then arises: is it good to be a contrarian in the long run?  Absolutely! But….

The way a contrarian is able to increase the odds of success in investing is to keep the analytic part of their thinking process switched on at all times.  Investing with the momentum makes sense if you get in at or near the start, like a surfer spotting the next big roller some way off the beach.  But you need to know how long to stay on the peak and when to safely get off.  Better to exit gracefully than crash out and get caught in the undertow.

A good contrarian investor is not someone who just buys cheap out of fashion assets, although that can be part of the process.  The contrarian assumes the majority view is wrong until they have proved to themselves that it is not, or even that it is wrong but will push share prices up for a while!  Above all the contrarian (maybe without actually knowing as much) understands that behavioural biases influence investment markets and clichés and simplistic rules of thumb are not an intelligent way of building a portfolio.

I will finish with an example.  It is widely believed that electric vehicles are the future and indeed there is concrete evidence of reduced sales of diesel cars.  A simple view might be to invest in Tesla or another car manufacturer with a stated specific total commitment to electric cars,  and so sell or even ‘short’ holdings in businesses like Volkswagen, Nissan or BMW. A contrarian would perhaps argue that with the most advanced production facilities in the world, these latter companies could switch to making electric cars much faster and at lower unit cost than a new player who will have to purchase vast amounts of capital equipment and learn the process.  So the contrarian would take advantage of bad news about diesel car sales resulting in lower share prices for a well run ‘traditional’ car company to build a stock position, especially if they can see from thorough research that plans for a major switch of production are already well under way.

In my view being ‘contrarian’ is simply a matter of fighting the human tendency to be one of the pack and keep your intelligence turned on all the time.  If you can do that, you will have a lovely show of investment blue bells and cockle shells.

Ebb and Flow

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I have the pleasure of looking over the River Neris from the terrace along one edge of my house.  The restful and usually peaceful view often assists my thinking.  As anyone familiar with the great works of literature or even the main religions of the world will know, there are not many tales that don’t at some stage involve a river. Two of the great rivers of the world get a mention in the very first chapters of the Bible, the very pen name of Mark Twain is derived from the language of the river and there are more examples of books that feature rivers heavily than I could possibly list.  See how many you can think of!

I mention this because a large powerful ever flowing river is a good analogy for global stock markets.  Most of the time it flows along with the level varying not much from day to day topped up by occasional rain and supporting the activities of all sort of dependent beings from fishermen and ducks to factories and hydroelectric schemes.  But at times the level changes more than usual and I have noted this happens in two main ways, which is the same for stock markets.

A less common but very noticeable event is a sudden increase or drop of several meters in the water level.  This is prompted by a single event or series of closely linked events – exceptional rainstorms or a call to release water rapidly through the dam of the downstream hydro electrical system, for example.   Generally such a rise or drop is reversed very quickly.  The 1987 stock market crash, or the correction in Summer 2015 would be analogous events.

More commonly there is a seasonal change in the long term weather pattern and the river rises gradually to eventually reach a flood level or declines until near drought conditions prevail.  In both the flood and drought outcomes the consequences are serious, but are only appreciated right at the end of the long process.  On  a day to day basis, the changes are not very noticeable and not even consistently in the same direction.

This is how it is with markets most of the time.  A very sharp correction can often be reversed almost immediately.  Long slow declines or periods of steady appreciation can seem almost endless and indeed the ‘inflection’ point when an underlying change in the long term background conditions is rarely detectable until after the event.  However, large amounts of money are made and lost by investors who are in reality not even paying much attention.

In my view we have passed the inflection point for the long rising market that started in 2008.  The conditions have changed – liquidity (a very appropriate word) is now flowing less freely and will be further constrained and the overall volume of wealth in the system is already shrinking.   Investors need to understand that and expect not to make money from rising river levels, as suggested by the famous saying “a rising tide floats all boats”, but from seeking out protected pools and rivulets fed from long nourished underground springs.  That requires rather more effort in exploring and researching.  Doing nothing will likely see wealth declining over a period of several years.

 

What you should have bought on January 1st 2018

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Hindsight is the only perfect vision, it is said.  The publishers of the FT Trustnet web site have recently put together some charts showing how various regions and asset classes have performed in terms of value changes so far this year.  It is not a pretty picture.

The only way you could have made good value from high level asset allocation decisions would have been

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