Comment and opinion for retail investors in the UK
After a longer technical post last week, this week I am going to confine myself to cherry picking a few news items that are relevant for investors who are considering portfolio asset mix balance and possible transactions, like profit taking.
Markets certainly seem edgy at the moment and the odds of a Santa Rally are receding. I suspect that institutional traders are looking to book some gains after a good year, perhaps nervous about the worsening Covid situation in much of Europe.
When undertaking some research into Agritech investing a few weeks back, I concluded that for the moment the only way a retail investor could make a highly focused investment in that theme was by purchasing an ETF (Exchange Traded Fund).
This week saw the market value Tesla at over 1 trillion US dollars or more than all the rest of the US auto businesses added together. That valuation makes no sense on any conventional accounting measure or the long standing principles of value. If you buy Tesla shares at the current price, you either believe it will corner the market in electric cars in way that will allow it to make super profits for years (highly unlikely) or you just think the shares are like crypto, so well loved that whatever the price, someone will want to buy them later at a higher price.
That reminded me of a proposition I heard expounded by Professor Schiller, the Yale ecomonist and market guru. He suggested that human behaviour was heavily influneced by stories. We all love to hear and tell stories, and it seems that all cultures have histories of folk tales, such as those incorpoarted into the collections of the Brothers Grimm, Hans Christian Anderson and others.
The Professor’s argument (as interpreted by me) was that the explosion of social media and the internet means that we are all exposed to an overload of information and we probably get comfortable with a tale that fits in with our personal biases that and we can maybe share with our social circle.
There has been many a comedy sketch show written on the basis of a national audience understanding what is the favoured topic for the gym, the pub, the dinner party and so on. Where I live every small social group will include someone who has ‘made a tidy sum’ from Bitcoin or similar (plus a few silent ones who have lost a tidy sum, I guess!).
In the UK, people legendarily talk about house prices and Brexit, and maybe vaccines these days. I can even report that a certain section of the community where I live is fascinated with the price and acquisition of vegetables and of course almost anywhere a mostly male group will tend to elaborate/fantasize on their favourite sport, hitting better golf shots, catching bigger fish and and making a great deal of having been at school with a famous footballer.
If this is a genetically embedded human characteristic, then maybe participants in the investment markets buy assets on the basis of what others tell them directly or indirectly, in other words what is an accepted popular assessment and not what makes strict financial sense.
I think we can see plenty of evidence of that.
We must however remember one of the most insightful stories of all times, credited to Anderson, but based on a 14th century Spanish tale from a collection of cautionary fables – The Emporer’s New Clothes. A story of 2 swindlers who tell such a good story everyone is scared of exposing it. It takes an innocent child to decry the fraud, but actually, the emporer still tries to bluff it out (‘fake it ’til you make it’?)
In my assessment, fundamentals come through in the end and a false valuation of assets, whether it be shares in a medical testing company, Twitter or an electric truck maker, all of which are said to have told tall tales, will revert to something that can be asessed on a factual, not a fictional basis
In my October Watching Brief post I introduced a Digging Deeper topic initiated by readers who wanted some pointers on identifying manager style.
You may find it useful to read the introductory comments when I suggested starting with the house style. In the example I chose, which was a real request to me for comment on a fund, I have been looking at the Baillie Gifford Income Growth fund.
I think all readers will know that you can find out who in person manages a fund using resources like Trustnet and Morningstar and most of the time you will easily find a short biography, supplied by the employer and consistent in all research sources. This bio may be expanded on the fund provider’s own web site but that is in my experience unusual.
Base facts that I usually pay attention to are:
A whole range of news coverage leads one to the inevitable conclusion that we are at a potential inflection point in the long term relationship between what economists call ‘the factors of production’. These factors are usually stated as being land, capital and labour, with enterprise touted as a potential extra when I was at college – possibly because top managers did not like being classified as labour!
Last month I wrote that this was often the time of year for bumpy markets and I was not wrong for 2021.
Issues that are potential headwinds and which have blown up somewhat more briskly in the last few weeks include:
