Monthly commentary

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!

Watching Brief – February 2020

3rd February 2020 by Mark Potter Leave a Comment

Pottering About

Virus volatility

As I write, the main issue impacting investment markets is the coronavirus outbreak (nCoV to be accurate). This is not the first scare from this range of viruses as readers may recall: we have had SARS and MERS previously. The numbers infected and the number of deaths are touted in the media in a dramatic way, but actually are not large relative to, say, the number of people who die waiting for treatment from the NHS.

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Monday Mashup – nCoV

27th January 2020 by Mark Potter Leave a Comment

The above abbreviation is I read the correct title for the new form of coronavirus that has been the topic of news headlines for a few days. It is actually called novel coronavirus by the WHO. We have in the past seen outbreaks of other variants from this virus family: SARS and MERS. If you want more data on that, you know how to Google!

A global epidemic could be as damaging as a world war

I am writing about the virus because I have seen headlines like “market sells off on coronavirus scare’. That supposed ‘sell off’ was of course a figment of the sub-editor’s imagination. However, as I wrote a while back when there was more concern about the SARS variant, disease at epidemic levels is a very serious risk for markets. How much risk depends on the effectiveness of the early reactions of the international health authorities to the outbreak and how soon it is contained. There is a point in the progress of an epidemic when it ceases to be manageable.

We have plenty of history to examine when thinking about the implications of rapidly spreading infectious and potentially fatal illnesses. Not long ago I read Defoe’s Diary of the Plague Years (about the plague ahead of the The Great Fire of London) and by co-incidence I just started on one of my Christmas presents, Boccaccio’s Decameron, which to my surprise opens with a long narrative of the impact of the Black Death in 14th Century Italy. I also quite recently saw a documentary about the horrendous Ebola virus (not actually gone away) in Africa.

All this co-incidental research tells me that an out of control illness destroys economies at a phenomenal rate and in a year ot two can cause devastation that could take decades or even centuries to recover.

My understanding of current readiness and maybe more relevant, political will to do something, is that it is good in China, reasonable in adjacent places like Australia and to me at least, unclear in the Western world. It was very noticeable that the initial Ebola outbreak only got the attention and resources it needed from the best specialists in North America when the Americans and Canadians had their own nationals coming home and discovering they had the disease. I would not be so sure that the Orange one would offer the same resources now.

Although the better educated people had a surprisingly resourceful and intelligent approach to dealing with the plagues of the Middle Ages, they had no real medical skill and of course only very limited pharmacology, so whole populations were decimated or even wiped out. We can be more optimistic that this infection will be controlled and the impact minimised. But I have a slight nervousness when I make that assertion. If the disease starts to get out of control, the impact on financial assets would be a heavy one.

During World War 2, a German diarist called John Rabe, who was in Nanking when it was overrun by the Japanese recorded that he bought two genuine Ming vases for one dollar each. There are still many houses in Lithuanian that have been unoccupied since their Jewish owners were murdered and the contents looted in the Holocaust. One reads that Italian towns are selling houses for 1 euro each. In Japan there is a village where the only ‘inhabitants’ are hundreds of stuffed toys.

Financial values are totally dependant on active demand and without people, there is no demand for assets. That is why mass deaths in an epidemic is a great risk to asset valuations.

Monday Mashup – runaway train?

20th January 2020 by Mark Potter Leave a Comment

My reading of assorted public and specialist media over the last week or two has revealed that many commentators see the current valuation of many US shares in particular as too high on normal valuation bases. I read an article saying a new valuation basis may be needed. The last time I heard an American fund manager talk about a ‘new paradigm’ in stock market pricing was ahead of a market crash so that sort of viewpoint rings warning bells.

But as my readers will recall, I was saying this sort of thing a year ago and yet 2019 was a really good year for equity investors. So maybe this time things are really different?

The end of any bull market is different to previous ones, that much I would concede!

What other actual facts are worthy of examination to help explain what is happening? Markets are going up when really they should not. Here are a few for you to ponder on:

Markets will always be cyclical – but inversion points are only obvious after the event

The US Government is about to issue 20 year Treasury stock for the first time since the mid 1980s. This reflects the fact that the US debt is astronomic and tax cuts are being paid for not by GDP growth or public sector savings but by borrowing. That is like you and me maxing our credit cards to give the money to our rich uncle. We know where that would end up.

In a world where populism is rampant, central banks are so afraid of recessions that they will use every tool in their nearly empty box to keep money circulating. This means that they are beginning to own more and more debt securities. This is good for bond prices as there are forced buyers in the market.

In a very simplistic analysis, we can say that Governments are issuing bonds (borrowing) and their own central banks are immediately buying them up. This could be argued to be money printing with no interest cost! Like you borrowing money from your grand-kids piggy bank.

As was proposed by eminent economists when the idea of quantitive easing was first proposed, the eventual consequence of this sort of policy has proved to be inflation in asset prices, so those with assets have become richer. The weakness of labour forces, even in a full employment market plus the application of technology (the real new paradigm) and the globalisation of manufacturing has for now kept the lid on inflation. This is good for equities.

For investors, who own assets (both bonds and equities), this would appear to be very good news – policy is feeding the asset price machine with lots of money and the pipes directing it to benefit the bulk of the population are all closed.

True, if there are hints of the banks wanted to start taking money back out of the system, people get scared pretty quickly, as in mid 2018. But banks trashed their reputations 15 or so years back and no-one objects when they concede to populist government pressure to bump up global credit limits.

It is even possible that some world leaders, fearing elections or even revolutions, are doing what the people that keep them in power (in the media and at the top of the wealth range, or in charge of/supplying their armies) would like them to do, irrespective of the long term consequences – no need to name names.

As long as this continues, investing in equities and bonds will be a nice earner. But I fear that much as happens to the person who pays off one credit card by drawing on another, something that works for many years, the end consequences are bankruptcy and the selling off of assets.

In the global scenario that could actually accelerate the transfer of political power from West to East. It is interesting to note which countries are running surpluses and quietly buying up the assets of debtor nations. If you have grand children, encourage them to learn Chinese.

I have to concede that we probably should stay in the markets for the ride, but if there are any signs of it becoming a train wreck, bailing out sooner rather than later would be essential. Excuse the mixed metaphor!

Of course, asset diversification and hedging risk with adequate cash reserves would be as useful a defence as ever. Personally, I am still retaining a very heavy cash element in my asset base.

January Crystal Ball Gazing

13th January 2020 by Mark Potter Leave a Comment

Or Watching Brief – Episode 2!

What the papers say

I have now absorbed the essence of the data produced at the year end by J P Morgan and published as a weighty guide with their opinions about what to expect in the year ahead. I have also read several media pieces from experienced financial journalists which are surprisingly consistent. The scribblers (I know, I know) are of the opinion that most markets look to be poor value, are overdue a setback and are subject to all sorts of headwinds. Much as I said at this time last year, in fact. But they all conclude that the ‘bull’s’ have control and momentum will keep driving the markets along.

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Monday Mashup – vanishing assets?

6th January 2020 by Mark Potter Leave a Comment

I am indebted to one of my readers for pointing out that the management of the Premier Defensive fund and its sister the Sentinel Defensive fund changed late in the Summer. I had not spotted that the long term manager Paul Smith had left ‘for personal reasons’.

The Premier fund has been handed over to his deputies but the cheaper Sentinel fund is being transferred to another external manager, Atlantic House.

I used the Sentinel fund myself and indeed still own it in my cautious portfolio element. I liked it because Paul Smith was an expert manager of a specific sort of investment trust share class, zeros, or zero dividend preference shares to give them their full name. These assets were very suitable for stable short term returns if managed by an expert like Paul.

Recently less and less ‘zeros’ have been issued so that very narrow asset class has virtually disappeared. I don’t think Paul ever claimed to be an expert in short dated corporate bonds, which is the job Premier seem to have given him as an alternative, so perhaps his departure was inevitable. I would not want to own the Premier fund now. There are cheaper alternatives for getting access to short dated corporate bonds.

The Sentinel fund may have an alternative future because as far a I can tell Atlantic House have a good record in using derivatives to control volatility and volatility control is what defensive funds are all about. I will follow with interest what they do with the fund.

I read that even ordinary shares on the main UK markets are being ‘disappeared’ at record levels, some 21 billion Pounds worth in 2019. The buyers responsible are mostly private equity firms, many from overseas.

Having less shares in issue is a reduction is supply, so a useful counterweight to new issues like the huge block of Saudi Arabian oil shares recently made available. So this ‘shrinkage’ may be a good thing.