Blog

The Market for Lemons

Evidence Based Investing | March 15, 2019

“Successful investing is about managing risk, not avoiding it” – Benjamin Graham. This phenomenon describes the adverse selection / knowledge asymmetry between buyers and sellers in, for example, the used car market. As prices (or in this case, standards) fall, the only willing sellers at a given price will be those that have “lemons” (defective goods) to sell. Thus, the average quality of goods available in the market gradually falls, leaving only poor quality goods left, which is a form of Gresham’s Law.

What’s Wrong with Buybacks?

Evidence Based Investing | March 8, 2019

“When stock can be bought below a business’s value it is probably the best use of cash.” – Warren Buffett (at the 2004 Berkshire Hathaway AGM). We covered this issue previously in June of last year, primarily from the economic angle, but recent events have appeared to politicise the issue. Several prominent Democratic Senators (Chuck Schumer and Bernie Sanders) want to prevent firms from buying back their shares unless they also increase worker pay and benefits, implying a link between low wage growth and high share buybacks. Marco Rubio, a Republican Senator has joined in. He wants to end the favourable tax treatment afforded to share buybacks (so that they are treated the same as Dividends for tax purposes). Thus, it is believed, firms may be more inclined to either pay out higher dividends or invest more in their businesses.

The Currency Effect on (UK) market returns.

Market Commentary | March 1, 2019

A common saying in finance is that “markets take the stairs up and the elevator down.” We are often asked by clients to explain the reasons for the dramatic fall from grace of UK equities relative to the rest of the world. Many suppose that it is a function of the fall in Sterling as a result of Brexit (and the political paralysis that has followed). In fact, all other things equal a fall in Sterling would serve to raise UK plc’s earnings due to the translation effect (i.e. a lower value of the pound would mean a higher return on the overseas income, once that money is converted into Sterling) and as domestic revenues for FTSE 100 firms are fairly low (c.22%, meaning 78% of the revenue is generated overseas),a fall in Sterling is seen as good news for UK share prices.

A Torrid January

Evidence Based Investing, Factor Based Investing | February 22, 2019

[The above appeared on the window of a Bookshop, “Bookends of Fowey” in Cornwall]. We don’t often do market commentaries in this blog, but after the biggest January gain for 32 years, it might be useful to look at what drove asset markets to such giddy heights, whereby nearly ALL asset classes went berserk. Once one pores over the fine print regarding performance, some interesting pictures emerge. The first is the economic backdrop, which does not appear overly helpful. Interest rate markets imply no more rate hikes, as the US economy appears to be slowing substantially, potentially taking the global economy with it.

It’s a Kind of Magic..?

Market Commentary | February 15, 2019

You may not have heard of Modern Monetary Theory, but you soon will do; it is becoming increasingly popular in the US as the “democratic left” searches for an alternative narrative to that of Donald Trump and a way to harness popular discontent with the way capitalism appears to be working. As we have discovered recently, economic illiteracy is no barrier to popular acceptance and though this ideology is clearly of that idiom, it does look set to go mainstream in the run-up to the next Presidential election, set for November 2020. I will not attempt to debunk the theory itself (as my view of it is entirely independent of the likelihood of its’ coming to pass) but instead look at the consequences for asset prices in general should it do so. Forewarned is most definitely forearmed. So what is Modern Monetary Theory (MMT)?

Horses for Courses

Evidence Based Investing | January 25, 2019

“He’s like a man with a fork in a world of soup.” – Noel Gallagher on brother Liam, (Q Magazine, April 2009)

Something Wicked This Way Comes?

Evidence Based Investing, Market Commentary | January 18, 2019

The passing of Jack Bogle this week leaves the world of investing much poorer, but his career has benefitted investors enormously (nearly $1 trillion) according to some. He eschewed the riches that most on Wall Street seem to covet and genuinely helped millions of investors get cheap access to capital markets returns. This post sums up what many of us owe to him; he has truly left an enormous legacy, which we should all try to keep alive. “Success is not final, failure is not fatal: it is the courage to continue that counts.” – Winston Churchill

Are Markets Becoming Less Illiquid?

Evidence Based Investing, Market Commentary | January 11, 2019

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price – Investopedia.

Balancing all the Factors

Evidence Based Investing, Factor Based Investing | January 4, 2019

As our clients are well aware, EBI uses “Factors” within our portfolios to “tilt” our holdings towards those areas that exhibit a premium over and above that of the market for exposure to various specific characteristics. All portfolios have a tilt towards Small Cap and Value shares, but for the World Portfolios, we also employ Momentum, via iShares and Vanguard managed ETFs. It begs the question as to why we don’t use more “Factors”, which we shall attempt to address here.As the chart below describes, the growth of Factor Investing has been enormous, quadrupling in the last 6 years, as US investor interest has mushroomed.

Will the Fed flinch?

Market Commentary | December 21, 2018

David Rosenberg @EconguyRosie:”One silver lining from the stock market’s horrible behaviour is that we haven’t had a presidential tweet since Oct 31st”. (Gluskin Sheff Chief Economist).