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Valuing the Future

Value investing at its core is the marriage of a contrarian streak and a calculator. Seth Klarman- Hedge Fund Value Investor. We touched on this subject at the end of April, but thought it might be a good idea to look at the subject of present and future value discounting in more detail. Last week the Bank of England raised interest rates by 0.25% to 0.75%; although Mortgage rates moved at the speed of light, (I got an e-mail from HSBC telling me that my mortgage was going up 2 and a half hours later!), it appears that savings rates will be moving at a more sedate (or glacial) pace. Many of the newer UK house buyers have not seen a rate rise at all (as we have been stuck at or below 0.5% since 2009), and the effect on consumer spending and confidence is unclear.

Trees Don’t Grow to the Sky

Market Commentary | August 3, 2018

“Nothing is so painful to the human mind as a great and sudden change.” – Mary Shelley.

China in Your Hands

Market Commentary | July 27, 2018

“The key issue is the shift of the centre of gravity from the West to the East, the rise of China and India” – Klaus Schwab. (Chairman of the World Economic Forum).

The X (minus one) Factor?

Evidence Based Investing, Factor Based Investing | June 22, 2018

“Better a diamond with a flaw than a pebble without.” ― Confucius We return once again to the subject of Value (last discussed c.18 months ago). In truth, not much has changed, except that the chart below now shows an underperformance of Value vis-a-vis Growth of c.4% per annum annualised compared to 2.73% over the period shown in the December 2016 blog post. This has left many (including ourselves) in a quandary. Nearly all of the arguments advanced in the previous blog are still valid (if not more so!), but it has not, aside from a brief 6-month recovery in the second half of 2016, amounted to much; if anything, Growth has recovered with renewed vigour in the last 3 months.

Looking for Black Swans

Evidence Based Investing, Market Commentary | June 15, 2018

“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief. ― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable. Having relatively little to do at the moment, analysts appear to be playing the spot the “black swan” game, with attention focussed on the likely cause of the next market hyperventilation. A recent Deutsche Bank study suggests that financial crises are occurring with increasing frequency of late, defined by them as a 15% stock market fall, a 10% foreign exchange rate decline a 10% drop in bonds, a 10% rise in inflation or a sovereign default.

Cracks Emerging in Markets

Evidence Based Investing, Market Commentary | June 8, 2018

“Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge” – Tina Vandersteel, Grantham, May, Van Otterloo & Company (US Hedge fund).

Are the US Markets being Privatised?

Market Commentary | June 1, 2018

“A basic principle of modern state capitalism is that costs and risks are socialized to the extent possible, while profits are privatized” Noam Chomsky. (Equity) markets appear impervious to risk of any sort; no matter what politics, economics, diplomacy or military conflicts throw at them, they either ignore it totally or bounce back within days (and sometimes hours). What gives? Is this a(nother) bubble, or has something changed to reflect a new reality that we may not yet appreciate?Going back to 2013 (May 2013 to be exact – i.e. 5 years ago), the S&P 500 was at 1,627 and trading on a trailing P/E of 17.6; fast forward to today and we are 2,705 and a P/E of 24.6. So the market has risen by 66%, but earnings by only 19% over that time. The residual is the rise in the multiple that investors are willing to pay for those earnings streams. The P/E has risen by more than twice the growth rate of earnings over that period. Why?

Extend and Pretend

Market Commentary | May 18, 2018

“A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.” – Daniel Kahneman Extend and Pretend is a phrase that encapsulates a desire to bring forward gains into the present, whilst deferring costs or risks into the future. It refers to the practice of Banks during the mid-2000’s of refusing to accept losses on loans (mortgages for example), by allowing borrowers to pay back over a longer time-frame, thus avoiding having to book loans as non-performing in the short-term, but in the process storing up even greater risks into the future. It came back to haunt the financial system in 2007-09, leading to the biggest financial crisis for at least 70 years. The policy never ends well in any sphere of life.

Adapt or Die

Market Commentary | May 4, 2018

“Tina Turner doesn’t need another hero, but Bonnie Tyler is holding out for one. Tina, give one of your surplus heroes to Bonnie. Job done.”- @limberstar (Dean w) Tweet from 26/04/18…

Stiff Competition

Evidence Based Investing, Market Commentary | April 27, 2018

“It is nice to have valid competition; it pushes you to do better” – Gianni Versace.