— Jan 21, 2022


We are currently quite pessimistic about global equity and bond markets.

Regular readers will know we have become increasingly concerned about the speculation that has been growing over the past couple of years and which has become, for want of a better word, rampant.

This has been led by a new generation of novice investors, enticed by the lure of easy returns that many have made by speculating in the likes of Tesla, bitcoin and the so called meme stocks.

The huge amounts of stimulus money that has been thrown around by Governments worldwide has added even more fuel to the fire and created an enormous amount of new day traders, many of whom have taken up this new hobby through boredom and a bank account stuffed with this Government stimulus money.

We are increasingly convinced that this will end dismally, both for those investors and also for global equity market indices.  And what is more, it may end soon.

We appreciate that as Disraeli was famously supposed to have said (or so Mark Twain attributed it to him) there are lies, damned lies and then statistics. This recent statistic quoted in the Times though stood out to us:

“Over a third of companies trading on Nasdaq are priced at 10 x THEIR ANNUAL SALES OR MORE (never mind profits which in many cases there are none!).”

This kind of craziness is, to us (as we are actually old enough to have witnessed it) so reminiscent of the tech boom in the late1990’s. This peaked in 2000 and after which the Nasdaq lost almost 80% in value over the following 3 years.

In fact we are sure that the process is already happening. Bitcoin has already lost over 15% of its value so far in 2022 and is down around 30% from its highs last year.

Meme stocks are crashing; the two most infamous ones, AMC and Gamestop, are both now down by 2/3rds since their peak.

Only a small select band of companies are now holding the market up, the infamous FANGS stocks. These are now responsible for around half of the S & P return from end 2019.

If we are right then how are we positioned to protect our investors capital in such an environment and be ready to take advantage of the much lower prices that we believe will ensue?

Well firstly, we are avoiding such dangerous waters and that generally means the US equity markets where we are heavily underweight. Valuations are much more sensible in the UK where we remain overweight.

Secondly, the equity exposure we have is weighted toward stocks that possess the virtues that currently are considered old fashioned but we think still remain valid; virtues such as relatively dependable profits regardless of economic conditions, genuine free cashflow to pay decent dividends and very strong balance sheets with little debt.

Businesses that provide goods or services that people consume or use on a regular basis and are not dependent on large discretionary purchases or business investment that may quickly disappear in a harsher economic climate.

Businesses that have also stood the test of time with proven business models developed over (in most cases) decades if not a century or more of trading.

And finally, and most importantly, which are currently available at very low prices compared to a) the rest of the stock market and b) by historical standards.

In addition, we are generally avoiding expensive fixed rate Government and corporate bonds, where the consequences of buying 10 year US Govt bonds yielding 1.8% and UK bonds yielding 1.3% to maturity when inflation is heading over 6% here and already past that level in the US will be fully exposed.

We believe this to be imminent given the buyer of last resort (UK and US central banks) are finally reducing their purchases of such bonds. This will reveal the true market price of such instruments and we are sure it is much lower than current prices may indicate.

Finally, we have higher than usual cash balances. This is purely a short term measure. At the moment it may appear to be foolish given returns are still zero. However, this is an opportunity cost; providing us with firepower to take advantage of the opportunity of lower prices and thus make significant gains in due course.