Markets and Froth


The markets are always odd. They’re never as ‘perfect’ as the textbooks might suggest and when wild human emotion becomes involved, really stupid extremes can arise – to the upside and the downside. What are the latest extremes of this? Coinbase (a crypto business) floating with a ‘value’ of $100billion? A financial advisory business (PensionBee) with a model which isn’t as dynamic and unique as they purport and ‘worth’ a mere few hundreds of millions despite making a £13million loss last year?

Then Tesco’s results come along and the market’s not so happy and the shares drop a few percentage points? It’s a dull business model frankly but we are buyers of them for two reasons – the first that we believe they are undervalued and the second because we shan’t be buying either of the first two or anything like it, so we are not exposed to the extremes. The ‘crash’ when it comes, will be as selective as it was in the Dotcom bubble burst. Just think about it. These overblown stocks have been primarily chased higher by fair-weather investors and speculators who only think things go up. They will flood for the exit when things change (and who will be the buyers?). Owners of Tesco shares won’t. In fact, I suggest Tesco shares will rise as some of that hot money will seek good, old-fashioned value which pays an income – dividends from real profits (usual caveats of course…).

I am reminded too of the adage from Aldous Huxley. He said ‘that men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach us’. I am afraid many of today’s speculators have not learned that simple lesson. Maybe I should just add for all you tech and index aficionados out there… ‘Growth’ versus ‘Value’ peaked in October 2020. This was a many-year trend and the biggest valuation variation between the two themes since records began. The top ten ‘Growth’ companies count for 33.3% of the world index whereas the top ten ‘Value’ stocks count for a mere 11.78% of that index. Does that explain why we are not worried about a collapse in tech stock prices, especially as dull value is still so fundamentally cheap, owning assets and paying big dividends typically from trading in boring things with you and me every day? Might you understand why we have had the best ever performance year since the Firm was established in 1985 I wonder and a tremendous period since October 2020 too?