Dear Friend
The best advice which any investment manager or adviser could have given to his clients in the depths of the Pandemic reaction (March-May) would have been to ‘sit tight’. It was too late to sell so why incur losses by selling at the bottom? Such advice, anyway, was not from pure superstition but a rational judgement of obscenely low values of so many asset types and when the actual best action was to buy, not sell.
However, apparently 8% of all retail investors in some form or another, took part or all of their money out of the markets then, according to research by ‘Oxford Risk’. What this means in simple terms is that they were either badly advised or instead they had no-one noteworthy to consult for guidance so they simply issued instructions to encash at the worst possible times (sadly too, many professionals, facing the same emotional pressures, did exactly the same thing with money they managed). What is even worse is that 34% of those owning shares now say they own fewer than they did at the start of the year, compared to only 12% who own more. Our clients own more. The cheaper things became, the more of them we bought with every spare penny we had available and we encouraged those with excess cash to subscribe more to ludicrously under-valued assets. Well done indeed to those who responded.
So, because we were sending regular updates to our clients with our reassurance and encouragements and indeed responding to those who contacted us directly, we had hardly any withdrawals aside from those who already had a specific need for funds. What has that saved those investors? I guess the point is not whether your adviser is perfect (as none is) but does he have the courage and stability to be able to act rationally in the face of the storm and can you trust him yes, to make mistakes too and to repeat the same pattern of ‘mistakes’ if that remains the ‘right thing’ to do. More importantly can he do what is the right thing at the most uncomfortable of times – well, at least more likely than you would yourself if decisions were left to you? We work very hard for a small management fee (as all other investment management firms charge of course). These fees are related to investment sums so as values fell, revenue fell too but the work becomes more frenetic, more difficult and more demanding by far but that is the responsibility which goes with the job. It is not a perfect science and we can only promise our best endeavours at all times, always remembering it is not a game but it is real people’s savings and incomes generated from their and their families’ hard work and for which we are responsible. Do you have the knowledge, confidence and experience to feel competent to make those calls at those worst of times, (as opposed to making none at all) or did you sell at the worst time and suffer irretrievable losses as a consequence, all because you don’t pay a competent and trusted investment manager the odd percent a year to take those decisions for you?
What Did You Do With Your Investments?
You have to react to what is in front of you. We do our best – we can offer no more. So what did we do? We issued selective purchasing instructions to our brokers on these dates:- 9 March, 13 March, 18 March, 23 March, 25 March, 30 March, 31 March, 2 April, 3 April, 7 April, 9 April…. So rather more activity the lower the markets went. We took the decision that things were ludicrously undervalued at these levels and so with any and all spare cash available (remaining prudent of course and respecting pre-set disciplines and individual client scenarios too of course), we had to subscribe whatever we could. If you are not with us, it might be worth asking your manager what he was doing – sitting on hands, numbed into inactivity, selling stock at giveaway prices to the few buyers like ourselves prepared to take them from him so they could panic react in the situation or were they contacting you to invest more? Of course not everything has rocketed since but many stocks we have acquired then were at unbelievably low prices. For whom were we buying? New clients, clients subscribing more cash, reinvesting income, minor adjustments to existing portfolios, cash reserved from previous transactions… Any regrets? Yes, greedily I could say I regret that we didn’t have even more cash available to subscribe or perhaps that our missives to clients were not as firmly persuasive as they should have been to encourage readers to place even more cash into the markets when a once-in-a-generation opportunity arose. Maybe, just maybe, we should have sold some more of our defensive assets like gold, fixed interest bonds, commodities and currencies to buy more of the cheaper equities too but that is only with the benefit of hindsight and not prudence at the time and when instead it was easy for investors to criticise for paper losses showing as a consequence of the pandemic.
Remember too whatever many might say – the FCA wrote to the advisory community in the summer as it was so concerned that the records were showing that significant numbers of advisers had raised cash early in the year and it was still sitting there – uninvested, in cash, as the markets had rebounded. That was and is a heinous sin. You cannot change the past and there is no point reacting after it is too late but you can affect the ‘future’ by the decisions you take today.
Wrongs And Rights Issues
There have been many capital raising exercises by quoted companies over the Pandemic’s course. Our strategies have had several and these have been greeted by the market in mixed ways – usually with ‘relief’ and a boost to the share prices as it is realised that valuable cash is being raised to help the company through the hard times.
We consider each and every one very carefully and they are not always attractive to buy. Sometimes the ‘market’ can push the price of the main stock so low that the ‘offer’ isn’t attractive at all so it is best left. Sometimes however it is so good it would be foolhardy not to fill our boots. Sometimes it is certainly not so clear at all and one such was IAG – British Airways’ parent company. It was a close call, but we decided to take-up as much as we could for existing investors. Many might have suggested it was throwing good money after bad, but we had the unenviable challenge of making an assessment. The new shares were 92c each (83p). The old shares had been as low as 91c…
So, we took-up our entitlement where we could and as at the point of writing, they have been up to £1.66… that’s a mere doubling of the Open Offer price and as sure as eggs is eggs, many shareholders would have let that one pass them by. It’s been our best one so far and the only clients for whom we could not acquire their entitlement would be those without any available cash (we tried to ensure we had as much reserved as possible) or those liquidating or with prospective cash needs. They don’t all go like this of course but there are several which have proven to be very worthwhile and well-done to investors who have subscribed cash to make sure they could avail themselves of all opportunities.
Inflation
There was a very interesting piece on Charles Goodhart’s book ‘The Great Demographic Revival’ in the FT last week. It was buried near the back of the Paper but flagged by respected columnist Martin Wolf. The book notes that after such a period of global borrowing and spending, there becomes something of an inevitability of rising inflation and I have tended to agree. After all, borrowers (governments!) need inflation to diminish the real value of all the debts they cannot afford to redeem. It could be 5%pa – or it could be 10%. The book goes on to note that changing global demographics will have a hand in this and then, governments will rediscover that when the inflation genie is out of the bottle it is nigh impossible to control. Some inflation is good, we like to feel we are earning more, seeing the values of our assets and homes increasing, etc, even if that is related to higher prices for goods and services we pay. Everyone hopes they gain as much as they lose but… there will be some big losers. Many middle-aged and younger people have never seen inflation of note. They don’t know what it is like realising that £1000 in the bank is only worth £900 at the end of the year or that as banks ratchet-up interest rates to dampen demand and control inflationary increases that their mortgage payments will rise – and considerably. That will have a devastating impact on the residential property market which is already way above its long-term inflationary increase chart already… (remember that as much as 40% of all residential property prices is represented by debt so the unscrambling could be colossal). Of course, governments then are likely to have to pay higher interest on their debt too… but maybe they will keep manipulating interest rates for that so they don’t…
Can you prepare? Yes – you can ensure you are not over-borrowed against things like inanimate houses and that you could afford increases in your home’s mortgage costs. You should also have real assets which have the opportunity of increasing in line with inflation – such as shares in companies which will increase their goods and services’ prices to keep-up and thus their profits. Don’t keep too much in cash as that will fall in buying power – three years at 10%pa inflation means that your £1 would be worth just over 70p then (even if you may receive a little interest on it for a change) – ouch – but the money in real assets should be at £133.10 instead as well as paying you dividends (not that anything is ever that linear!). Can you afford that risk and indeed the lost opportunity?
Tesla
Well, with no fanfare this time, Tesla was admitted to the S&P500 index, as the biggest US Car maker by its share price but certainly not by its car sales. A Company which to date has only made a profit by the artificial sale of carbon credits and not by selling cars, batteries or space rockets, entered at number fourteen on the list with a market value of some $400billion.
So if you are a ‘tracker fund’, you have to have it, whatever you think of its value after having risen 374% this year alone, so instantly these trackers have to push the price up to put-it-in – and at the same time, dumping loads of other shares displaced by its arrival and size. More and more money is in these ‘trackers’ and that accentuates the ‘problem’ but as the FT’s tailpiece says, ‘sooner or later they will be held to greater account’. We don’t have any Tesla in any of our strategies. We are also very, very wary of these big trackers for these and other reasons – we could be in for a tracker inspired correction and the numbers would be significant. Then, being ‘cheap on fees’ is hardly a benefit which will save you!
Risk Warning
Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.
To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!
If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.
Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
