Whatever you thought you knew about investing is now wrong.
Our world and the financial world are upside down. It now looks like this:
- Ultra-low to negative interest rates
- Close to or below zero oil prices
- Negative yielding bonds
- Stock markets going up with record unemployment
- Company profits warnings and corporate failures.
- Dividend cuts and cancellations
- Government bailouts for companies
- Governments and Central Banks printing money
- Massive coordinated Government economic stimulus
We need a new mindset. “This is the Modern World”
What kind of fool do you think I am? You think I know nothing of the modern world All my life it's been the same I've learnt to live by hate and pain It's my inspiration drive
But strange times produce new opportunities. We need to understand these.
Old World Safe Havens are NOT Safe
Gold, other precious metals, diamonds, other gemstones, etc. were typically seen as safe-havens. If the world came crashing down, you could rely on them to at the very least. But now all bets are off. Gold, which performed well in the 2008 recession, hasn’t done the same this time around.
New digital assets (Bitcoin, Ethereum, Tether, etc.) that were supposed to have built-in protection have suffered huge losses as investors run for the exits. What the new safe looks like when it comes to investing is yet to be determined. Safe-havens need to be reevaluated.
Is a Government bond safe?
Conventional or historic wisdom has always been that Government Bonds or Investment Grade Corporate bonds are the safest asset you could own. Good investment advice was you should always have a portion of your portfolio in these bonds as a shelter in the storm. In case of times like these.
That’s out the window. These bonds are now instead of paying you interest, are costing you to hold them in real terms.
So why do people own them. Some, such as banks and insurance companies are regulatorily required to (yes, Ponzi scheme) and others (hedge funds, traders and speculators) because they are betting that those bonds will be bought back by the issuing Central Bank at some point. This is a game of musical chairs and you don’t want to be holding the bond when the music stops.
The value of your currency will go down:
When a Government or State prints money or creates money (Quantitative Easing) out of thin air this has a long-term effect. The US Government has to date “printed” more than $3 Trillion. In the UK it heading through GBP100 billion.
I would argue that Quantitative Easing (QE) is partly a form of intentional deliberate currency management or engineering. QE is deployed to stimulate economic activity. A cheaper currency makes export pricing more competitive. Clearly if everyone does it, QE becomes less effective. We are now in a race to the bottom in my view. Problem is the US is the biggest economy in the world. For the rest of the world the US$ is the reference therefore the likelihood is it will remain on its long term relative robust valuation.
To avoid this, you must have your money invested in an asset or assets that produce more money in your own currency but also assets that produce money or income in other currencies. This could be your own business, maybe property (but cautiously) and or secure well covered dividend paying shares or equities (my preferred).
What is liquid?
Liquid means how easy is it to sell. Well 6 months ago, oil would be one of those “liquid” assets. When everyone wants to sell, even oil get crushed.
The single biggest mistake you can make is believing you won’t need to sell…. ever.
As Keynes said in the 1930s: “Markets can stay irrational longer than you can stay solvent.”
“Fireproof” Funds catch fire:
More than £26bn has been withdrawn from so-called absolute return funds — investments specifically designed to protect savers from market shocks — amid growing evidence that they are failing to do just that.
Dividends ain’t what they used to be:
Don’t rely on dividends, you could be in for a very nasty surprise. Many of the markets biggest dividend payers, oil companies, banks and insurance companies have taken a profit kicking as a result of Covid-19. It is going to get worse.
UK equity income funds are about to blow up. Lots of equity income funds are going to let you down. Oil companies, high street banks, insurance companies, mid cap, and utilities are not going to pay dividends in the second half of the year. Look at the top ten holdings for most of these funds.
From Adrian Frost at Artemis UK Income Fund (one of the biggest) recent Factsheet, “the widespread cessation of dividends, the annual or semi-annual payments through which companies share their cash profits with their shareholders. This will result in a significant drop in the dividend yield that the UK market - and our fund - will generate this year”
Passive investing offers no protection or safeguards:
A passive investment approach in the current environment means owning some or many of the companies that are not likely to do well or potentially will not survive. There will be significantly more bad than good. So, here’s the good news you own 10 good investments and 90 bad. Overall you lost money.
Passive investing does not hold companies to account. There is no participation in voting or even public meetings attendance. Passive fund managers are blind bureaucrats slavishly instructing their computers to track an index with zero corporate governance or fundamental analysis.
Passive investing crates bubbles and prompts and acerbates runs and panic selling leading to irrational pricing.
One good thing out of this crisis is we think this is the last phase of the passive index tracking bubble or trend. Now is a massive opportunity for managers like TEAM to really outperform. Check out colleagues, Craig Farley and his thoughts on Asia. Check out Ben Shenton on investing. We will outperform passive, as will other dedicated, experienced and disciplined active investors. We and they are true investors.
Capitalism cannot work and thrive without active investors. Market stagnation equals market failure.
Passive investors are passengers on a train that have no control of its destination. Join the sheep and lemmings.
Interest rates are zero but debt is a killer:
The current recession has shown investors just how important it is to have a cash buffer in case things go crazy wrong.
When you have no money you can’t invest at distressed prices, or if you need cash your only option is to sell your investments in a bad market. This is the result of debt. Don’t borrow to invest. Not now not never.
What about now?
We believe the worst of the pandemic is behind us. Yes, tragically people died but we have not come close to the direst of predictions. In many parts of the world that is allowing the economy to open up sooner than had been expected. The unprecedented monetary and fiscal stimulus is allowing businesses and workers particularly in the largest economy in the world, the US, to hit the ground running as each state and the country begins to reopen. The US economy was strong going into the pandemic (just two months ago we were recognizing the strongest US economy of recent times). We think it will snap back bigger and faster than expected. But nevertheless, it will recover.
May is going to be an interesting month as more states and countries begin reopening their economies. There will be good news and bad news along the way. But with each successful phase of the reopen, the global economy, and people's lives, can start getting back to normal.
Things will not and will never be the same.
ONE THING COVID-19 CANNOT KILL IS INNOVATION. Investing is about finding companies you personally can identify with, understand, have confidence in and that you have a clear multi year vision of where they will be. Companies that coincide with what you believe in. Companies that overlap with your own life and life experiences. There is so much choice out there. We limit what we look at to just those companies that conform to the above. We have faith in our own inner judgement. We all know what is a good company. We know, we don’t need telling. Investing is about life……our life and your life. We take responsibility and enjoy that.
One last thought…. the Spanish flu of 1918/1919 killed probably 50 million. What happened next?.......the “roaring twenties”, one of the most positive economic periods in history. OK, it didn’t end well but it lasted 10 years.