How we can turn bad news to our advantage
by Bill Jamieson
Monday 1 November 2010
When you bump into someone who's not a pessimist, check whatever you're drinking and that you haven't wandered into the wrong room. Last week I had the pleasure of renewing acquaintance with Mike Williams, US stock market guru and long-time pal of Alan Steel, sage of Linlithgow and IFA extraordinaire.
Williams is an accomplished speaker on financial markets. He has an informal, engaging style. Few leave his presentations without feeling quietly buoyed and less cast down with woe. There is the slight whiff of the revivalist preacher about him, a sort of toned-down Billy Graham of stocks.
What he sells - and sells well - is reassurance. Markets are jittery.
But we've been here before. The dollar is crashing. But this is nothing new. The world is full of bad news. But, hey, when was it ever different?
Williams is lead manager of the Richmond Core Fund in America and Alan Steel arranged a presentation at Edinburgh's New Club with a select group of investment managers, advisers and clients. As the relentless drizzle of bad news is if anything more intense here than in the US, Williams' quiet-voiced blend of reassurance and self deprecating humour was always going to go down well.
He recalls how he began in finance in the early 1980s. "Mike", he was told, "it's never been as bad as this.". Fast forward to the nadir of the tech stock crash in 2003 and old hands told him: "Mike, you don't realise, it's never been as bad as this." Today, as the US recovery sputters and the Fed is poised to announce further resort to quantitative easing, everyone all around is saying the same: "Mike, you don't understand. It's never been as bad as this."
On each past occasion, equity markets went on to rally. And that, he believes, is where we are now. In 1998, bonds were on a price earnings multiple equivalent of 11 and US shares on a multiple of 40 - very expensive. But we kept piling into shares and gave bonds a miss. Today, after investors have pulled a net dollars 31 billion (GBP19.5bn) out of mutual [equity] funds in the past year and piled dollars 275bn into corporate bond funds, the average PE on US stocks is 11 and bonds on a PE of 40.
The message is clear: bonds are at, or near, the top. Equities will be the better buy from here.
It's a contrarian message that goes against the grain of popular perception. But that is how brave investors have traditionally made money. It takes a Herculean effort of will to act counter to the bleak and baleful news flow of the times. In the US, jokes Williams, CNN stands for Constantly Negative News. Here Alan Steel talks of "Bad News at Ten" from the "Biased and Blinkered" BBC.
Little wonder that UK investors continue to prefer bonds over shares and that there has been little conviction behind the market rally of the past month.
It's certainly true that there are huge hazards to be faced and that the recovery story is still broadly an act of faith. But for equity investors who should be well diversified by now after the traumas of the past decade, the UK is not the end of the known universe.
Steel points out some of the funds that have done extraordinarily well since February 2009 - the last time the consensus wisdom was that "things have never been as bad as this". Robin Geffen's Neptune Russia and Greater Russia up 150 per cent, Angus Tulloch's Global Emerging Market Fund up 140 per cent, JPM Natural Resources up 120 per cent and even Tulloch's relatively cautious Asia Pacific Leaders Fund is up 100 per cent.
Graham French's M&G Global Basics fund is up 80 per cent and, he adds, "an unsung hero", Harry Nimmo over at Standard Life who runs their UK Smaller Companies Fund and has done so for the last 17 years with tremendous results, has seen the unit price rise 100 per cent.
"In the meantime, a well known Gilt Index Tracker Fund highly popular with pessimists is up 10 per cent And even though long-term interest rates are at alarmingly low levels and unlikely to fall much lower, billions of pounds and US dollars are piling into a sector perceived to be safe." Steel believes this bond bubble will burst in time.
The one grim consolation I can offer from all of this is that no-one can point to any mood of irrational exuberance in markets at present - and it is unlikely to show through any time soon.
The silver lining of bad news is that it obliges us to be judicious in the investment decisions we make and not to be caught up in a manic bubble - only buying because everyone else is doing so. The judicious investor feeding in measured amounts into a range of equity funds over a period of time - and especially those that are particularly out of fashion - stands a good chance of outperforming bond funds on a three- to five-year view.
It is not optimism as such, more a concern that the risks of sticking with government stocks or bond funds may now be more risky than the equity alternative. It is this cautionary argument that I believe will come to prevail.
Quote courtesy of The Scotsman
Monday 1 November 2010