NOT A LETTER FROM LINLITHGOW
Last month I said that I was taking a wee break from Letter from Linlithgow. Isn’t it funny that when you’re trying to give your ageing grey cells a wee break, something fascinating turns up out of the blue. So I thought I’d share it with you. This ‘Not a Letter’ was triggered by increasing fear, stirred up by headlines and ‘experts’ about bubbles, speculators and ‘too much money being printed’, all leading (they claim) to rampant inflation. No good ever comes from bubbles said somebody with a short memory. To demonstrate how poor predictions from the much-quoted famous can be, here’s one from a Nobel Prize-winning economist in 1998 – “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine”. Sorry I couldn’t resist that one. No more quotes, I promise.
I’m supposed to work a ‘Twat week’ these days (Tuesday, Wednesday and Thursday) and then choose what I want to do on Mondays and Fridays. What tends to happen though is that almost all the time I end up reading to find ‘stuff’ to send to my colleagues that gives insights as to what’s likely to happen next as secular trends, as opposed to the media’s fixations on never-ending short term negatives, coupled with their “you can’t beat an index so why bother” mantra. And in searching for interesting content for the best part of 40 odd years I’ve been lucky to stumble across some great long-term investors and thinkers who are unselfish in giving away their ‘secrets’.
This ‘Not a Letter’ is thanks to them, including Mike Lipper, Vitaliy Katsenelsen, Howard Marks, Eddy Elfenbein and Chris Mayer to name just a few who have seen it all before. The vast bulk of my research comes from the US where I was also lucky to find Vincent Deluard and Warren Pies, both formerly with Ned Davis Research and folks like Scott Grannis and
Ed Yardeni who are enthusiastic economists (not many of them to the pound as my grannie would say). I also share thoughts and data regularly with Philip in North Devon, a long service IFA who also cares about his clients and staff.
The following though comes largely from the writings of Ben Carlson from a piece he wrote earlier this year about bubbles and speculation. This year and much of last year, for a number of reasons have seen a dramatic rise in speculative ‘investments.’ We’ve heard about Meme stocks where ridiculous amounts are being made or lost in next to no time. It’s been calculated that one particular stock is ‘owned’ for an average of four hours. Cryptothingies like Bitcoin allegedly are 95% owned by less than 5% of their ‘investors’ while the massive gyrations of some values are down to get-rich-quick speculators playing with their mobile phone Apps as if it was a Super Mario game.* (*showing my age there).
Bubbles have happened for centuries and while they attract headlines and eyeballs they always end in tears and/or bankruptcy for speculators sucked in too late. We all know about the South Sea Bubble when Isaac Newton lost the equivalent of £millions, and the Dutch Tulip Bulb Bubble where at the top of the speculative frenzy, one Semper Augustus bulb could have bought an Amsterdam townhouse. But how many have heard of the British Railway Mania bubble of the 19th Century, never mind the early 20th Century Automobile or Airline bubbles?
Apparently like most other bubbles they started as a great idea that then became a ‘get-rich-quick obsession with crowds of gullible ‘investors.’ The first commuter trains appeared in the UK in the1820s. Travelling at a scary 12 miles an hour they cut the London to Glasgow journey to only 24 hours, roughly the same as it took me a couple of years ago thanks to ‘leaves on the line’. By 1840 there were 2000 miles of railway track. Then in 1842 Queen Victoria was persuaded to have a train trip.* And thanks to her enthusiasm for rail travel, by 1844 railway shares were regarded as having huge potential.
*(that led to the Deeside railway from Aberdeen to Ballater, completed in 1866. The station is now a pretty restaurant. We paid a visit to Ballater recently during a short say in The Fife Arms in Braemar - highly recommended by the way).
Reckless euphoria took over and by 1845 almost 500 new railway companies were formed, with share prices up 500%. That year the identities of 20,000 investors who’d subscribed at least £2000 into railway shares were disclosed including 157 Members of Parliament, 260 Clergy and Charles Darwin. The majority though were ordinary speculators hoping to cash in big time, at the top. The amount invested was equal to almost half the GDP of the UK. But bankruptcies then hit an all-time high and 1000s were financially ruined. By 1850 share prices fell 85%.
But the railway mania boom and bust had some positive outcomes. By 1855 over 8,000 miles of track gave the country the highest density of railway tracks anywhere - and 7 times the length of Germany. Businesses experienced huge efficiency gains thanks to cheaper and quicker transport of goods and passengers. And before the bust, over 500,000 were employed in building the network. Also this led in turn to better news distribution (not sure that was a good idea mind), and stockmarkets became more effective with stock broking firms exploding fivefold from 1830 in only 17 years.
Similar booms and busts took place for speculators in the automobile and airline businesses. In the 1920s in the US when car ownership soared there were 108 car manufacturers attracting small and large investors. But thirty years later there were only three manufacturers left. And time after time the airline industry has either lost money or almost disappeared. No wonder one of our favourite fund managers said he’d never invest in airlines. Look at what’s happened this last 15 months!
In the 1970s researchers at Corning Glassworks developed a remarkably clear glass. Scientists at Bell Laboratories took fibres from that glass and sent laser beams down the fibres using optical signals. Putting these two inventions together- clear glass and lasers- created what we now call fibre optics. Fibre optic cables are far more efficient at sending signals over long distances than copper. Folks as old as me will recall having to book calls well in advance to relatives in Canada or Australia, and having to wait ages to be connected for a call that could last only a few minutes. Now you dial up and bingo. Or for the technically gifted- Facetime, Skype, Zoom etc. Who’d a thunk it?
The Atlantic has 10 different fibre optic cables which easily cope instantaneously with our communication needs. And they’re being used to transmit all the information we consume on what Ben calls “our little glass supercomputers” that we carry around for work, play, entertainment, socialising and wasting time checking what our pals are eating or what’s happened on the stockmarkets in the last 3 minutes.
That infrastructure would have taken a lot longer to build had it not been for the speculative madness of the late 1990s Dot-Com bubble. When the bubble was a baby in early 1995, 4 stocks including Cisco and Microsoft were worth a combined $83 billion. Five years later that group grew to a market ‘value’ of almost £2 trillion. The speculative fever got so extreme that in 1999 alone 13 (unlucky for some) US Tech stocks were up by at least 1000%. Qualcom went up that year 2,700%. Then the bubble burst before the end of March 2000. I remember it well. I owned 4 Tech stocks, all up between 100% and 1200% and rather than cash in, to postpone the tax charge on the astonishing profits, I decided to wait until after the 5th of April to defer the tax by a year. Lost the lot! A painful lesson learned.
Incidentally, Amazon shares fell 95%, Cisco fell 86% and Apple fell 80%. Suddenly canny investors realised that the fundamentals of the ‘new tech paradigm’ couldn’t justify the crazy growth in some ‘values.’ However, before the bubble burst, telecom companies raised massive amounts from investors and were able to lay down over 80 million miles of fibre optic cables. That came to over 75% of all the digital wiring that had ever been installed in the US in history. There was so much over-capacity 85% of the cables were still unused in 2005. In only 4 years the cost of bandwidth fell 90%.
The survivor businesses of the Dot.Com boom/bust thanks to a combination of massive fast bandwidth and cheap costs laid down the basis for the Internet as we know it today. But it took enormous courage to invest in Amazon, Apple and Microsoft following the humungous falls in their share prices. I recall trying to invest to invest some money in a Nasdaq fund (on the basis it was cheap following its 80% fall, and that it seemed wiser than buying only a few shares as I’d done before in the Tech space) - but the few funds available were shut down through ‘a lack of interest.’ Doh!
As a matter of interest I did invest a chunk of my pension fund in a UK Small Company fund at the time. I still have it today. Given the rock-bottom Tech values and Nasdaq level 20 years ago plus the much maligned economic performance of the UK, you would assume that the Nasdaq would have easily outperformed the UK fund. And you’d be wrong. The UK fund is up over 900% outperforming the Nasdaq by miles. Yippee.
Today we are in unprecedented times (again). There are bubbles about (again). The News concentrates on one worry or problem after another (again). Meantime ‘high inflation’ has taken over the baton as the next BIG worry that will trigger the next crash. The ‘one problem after another’ mantra of our mainstream media may well be the reason that (according to HMRC) money flowing into Cash ISAs last year earning zilch was almost 4 times the money flowing into stockmarket ISAs. Indeed Cash ISAs now have twice as much ‘invested’ than stockmarket ISAs. (Almost £50 Billion wasting slowly away).
The truth is that nobody knows what the inflation rate will be. The numbers are irrelevant anyway. How do you compare today’s inflation rate with any of the past, when the constituents making up the ‘rate’ keep changing to suit what the government and the number crunchers want you to believe. It’s all noise. Just noise.
So at times like these I go back to read what my collection of ‘old head’ long term thinkers have to say about it all, and compare that to what I remember from my 50+ years in this industry. And what they and I still believe is that the best antidote to inflation and/or bad news is simply to invest in great world class businesses (or in our case world class fund managers, selected to suit your risk profile) and keep them undisturbed in tax sheltered wrappers like ISAs or Pension funds. That’s what helps me sleep at night. Maybe I should call it ‘Comfortable Diversification’ for a change. Enjoy the nice weather everybody. And thanks for reading.
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.