If you saw the picture of David Cameron and his wife having lunch on an Ibiza beach you will now know where I had a long Ibiza lunch (lots of liquid refreshment, seafood, and laughter) a couple of weeks back on Cala Benirras. Fran and I and a young cousin from Canada were joined by Jim and his 3 mates at Restaurant 2000 right on the beach famous for its sunset hippie drummers. I first met Jim 32 years ago when he used to call on me as a young impoverished fund manager, though being based in San Francisco running a US fund probably helped his future prospects. And we'll return to Jim later.
Let me paint the picture of what investment and stockmarkets looked like in 1981 when Jim and I first met. In 1966 the Dow Jones Index, a so called measure of US corporate wealth, topped out at 995.15, up over tenfold from the start of a long term Bull Market which began in 1942 when economists at the time predicted years of misery given the state of the world at the time (WW2). As we have come to expect since they were completely wrong. And just as an aside, to demonstrate the scale of their errors today, analysts at JP Morgan prepare a list each year of "Stocks to buy" --- and "Stocks to avoid at all costs." However one of the Stocks to avoid, over the last year, has outperformed 71 out of the 72 on their buy list.
From 1966 world stockmarkets then fell into what's known as a Secular Bear Market, which is obviously the opposite of a Secular Bull. These are long term cycles, for example, over the last century there were 3 Secular Bulls, from 1921, 1942, and 1982. Between 1966 and 1982 the Dow Jones fell from 995.15 to 776.9, that's a long time going nowhere, the consensus at the time was that this underperformance would continue for years, given that economists saw no hope for the US economy in particular.
Now of course history books show 1982 was a time of opportunity for optimists, given the Dow Jones went from 777 to hit over 11,723 by March 2000, and that ignores reinvested dividends which over long periods can amount to over half total returns. And what were the "experts" saying as we moved into the New Millennium? Do you remember the headlines? "A golden era" or, regarding stockmarkets, "a plateau at worst" --- thousands gave up their jobs to day trade stocks, and anything with dotcom in its name was a sure fire winner. But sure enough stockmarkets tanked, and by March 2009 had fallen 44%.
Now I know I write often about the benefits of going against the herd but I concede it's not at all easy, thanks to how our brains have evolved over thousands of years, where the least bit of perceived danger fires adrenalin from the hypothalamus encouraging panic to win over considered thought. And I often explain how difficult it is to spot a trend. Despite years and years of folks seeking an alternative, there is no better method to build wealth than to Buy Low and Sell High. And buying low is at its most effective when you are early into a trend. But trends are obvious to the majority only in hindsight, which is too late as you discover when you've followed the herd once again. (Some wag said, just buy high, sell low, and keep repeating this until you've no money left).
I describe trend spotting as this --- you walk along a road you've walked along before, often and without incident. A brick hits you on the head. No-one there! What is it? A fluke! For a while you walk along this road rather nervous, but no more bricks so you become confident again --- then bang, it happens again! What's your conclusion? A coincidence perhaps. Can't be a fluke, eh? The third time it happens though it's a trend! Pity you didn't spot it sooner.
Now let's return to the stockmarkets. When you examine the growth returns --- never mind the gains from reinvested dividends --- from the beginning of Secular Bull Market periods, until the end, it's plain that spotting the trend early is worthwhile --- a six fold increase from the 8 year Bull starting in 1922, a tenfold gain in the 24 year bull beginning in 1942, and a fifteen fold increase from '82 to 2000! So is there a way to spot the probability of a trend more quickly than suffering the third brick? After 40 years in this business looking for answers and, as a slow learner, I'd say it's about studying the habits of those experts rarely quoted who have dedicated a lifetime to studying what works and what doesn't.
Take Ned Davis Research for example, who study all manner of historical data. Their unique studies of investor sentiment give you an edge at market turn, short and long term. Global Strategist Tim Hayes the other day , on the subject of Secular Bull Markets, said "if it looks like a duck, sounds like one and swims like one, it's probably a duck" --- or in this case a Bull. While most investors have been running to the edge of the mental playground thanks to the never ending predictions of Armageddon, in the 4 years since March 2009, the US stockmarket is up over 22% pa, as it was from 1921, 1942, and 1982.
As to my old pal Jim, who foresaw the Tech boom from these early days 32 years ago, his spells of fine tuning the 3 bricks indicator to only one, has helped him to a position within the UK top 100 Rich List. (But at least he insisted on paying the bill). And as Tim Hayes and the font of all knowledge Joe Kalish believe, we are heading for years of stockmarket outperformance, what's Jim's thoughts these days? He reckons the next big thing, perhaps bigger even than the Tech boom, is Biotech. He's written a book on it - "Cracking The Code" - and a fund is being launched soon, not for the fainthearted I'd guess, (and do remember Regulators have stopped me giving advice) --- but with Jim's record I'll be slinging in a few bob, and if it works, and I'm spared, I'll pick up the tab next time Jim and I sit down for an Ibizan lunch. Salud!
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.