Letter from Linlithgow - September 2013

In the previous Letter From Linlithgow, sent out just before Fran and I jumped on a plane to Chicago - before flying on to Nova Scotia - a few days later, I talked about some influences in my earlier years, from Al Koran to the Larry Wilson/Fiddler on the Roof analogy of the eighties. Funny that. Arriving in Nova Scotia I was asked to give a talk to 60 Management Students at the local College about what inspired me to choose this career, and talk them through other inspirations over the years that drove me on to seek success, for me, my colleagues and clients.

It is strange though isn't it? The thought processes and what I'd written in the August Letter would form the basis of a talk days later in Canada. I also touched on the benefits of thinking outside the box, or if you prefer, away from the herd, inspired by Ned Davis and others.

September, if you recall, for those still watching Bad News At Ten, or reading the Personal Finance Sections of the Weekend Press was definitely going to be the worst month of the year for stockmarkets. Investors were encouraged to sell, hold off buying or preferably panic as September loomed. Syria didn't help, and neither did talk of yet another Fiscal Cliff (and the Shadows? - a wee reminder to our older readers of when music sounded like music) in the US.

Anybody remember Joe Granville? From the late 1970s for the next 20 odd years, Joe had the ear of the Financial Media here and over there, because he, and they, believed his every prediction actually was the main cause of stockmarket movements, usually downwards. Joe believed he was close to God, often dressing up as Moses at Investment presentations, and he also said he'd win the Nobel Prize For Economics. That never came true, and neither did most of his stockmarket predictions. Actually his reputation was built on only two occasions in the early 80s when his dire predictions coincided with reasonably big corrections.

(Do remember when the stockmarket rises it goes up, and when it falls it merely corrects - there now doesn't that feel better?)

Joe died aged 90 this month. I'm not sure how much wealth he had left, but we can surmise it wouldn't have been much, given his Granville Market Letter was at the very bottom of rankings for equity performance over the last 25 years, producing losses of 20% per annum. Really! Joe has left us with one great piece of advice though - "When something's obvious, it's obviously wrong" - so now we know why September turned out rather benign instead of ushering in "plummet and plunge" - it was obvious to almost everybody.

Unfortunately fear sells, and that's why folk like Joe Granville get airtime. Back in the early 80's, in this country, the market guru hogging the airwaves and our TV screens was Bob Beckman, red carnation in his buttonhole, rather dapper and a bit of a showman. In 1983 Beckman published his "Downwave - Surviving The Second Great Depression", crammed with apocalyptic warnings of financial disasters, based he claimed on historical cycles and "fact" (hysterical would have been more accurate).

Here's a taste - "Whole countries go bankrupt, banks go bust, companies will crash, industries disappear, millions lose jobs, house prices tumble, office blocks become unsaleable.... share prices slump...... history shows it will happen and happen to you ..."

What happened? Erm, the biggest Bull Market since WW2 got underway and those who listened to Beckman lost out big time. Unembarrassed by his failure, years later he changed his tune, with publication of his "Upwave" coinciding with a stockmarket crash and a few years of recession. Fortunately there are those who are more accurate than Granville and Beckman but sadly they aren't sexy enough for the media, over here at any rate. But how did I find them?

Well that goes down to a long slow process of getting it wrong, learning from it, and studying those who get it right. Probability it's called, I guess, a skill taught to me long ago by the best teacher I ever had, Johnny Ferguson, who died some years ago but not before I took the chance to tell him so.

Long ago, fortunately, I also stumbled across the Latin Motto of the Royal Society, formed in London in 1660 - "Nullius In Verba" which translated means - "don't take their word for it, check for yourself". So when the herd is over there, I'll be over here, because history does show they're most probably wrong. I've found probability trumps past performance worries any day.

Five years ago the world was supposed to end - well certainly the financial system - and folks ran for cover, dumping stockmarket funds as they went. Cash and what's known as Sovereign Bonds became popular, as well as what's called Tactical funds in the US, and Targeted Absolute Return Funds here. Some marketers prefer to call them Global Absolute Return Strategies - probably because their initials are GARS, which kinda leads you to suspect they're Guaranteed, which they aren't, but they sound safe to the fearful.

Back in the early 1990s in the aftermath of the '87 Crash and the following years of recession, these funds were popular. And naturally they didn't really work very well for obvious reasons. A fund designed to reduce your risk of market loss is clearly better to have before a market crash, not following one. But sadly human nature is to be sucked into stockmarkets after they've risen strongly for years, and to panic out when it's too late

GARS are therefore probably going to disappoint those who've bought into them since the Crash of September 2008. But over the last 5 years, billions have poured into GARS funds, mostly in the last 3 years or less. One of our favourite long term quality return managers Neil Woodford, a Value Investor, has taken 25 years to amass £14 billion in his flagship high income fund, which has returned 47% net of charges over the last 3 years.

One GARS fund in just over 5 years has attracted £18 billion, feeding on investors' irrational fears, and in 3 years has only returned 11.5%, which amazingly is 30% better than the average fund in this sector. One final pointer - when the investment industry reckons it's an easy sell to attract investors, it starts forming more of these funds so as to make even more easy money - for themselves!

Like now. So as Topol would say - Time to play the music.

Alan Steel

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.