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Fifty five years ago this month, Saturday-night cult viewing on the telly was a satirical programme introduced by David Frost which shared this month’s title of Letter from Linlithgow.  It was broadcast in black and white.  My grandchildren were shocked to learn that we didn’t have colour TVs then.  “How did you survive with Black and White-screen iPhones Grandad?” they ask.

You can hardly blame them for thinking this way.  Out of the five of them only Jackson is older than the iPhone, a year older to be exact and he’s only twelve.  That’s the iPhone that experts said wouldn’t be successful, but which sold over 1 billion of them in only nine years from its launch in June 2007.  Who needs experts, eh?

Fifty five years ago there were only two TV channels.  You weren’t glued to the telly then like so many are today, hypnotised by shock horror doom-laden predictions that suddenly disappear and are replaced by another scary monster.  Being sixteen in ‘63 with pubescent testosterone fighting for my undivided attention I didn’t have much time for telly.  Still don’t, but at my age now I can’t remember why.  Back then there were only two short News broadcasts, one around 5pm, the other at 9 at night.  And then you went to bed to keep warm, especially that February.

The winter of 1962/3 was a helluva freezer. February snowfall fell thick and fast.  It was so heavy you couldn’t see where you were going.  It remains the coldest winter since 1895. It was so cold that brass monkeys were spotted wandering around in the snow looking for welders.  But cold as it was, it wasn’t the coldest on record.

That honour belongs to Feb 1947.  From January the 22nd to March the 17th snow fell every day.  Drifts of over 16ft blocked roads over the UK.  And guess when I was born?  February 1947.  The extreme weather was due to a double depression I learned later when studying Climatology at Uni.  My birth must have been a double depression for my parents.  I remained an only child.

But looking on the bright side, having only two TV channels with hardly any News programmes and no “smartphones” or “tablets” it made for a less stressful life, oblivious to the constant bad news which swamps us in today’s head down 24/7 world.  Oh for the good old days when you could go off to Spain and spend two weeks on holiday in blissful ignorance.  Buenos Allegre.

Which brings me back to “that was the week that was” from Monday past.  Headline writers have wallowed in an orgy of gloom.  Their understanding when combining Arithmetic and English is appalling.  We’ve had “the biggest one day fall in the Dow Jones Index on record” when they mean a points’ drop, which is irrelevant, and not a percentage fall, which is.  A 4% fall may sound bad, but compare it with a 22% fall in one day in October 1987.  Let me tell you, that was scary.

“Market Meltdown,” “Panic,” “Stocks routed,” “Plunging” are popular descriptions bandied around to describe a fall which is “normal,” particularly following a calm period lasting an all-time record 404 days without a 5% drawdown in markets.  Here’s perspective from our friends at Ned Davis Research relating to the main US stockmarket index over the 90 years from January 1928 to now…..

Over that 90 years there’s been 303 falls of 5% or more.  That’s an average of over 3 a year. And there have been 96 falls of 10% or more!  So it’s actually normal to have at least one 10% fall a year.  As US investor Eddy Elfenbein said  “What was unprecedented was the market before Monday.  That had never happened before.  Ever.  The weird market behaviour didn’t start on Monday.  It ended”.

Instead of listening to the “experts” who like to wallow in pessimistic hysteria, heed instead the wise words of Benjamin Disraeli “How much easier it is to be critical than correct.”  And I also find in these market circumstances the words of Andrew Carnegie very apt… “There’s scarcely an instanceof a man who made a fortune by speculation and kept it.”  For the last year has seen, during the market calms, increasing demand for esoteric new paradigms, such as weird complicated derivatives and cryptocurrencies, promising instant super wealth.

That wasn’t going to end well.  And it hasn’t.  I try in these monthly musings to shy away from complications and technicalities.  I try to inject some humour to make them more readable.  But the obsession of much of the media on gloom, falls and charges has triggered a change this month.

Successful stress-free wealth-building, using the services of an adviser, is about trust, tax controls, patience, and trying not to give you nasty surprises.  A critical part of that to us is researching cycles and identifying the best fund managers within a Football Team structure, best goalkeepers, defenders, midfield and lastly attackers to give a winning edge.  (Apologies to the non fitba’ fans) I decided yesterday to spend the day analysing the net returns of a typical defensive team our clients would recognise, over the last 5 years including the 8th Feb (net of all charges, funds, platforms and our charges, warts and all),  and compare them to that of an uncharged unreal world of the FTSE 100 total return.  Also to a more appropriate benchmark (uncharged) the IA Mixed Investment 20% to 60% shares benchmark.

So I simply took the eleven biggest funds we hold on your behalf.  Given most of you, like me, are more interested in downside protection, the funds are weighted towards caution rather than adventure.  The results are very pleasing.  Our top defensive-leaning team produced a net 58.5% five year return, compared to the FTSE TR of 40.9%.  While the more appropriate comparison, the IA Mixed Sector only managed a 31% return without allowing for costs.

Five years ago the well-known Barclay’s Equity & Gilt Study stated “Over the next 5 years we expect Cash to provide inflation adjusted returns of -1.5% pa, and Equities 3.4% pa.” According to the “Inflation.eu” website UK CPI inflation averaged 1.5% pa over the 5 years.  So the five year gross equity return (without charges) is 27%.  We returned over double that. And at 31% reduced risk/volatilty.  (Source FE Analytics)

It’s at “extreme” times like now, when sentiment suddenly stinks and the inmates run the asylum until order replaces short-term chaos, that it clarifies the value of building teams defence outwards, in exactly the same way as all long term successful football managers.  Quality and process matters.

Carl Richards, whose simple drawings carry effective investment lessons for investors and which adorn our client rooms, released yet another today.  He compares Normal and Abnormal.  And uses sailing on the ocean as an example.  And concludes thus “As scary as it might feel remember waves are normal.  Occasional storms are normal.  And the last thing you want to do when you’re in one is abandon ship”. 

alan-steel
Author
Alan Steel
Chairman
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your advisor before taking or refraining from any action.

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