“On average neither of us has two legs”
(stated by an Economics Professor to students) 

“Economics is the only ‘science’ where two people with completely
opposite views can share a Nobel Prize”

P J O’Rourke

This month my letter’s a bit earlier than usual. I thought it should coincide with the 10th anniversary of the Bull Market I mentioned in last month’s letter.  A Bull Market which despite the combined “best” efforts of politicians, economists, media scary tactics and the ever growing number of paid-up pessimists is still rumbling along, doggedly climbing one wall of worry after another.

And as I’m off now for a wee jaunt to our favourite hotel, the Botanico in Puerto de la Cruz, Tenerife and not back until late March, it seemed sensible to get this one done and dusted before the holiday diet of Ribero del Duero Reservas takes its toll on my ageing 1947 communication system.

Since my February letter, as yet more “problems” have flashed up on umpteen worry indicators I also thought it was a good idea to share with you contrarian thoughts of a few “Nullius in Verba” thinkers whom I’ve found over the years to be worth following.  I haven’t room to mention all of them, or all of the gems I’ve picked up from them, but as most folks say when a busload of economists drives over a cliff; it’s a decent start.

So let’s see what Tim Price, “boutique” Value investor, Morgan Housel, US blogger and investor, and Matt Ridley a non-investment contrarian thinker have been saying about herd thinking and inconvenient truths.  And to please those of you who wonder “where she’s disappeared to” let’s start with pearls of wisdom from my Grannie McKay.  Who despite dying some 50 years ago gave such good advice still relevant today.

Gems like “there’s always two sides to a story,” “always do what’s right even when nobody’s listening or watching.” and “try to imagine that lurking round every corner there’s somebody waiting to do you a good turn,” are 3 favourites you’re unlikely to find in books on economics or other areas of “science” where “academic experts” cluster in stubborn consensus.

Nowadays I spend almost every working hour reading, thinking, and looking for patterns that may repeat since I started on this road 50 years ago, which includes early skirmishes in an actuarial dept.  Yesterday some surviving actuaries calculated (guessed) that the average 65 year old lost 6 months’ life expectancy over the last year.  Do you know any average 65 year olds?  Me neither.  Do you know the difference between an extrovert actuary and an introvert one?  The extrovert actuary looks at your shoes when he’s speaking to you.

And despite what you hear elsewhere, do you know that it’s normal for talented/disciplined fund managers to seemingly lose their way now and then.  Joel Greenblatt, a highly successful US fund investor who during the 1990s compounded his clients’ wealth by 40%+ a year, then wrote a book about his methods in a way that even his 11 year old son could understand.  When asked by friends why he was “giving away” his secrets he replied “don’t worry, most investors won’t believe me.”

And went on to explain that his disciplined “system” identified shares with significant upside potential but which for one reason or other were significantly undervalued.  Once an investment passed his stringent tests he’d buy the shares and then wait, and wait, and wait…sometimes for as long as 5 yrs.  Most investors he said would have given up by then, sold and gone off to chase the latest hot stock or fund that “had worked.”

Which brings me to Neil Woodford who I’ve followed for 35 years, originally when he was at Perpetual (now called Invesco).  Since he left them about 3 years ago to form his own firm he hasn’t had the best of luck with his “style” which despite recent media criticism he hasn’t actually changed.  In all the years I’ve known him he has stuck to a disciplined contrarian stance, and not been afraid to ignore consensus.

His underperformance and heavy media criticism has seen his flagship Woodford fund halve in size as investors left to chase “winners”.  In the last 25 years this has happened before. From 2004 critics ran a similar discrediting campaign when he wouldn’t invest in UK Banks.  In the late 1990s he was continually accused of “not getting the new paradigm of Technology.”  He then significantly outperformed in the years following.  Interestingly if you take the last 25 years, his old Invesco fund, now managed by his second in command, has still produced more than double the return, after all charges, of the FTSE100 total return index.

Value investor Tim Price, writing about contrarians, reminds us that human beings are not wired to feel comfortable when deviating from herd thinking.  Stockmarkets have been around for only a couple of hundred years, while our brains have been slogging along being fearful of this and that for some 300,000 years.  Not a good match.  The attributes needed to be an exceptional investor over the long haul he reckons is being prepared to do something that’s different AND combining that with patience.

Morgan Housel, who writes brilliantly about successful investment reckons only 1 in 100,000 are wired to be contrarian investors who can successfully ignore a consensus who think they’re both dumb and wrong.  He shared a conversation between Warren Buffett and Peter Kaufman, top US investment banker, during the Dotcom bubble of 1998/2000.  Buffett was widely accused of having “lost it”, and not understanding technology.  He was an idiot allegedly.  Kaufman reminded him that “Billions of people were watching you as year after year went by, yet you didn’t mind appearing foolish.  That’s no minor feat”.

Tim Price, also referring to Buffett, tells of a previous occasion when he was called a fool.  If in 1971 you’d invested $10,000 in Berkshire Hathaway (Buffett’s investment firm), by 1974 it would have been worth only $5708 compared to $7456 had you invested instead in the S&P 500 index.  By 1975, Buffett’s was still only $5422, while the S&P was back up to $10,229.  And the question is… 4 years of such underperformance, would you have bailed out?  And then what?

Here’s what happened next.  By 1976 Buffett was up to $13,392 compared to the S&P’s $12,643.  By November 2008, after the Great Financial Crisis, the original $10,000 invested in the S&P was worth $259,068 and Buffett, had you stuck with him through his rough patches was up to $14,387,737.  Not a misprint!  But how many stayed the course, ignoring the criticism? And ignoring the constant drip, drip, drip of bad news?

I know I keep going on about it but we do live in a world today dominated by obsessive consensus fake “news.”  Which brings me to Matt Ridley who writes about the wider “scientific” beliefs.  In a fascinating piece in “The Spectator” he quotes US satirist H L Mencken, who some 70 years ago wrote “The whole aim of practical politics is to keep the populace alarmed by menacing it an endless series of hobgoblins, all of them imaginary” And Ridley goes on to say “Increasingly, in a crowded market for alarm, it becomes necessary to make scares up.  More and more headlines about medical or environmental panics are based on published scientific papers, but ones that are little more than lies laundered into respectability.”

I wonder how many of you saw the recent disclosure about the ice on Lake Superior in Canada?  Geographers (like me) may be able to tell you that it’s the 3rd biggest in the world, but probably won’t know it’s bigger than Scotland, has 1826 miles of coastline, an average depth of 483 ft, a maximum depth of 1,276 ft, and is currently 91% covered in ice.  This is the 4th time in the last 20 years that it’s had over 90% ice coverage.  Not a record though.  That belongs to 2014 and 2015 when it was 95% covered in ice.  Doesn’t sound like warming to me.

Other news hidden away refers to a 30 year study of North American coastlines where it’s been confirmed that “official estimates” in 1988 of a 1 to 4 foot rise in sea levels has proved to be wide of the mark.  “At most a few inches” said a clearly disappointed spokesperson for the consensus.

So what’s my message this March?  Stay calm and patient.  And “just imagine that lurking around every corner is somebody desperate to do you a good turn.”  And if Neil really has lost it, we’ll know soon enough…. after this Brexit farce concludes.  Salud.

Alan Steel
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.