It has been an astounding few weeks. As I write, the FTSE 100 Index is down 30% in a month while crude oil has halved in value as Russia and Saudi are no longer on speaking terms because the former did not want to adhere to production cuts sought by the latter. As the lowest cost producer, Saudi then decided to teach everyone a lesson by opening the taps fully. This would always have damaged prices but against a background of Coronavirus inspired crashing demand, it’s turned into a bloodbath. Meanwhile, the redemption yield on 10 year Gilts is now around 0.5% while the 30 year yield amounts to a paltry 0.8%. These snap shots amply illustrate the panic that now stalks markets.
Despite agreeing with the late Canadian/US economist, J K Galbraith, that “the only function of economic forecasting is to make astrology look respectable”, I will, foolishly, attempt it. Why? Well, firstly, no matter how unprecedented current conditions may be, investment decisions will still need to be made and hiding behind the sofa is not an option. Secondly, I’m feeling very much on the astral cusp as Venus moves into Uranus. Of course, I can only guess what will happen from hereon but perhaps, rather than attempt prediction in the strictest sense, by presenting a plan of campaign based upon humility, logic and experience, I might be able to offer something useful.
I won’t labour the point as to why equity markets have collapsed. While Coronavirus infection is not too severe for most, it can be deadly for some and is highly contagious, to boot. Consequently, dealing with it leads to wholesale business closures and supply chain disruption. With many businesses losing their entire income, they have nothing to offset expenses and that is a short cut to bankruptcy. This is why the government has stepped in to pay a proportion of wages and salaries; it aims to ensure as many firms survive as possible while maintaining some degree of final demand within the economy. There is no doubt that with this pattern repeated worldwide, a deep global recession is a certainty. That is bad enough but the real concern is that it results in an economic depression, the likes of which we have not seen since the 1930s.
Central banks have little ammunition available because interest rates were never normalised after the financial crisis. They have now been cut to all time lows just about everywhere and it was odds on that Quantitative Easing (QE) would, once again, assume centre stage. Previously, the QE rationale was that the funny money would eventually be recaptured by central banks selling the bonds they’d purchased but I wonder whether this time, we’ll eventually see a more ‘Mugabesque’ approach to QE? This would cut out the middle man of Treasury departments selling bonds to the market and central banks buying them using electronic money created out of thin air. In its place, Treasuries might simply issue bonds to central banks and they then print up the appropriate amount of money. This is banana republic stuff but the sums in question are now so mind boggling we should remember that sometimes, the unlikely can become the inevitable in a heartbeat.
However, while the background is challenging, to say the least, I do believe this is a time when a calm head is likely to reap rewards. Or, to quote Kipling (Rudyard, not the chap responsible for exceedingly good Bakewell Tarts) “If you can keep your head when all about you are losing theirs …..” Which brings me to the thoughts of a living investing great, Charlie Munger. His business partner, Warren Buffett, gets much more attention but I usually find greater resonance in the musings of Charlie rather than Warren. I could paper the walls with wonderful Munger quotes (not just about investing but life, generally) but here are a few that, at this moment, appear particularly apposite.
“You need patience, discipline and an ability to take losses and adversity without going crazy.”
“It’s not supposed to be easy. Anyone who finds it easy is stupid.”
“Only buy a stock if you’re willing to hold it for 10 years.”
“The big money is not in the buying and selling but in the waiting.”
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% return on capital over 40 years and you hold it for 40 years, you’re not going to make much different than 6% return. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’d end up with a fine result.”
Munger’s description of the latter is ‘sit on your ass investing’ and try as I might, I can’t improve on that. So, despite all the madness that presently surrounds us, wonderful opportunities will present themselves. The question is, how many will have the guts and presence of mind to take advantage of them?
Now, while I lean towards Charlie, that doesn’t mean Warren isn’t capable of a pithy line, too. One of my favourites is “only when the tide goes out do you discover who has been swimming naked”. My guess is that many investors are about to find out that their advisers have left their cossies at home. The investment industry has a shabby habit of dreaming up products that, superficially, look simple but in reality are very complicated. Unfortunately, it will only be in the heat of battle when it becomes obvious that some have gone AWOL. I’m principally referring to Structured Products where returns will depend upon the performance of one or more indices and a penalty will ensue if those indices fall below a certain level. Add to this a chef’s selection of counterparty risk, derivatives, no dividends and a sometimes opaque charging structure and with markets shedding 30% almost overnight, I’m left asking myself, what could possibly go wrong?
It appears possible we might be quarantined until June. For all sorts of reasons, let’s hope that’s not true. The human cost would be immense, the economic dislocation unprecedented and most worryingly from a personal point of view, I’m now almost certainly addicted to ‘Escape to the Country’ ……. which is bad enough but when you start to actually care whether Paul and Margaret from Reading will succeed in finding a Devon farmhouse within their £600,000 budget (but are then left frustrated and annoyed when you learn their current house isn’t even on the market) there’s probably no way back.
John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
