November 2021: Truth Or Dare
“The big money is not in the buying or the selling, but in the waiting” (Charlie Munger)
November came to a volatile spiky end for the markets, pushing most into negative territory for the month, raw data being…
And on the currencies, although a mixed month, 2021 has seen the USD strengthen its position…data as follows
🌞 The last three trading sessions has seen volatility increase after what has been relatively benign times of late.
As with most volatile trading sessions, this is driven by emotion. Right now fear is the emotion. Fear of the new Omicron variant which could cause more lockdowns / travel restrictions especially as we enter the Christmas season when increasing in spending, travelling and general positivity usually sees markets move up in what has become known as a “Santa Rally”.
After last Friday’s trading session which saw the Dow Jones fall by over 2.5%, its worst single day of the year, one reason for the sell off I read stated that Omicron “could be more transmissible” but “there is no evidence” of that. The statement itself has no factual basis and almost laughable, but this was still enough for emotion to overtake and sell offs to happen.
Short term market movements and high volatility are rarely correlated to facts. Ifs, buts, maybes have impact in the short term but never in the long term. Successful long term investing is based on facts not conjecture.
Our business has little interest in a 2% fall in one day on a market, much the same as it has little interest in a 2% gain. Client portfolios are managed for the bespoke timeframe and if we look at equities, five years is a reasonable sample period.
Over the last five years the S&P 500 has increased by 108%, the Dow Jones 80%. Look to my favoured sectors, one being Information Technology and the five year return is 268%. These are the numbers that count. Break that down, someone who parked US$100,000 into the S&P tech sector five year ago today has US$268,000. That is tax free growth of US$33,600 a year – not a bad return for doing nothing other than being patient and holding good investments.
It is the above numbers that interest us. The job is to obtain capital growth and that is illustrated with fact based numbers by investing in businesses where their growth potential and market value is based on facts.
Speaking of facts, I was reminded recently of “net net” investing. This is basically where the net current assets of the company are worth more than its current market value. Many have described this difference as free money. As a Chartered Accountant in a former life, balance sheets still hold interest for me.
Finding these companies in the true sense of the word is not so easy but looking for businesses where book value is not too far away from its share price are a good hedge when markets are on the downturn. Companies where the founding families still play a crucial role in the running of the business often fall into this category. Wall Mart for instance currently has a price to book of around 4. At the other end of the scale Tesla, whose share price is based around what the future holds is over ten times that at 42.
That is not to say Tesla will not continue to grow and its share price will be higher in the future, it’s just about understanding the differences and how these company share prices react in differing environments.
For now we wait to see if we have been naughty or nice and if indeed we get the traditional annual uplift in value for Christmas. Further falls will not spoil my Christmas and they shouldn’t spoil yours. Its not the next few weeks that matters its the next few years
🌞 I hope that you all have a great festive season and are looking forward to 2022. As I always say no one has a crystal ball but thematic, process driven strategies get positive results. So keep calm and Omicron!