ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

ON BELIEF – LISTEN TO YOURSELF, TRUST YOURSELF

4 Feb 2019

There is a classic episode of Yes Prime Minister (“The Bishop’s Gambit”) in which Jim Hacker has to choose between two problematic candidates for a vacant bishopric. One is a “modernist” and the other is a “separatist” (of church and state). There is a famous exchange that runs as follows: Sir Humphrey : “The Queen is inseparable from the Church of England” Hacker: “What about God?” Sir Humphrey: “I think he’s what is known as an optional extra”. Sir Humphrey explains that a “modernist” is a coded word. “When they stop believing in God they call themselves modernists”. Theists tend to prefer the word “faith” to “belief”. Much blood has been spilled across the centuries over the question of whether the wafer and wine offered as part of holy communion are really the body and blood of Christ or merely symbols. If you think that the answer to that question is obvious (and the chances are 1000-1 on that you do) that is because you can’t help yourself. Belief is not a result of choice. It’s something that happens to you based on the empirical evidence that you see. FAITH IS NOT AN INVESTMENT TOOL By contrast, faith is a great liberator. The more improbable something is, the deeper the faith required to accept it. Faith is not based on reason. Consequently, behaviour driven by extreme faith often looks like irrationality or worse to outsiders. For this reason belief is an essential tool of investment while faith is a menace. It is often difficult to distinguish one’s own beliefs from what might loosely be called wishful thinking. It is quite natural, but not good, to suffer from confirmation bias when hearing news about a company in which one has already taken the decision to invest. Confirmation bias is a symptom of faith. Not merely in investment but in all aspects of life we are keen and competitive to be clever and right and successful. I find it remarkable how hard it can sometimes be to work out what I actually believe. I would like to think that my beliefs frequently coincide with what turns out to be the truth but the relationship between belief...

Report on Q4 2018 – full of sound and fury

Report on Q4 2018 – full of sound and fury

5 Jan 2019

Over the first nine months of 2018, the UK stock market was barely changed. In Q4 the world’s obsession with uncertainty overtook it. Trump took on China again, Trump took on the Fed, Congress took on Trump, the ECB took on Italy, the Conservative party took on Theresa May, everyone took on Saudi Arabia and the oil price took fright. While a falling oil price is sometimes considered broadly beneficial to the world economy, it is currently identified as a harbinger of global recession. The FTSE 100 fell by 10.7% in Q4, the 250 by 13.9% and the All Share by 13.1%. The rule that in nervous times investors favour large international shares (i.e. the FTSE 100) overall held good, though not on a scale to promote rejoicing or relief. For roughly the 17th time since the financial crisis the fear of impending inflation faded away. The underlying assumption that we are living in long-term deflationary times held good again. Government bond yields have duly subsided again. The US ten year yield has slipped from 3.0% to 2.6%, the UK 10 year gilt yield is now c.1.2% as opposed to 1.5% three months ago. It is times such as this (when the Japanese stock market’s daily change is one of the news headlines on the Today programme) that it is most important to remember our (or my) basic investment rules. Sharp and extensive falls in the price of classes of assets are caused only by the forced capitulation of unwilling and unhappy sellers. Great market collapses are invariably accompanied by the realisation that something that everyone took for granted is no longer true. Black Monday in 1987 was, with hindsight, a financial services event. Stockbrokers, fuelled by American money following Big Bang, were being paid more than bank directors had earned only a few years before. It was the time of Loadsamoney (Harry Enfield), Money (Martin Amis) and Serious Money (Caryl Churchill) and I am prepared to say without embarrassment that it was bloody marvellous to be part of when you were in your mid twenties. But when it was over you knew it was over. When the DotCom bubble burst in 2000 it...

Report on Q2 2017

Report on Q2 2017

5 Jul 2017

The UK stock market was on a rollercoaster ride to nowhere in Q2. The FTSE 100 fell by -0.3% and the 250 managed a rise of +1.8%. Given that we had a shock election, a shock result, a hung parliament and that the shadow Chancellor thinks that democracy has failed, you could say that the stock market has been amazingly calm. Likewise the government bond market. The 10 year gilt yield was 1.23% at the end of Q1 and 1.26% at the end of Q2. This is the dog not barking in the night time. We are widely told that the pale imitation of austerity that has been attempted for the last eight years is to be abandoned but the bond market is not panicking yet. Here is a picture of gilt yields since 2007.    One of the lessons of the election was that voters under the age of fifty or so are not frightened of the things that made the 1970s rather messy. Inflation, double digit interest rates and labour unions challenging the government’s right to run the country to name but three. It remains the case that the return of inflation is what bears warn about most frequently. In the 1970s the best way to protect oneself against inflation was to buy property. House prices rose by 492% over the decade. I wouldn’t advise the same strategy now. In fact I would consider doing the opposite. The world still seems pretty deflationary to me. You can choose your own explanation and file it under “uncertainty” but it still seems to me that listed companies are still being very cautious about capex and expecting their shareholders to approve of this caution. Here are five domestically exposed UK companies that have reported March or April year-end results recently. Halfords cut capes by 11% and raised its dividend by 3%. Dairy Crest cut capex by 62% and raised its dividend by 2%. M&S cut capex by 25% and kept its dividend unchanged. Stage Coach cut capex by 18% and raised its dividend by 4%. Royal Mail cut capex by 16% and raised its dividend by 4%. All these are behaving in a risk averse...