On the Money: Alan Steel
Nineteen Sixty Nine was some year for optimists. And if you were a pessimist you weren’t missed out either. On the bright side there was the first man on the moon. Before that was Woodstock, the first big free Rock festival. Concorde had its first test flight. And exactly 50 years ago this month, having convinced Scottish Widows I was its missing link, I joined its actuarial department as a trainee. A small step for me. Not sure about Mankind, though.
Almost immediately global stock markets fell. The Vietnam War had started and pessimists took a dim view of prospects for the UK and US economies. My memory tells me that the UK wasn’t doing too well anyway. Whatever the worry, the FT All Share Index fell 37%, or almost two-fifths. Yikes.
Fifty years later, over 46 of which have been spent as an Independent Financial Adviser (now chairman) when I left the “safe” world of big “with-profit” insurance companies, it’s fascinating looking back at some key “aw naw events” that stood in the way of investors trying to save up for a comfortable retirement. It’s been shown that investors hate losses twice as much as they enjoy profits.
Now the good news is that if you’d simply stuck your savings in some sort of tax free equity investment (such as a pension plan, which is just a tax effective savings thingy with complicated rules) like the FT All share Index, back in 1969 you’d have rolled your wealth up at over 8% a year on average. After inflation that’s roughly the same return there’s been since 1900… about 5.3%.
At 8% a year, patient long term tax savvy investors have been doubling their money every nine years. And sticking your savings into stock market do-dahs via a pension plan turbo-charged returns thanks to a helpful dookie-up by the Government. It’s called a tax uplift. A 20% taxpayer gets 25% more invested for free. And 41% Scottish unlucky taxpayers qualify for a near 70% dookie-up before their money’s invested. Now that really is a “Help Ma Boab”.
But here’s the bad news. Most of the last 50 years economic commentators have been obsessed with problems. If you were to take a sheet of paper and write down all the “ends of the world” we’ve all encountered since 1969, I bet you’d need at least another sheet to complete the task. When I started in 1969, because of political turmoil here and Vietnam over there, the FT All Share index fell 38%. It fell again, over 20%, in 1971 when Rolls-Royce went bust.
It collapsed by over 70% from 1973 because of “an oil crisis” when the oil price rose two-thirds overnight. Wait for it. From $3 a barrel to $5. Yes, really. Actually in the last 50 years, when you look at any coloured graph of the FT Index all you see is a sea of red. If you looked at a typical long term chart you’d see a line that starts at the bottom left and increases steadily to the top right, despite all the falls and worries.
But the truth is most the time the index is “below water”. Since 1969 the facts are that 16% of the time the stock market is in a drawdown of between 5% and 10%. A further 20% of the time it’s in drawdown of 10% to 20%. And a remarkable 27% of the time it’s in drawdown of more than 20%. No wonder investors who insist on looking at their portfolios every day end up as gibbering basket cases.
In a recent interview, Warren Buffett’s right hand man Charlie Munger was asked if their current underperformance worried them. He replied that they just kept doing what they always did. Buy great businesses as cheaply as they could and kept them as long as they could. Over time their share price fell by at least 50%, and six times they underperformed the main index by at least 30%. Sometimes the inmates run the asylum. But reversion to sense eventually happens.
Right now in the UK those investors like Buffett who like to identify businesses where their true value isn’t recognised in their share price (the Value sector) are being pilloried by critics who say yet again , as they did in 1997/2000, and in 2005/8, prior to two cataclysmic crashes of overvalued new paradigm stocks, that the fund managers are stupid / greedy / incompetent / past their sell-by date (delete where appropriate).
The man who is their number one mutual hate target right now is of course Neil Woodford. I’ve known Neil for 30 years. Over that time his patient value process, which like Buffett has been criticised when there’s a reason to ignore value and to keep piling in to a new fad, has delivered long running excess returns, and in technical lingo “fairly stiffened the UK Index”.
Yes, he’s made mistakes. He was unusual by being too transparent, showing all his stocks, so when one or two fell, they fell even heavier, being driven down by short-sellers (a subject for another day, but it’s usually the hobby of arch-pessimists fuelled by folks who own the shares and are happy to see them fall in return for a small shilling in interest). No, I don’t get it either.
So as the media onslaught accelerated faster than a forest fire in a high wind, more and more of his previous long term unit holders capitulated in a frenzy to exit and rush to recent successes, albeit in overvalued overloved international growth stocks.
In my 50 long years in this industry if there’s one thing I’ve learned worth passing on to investors, it’s this…. selling something because the crowd is selling and buying something because the herd is buying is never a good idea. Progress in life isn’t linear, it’s cyclical. and finally as US legendary investor Peter Bernstein said back in 2004 “diversification is key for long term investment success but only if it’s uncomfortable diversification. Successes come from the most unlikely places.”
Alan Steel is chairman of Alan Steel Asset Management
Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.