ON THE MONEY: Alan Steel says it rarely pays to listen to gloomy warnings
“Always remember: problems don’t come to stay. They come to pass” – Mike Williams
“Investing should be more like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas” – Paul Samuelson
I saw a headline the other day that read “The FTSE 100 Index passes through 7000 for the first time since last February”. But headlines often mislead. Imagine if the headline had been “The FTSE 100 Index eventually reaches 7000 after it breached that level 21 years ago”. That’s also a fact but tells a completely different story.
Back in late 1999, as a recipient of a ‘Nae Luck Award’ I agreed to do a wee talk on investment at a local Rotary club. Now I don’t know what the membership of Rotary Clubs are like these days but back then they were dominated by country lawyers, auditors and bank managers all enjoying a couple of hours of merriment with a wee dram while enjoying what reminded me of school lunches. Apart from the odd update on what was happening at Rotaries in Kampala or Dunedin (much the same as here apparently) the highlight was the chance to heckle the day’s speaker or doze off in a quiet corner.
At the time stock markets were flying, despite warnings three years earlier by Alan Greenspan, chairman of the US Federal Reserve, of “irrational exuberance” thanks to an exciting new paradigm called dotcom. And the FTSE 100 index (the Footsie), which had no exposure to internet stocks (unless you included Vodafone), got carried away by the hype despite being dominated by boring oils and banks. On the day of my presentation the Footsie stood at 6950.
Ever the contrarian I pointed out that the Footsie’s wee sister, the FTSE 250 Index, which consisted of up and coming growth businesses, lagged behind in the euphoria with its index level standing at 6450. Common sense alone suggested it ought to have been higher than the Footsie and I made the mistake of declaring to the traditionalists present that as the banks were clearly overvalued a better bet for future returns lay buried in the 250 basket. It didn’t go down well, but let’s look at what’s happened since.
As I write this the Footsie is back below 6900 but the 250 is above 22,000. Over the last 20 years the Footsie, ignoring reinvested dividends is only up 17%. With reinvested dividends it’s up 142%. The 250 equivalents are up 249% and 505% respectively. Big difference, eh?
And to put all that into perspective the US Index which contains the biggest US companies and contains internet winners like Apple, Amazon and Microsoft, the S&P 500 is up 247% and 416% respectively. Mind you that’s only in dollar terms. Investors in sterling would’ve also made a significant currency gain. But it does show you that ‘The Acres of Diamond Theory’ isn’t that daft, after all. Instead of taking currency risk a UK investor can find ‘diamonds’ buried closer to home. One of my own long term favourite UK fund managers has been uncovering ‘diamonds’ for over 20 years now and is a principle reason why my pension fund has become my wife’s best friend.
While researching for this piece I discovered another presentation I delivered to a group of solicitors 15 years ago (how come I got all the hard stand-up gigs?) Being natural masochists, they asked for an update on pensions planning (remember A-Day and Pensions Simplification anybody?) and ‘investment tactics during difficult times’. It wasn’t long after The Economist’s cover was dominated by a cartoon pic of Alan Greenspan taking place in a relay race trying to hand over a baton which was a lit stick of dynamite carrying the words ‘The Economy’. No guesses at what the message was.
Also from The Economist’s cover in December 2004 was a dollar bill being eaten by a caterpillar with the accompanying headline ‘The Disappearing $’. By the way, it was $1.95 to the pound at the time. Go check the exchange rate today. Next up was from BusinessWeek’s cover August 2003, ‘The CRISIS at the NASDAQ’ predicting its demise. And in case you think all this gloom was new over the last 20 years, here’s BusinessWeek’s cover headline from October 1987- ‘HOW BAD?’ –‘Will Wall Street Take the Economy Down?’
In March 1979 BusinessWeek’s cover story wasn’t any cheerier- ‘The Decline of US Power?’. And even back in Winter 1929 its front cover was dominated by a drawing of the Titanic hitting an iceberg with the tag line- ‘End of Capitalism’. And don’t start me on about Nobel Prize winning economists who clearly have to major in extreme pessimism to qualify. No wonder so many of us reach retirement wishing they’d listened instead to optimists which, of course, means turning off the TV News.
At a Zoom presentation, a favourite global growth fund manager of ours had a slide which showed that over 30% of investors over age 65 sold out their equity holdings last March as pessimism swept financial headlines. Here’s what the Financial Times said last March -‘Cash is king. As the Covid-19 crisis worsened investors shifted a record amount of assets into cash in March.’ As Pete Seeger used to sing… ”When will they ever learn?”
We have a drawing in our offices showing peaks and valleys with the following words above the peaks “Greed – Buy”. And in the valleys- “Fear-Sell”. With the added words- “Repeat Until Broke”. As Mike Williams says, and my grannie too used to say, “Remember: problems don’t come to stay. They come to pass”. No doubt we’ll hear of even more ‘problems’ this summer. Ignore them. Go sit outside if it ever warms up again and watch the grass grow instead.
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.