In the autumn of 2007, I was looking at investments for clients, especially Commercial Property Holdings; a major part of the portfolios’ holdings then at 30-40% plus. Property had done wonderfully well the previous few years (it is important to note this was a very different time in a lot of ways and before the creation of LWM and the portfolios).
I was reading research from JP Morgan and one comparison graph of values stood out. The return on the 10-year Gilt (UK Government Bond) had become higher than rental yields for prime London property. I just couldn’t see how that was right and this suggested surely significant overvaluation of property. We sold pretty much all the property fund holdings for clients over the next few months on the back of this. The money then remained in cash as I couldn’t work out what to recommend, everything seemed expensive. Then in mid-08 the Financial Crisis hit.
The initial period of the crisis was harrowing in the extreme. I understood enough to know that things were perilous, the financial systems of the world were close to breaking up. This lasted for several months but relatively quickly it was apparent that the system, although battered and bruised, would not fail. Much damage had been done for sure.
What I had come to understand from reading about the process of the great investors through time though, was that these were the moments where the best opportunities became available. Prices would massively distort to the downside.
It’s the secret in plain sight for successful investing:
Understand what you are buying is financially solid and can weather the storm.
Buy when no one else wants it, sell when they all do.
Easy to understand, so so hard to do.
But unquestionably ‘THE’ great single market inefficiency, the occasionally extreme emotions of fear or desire.
In 2009/10 we talked to clients saying, we know it’s uncomfortable but don’t just sit in cash, invest in assets. There are many great investments that will do well. Most accepted the recommendation at least in part.
We then emphasised the US in the LWM portfolios ongoing, because in our view they had taken the pain and allowed the bad stuff to burn off. This made them fitter and leaner to grow.
By comparison much of Europe adopted what became known as “lie and deny” approach, which effectively allowed dead companies to keep going with bank support. This lessened the initial pain and prevented banks from having to write off assets, so ‘improving’ their balance sheets but significantly hobbled regrowth.
For the 2010-20 decade the US market grew around 300%, France by around 50%.
‘Think 5 years NOT 5 Weeks’
The first thing to put front and centre is everyone is scared. Nothing wrong with that, I’d be an idiot not to be currently, but fear is not an investor’s friend. Thoughtful caution absolutely, over confidence absolutely not. What’s needed is a calm, careful analysis of the facts known used to plot beneficial future outcomes.
The trajectory, and resultant financial implications for the entire current situation, hinges on one variable: TIME
To lock down economies for 4-6 weeks is massively disruptive but it’s doable and countries will pump enough money into all the systems (personal and corporate) to mitigate excessive damage. This gives time in two ways.
Time to ramp up medical infrastructure
Time to slow down the spread.
The two work in tandem.
Does the lockdown go on for longer?
Probably not in a number of countries, the economic damage will become just too great. We are starting to hear this from the US already and we can expect similar from a number of governments, with a change in message over the weeks from terror inducing now (designed to scare people into isolation) to far more positive and proactive.
I have listened to and read everything I can from the best minds globally.
Please understand I am focusing here on economics not health and well-being. This is foremost a health and safety issue not monetary. May you all be unaffected.
The clear themes to their observations are as follows:
- This is temporary; it will sort itself out. The unknown metric is time, how long it will take?
- There are clearly going to be companies and sectors that will be very negatively affected but also some positively.
- Anything related to travel/leisure is not going to be in great shape.
- The internet and major online companies will experience a boom in sales, but more importantly have enormous new client banks, many of whom will stick. This will both speed growth and save enormously on future advertising and promotion costs.
- Healthcare and Biotechnology companies will be more highly regarded.
- Interest rates will stay at zero for years.
- There will be a pressing need in time to reallocate funds into assets that produce a reasonably secure positive income return. The value of companies with fortress balance sheets paying dividends is going to rise, as will those with strong and predictable continuing growth.
- Internet Companies
- Healthcare/ Biotechnology
- Artificial Intelligence
- Cloud computing
- Telecoms/5G (Including Virtual Office/VOIP)
The unknown variable, the one thing that would allow everything to be modelled, is TIME.
How long does the major dislocation last?
If we look at those countries that are ahead of us in going through the lockdown process, then their experience was 4-6 weeks. If that’s the same across Europe and the US, then that’s ‘manageable’.
The LWM portfolios (as I have written about and discussed in person with many) have increasingly and significantly targeted the Technology and Health sectors globally because simply that’s where the future growth will be in markets. That was true when we started LWM, far more so at the start of 2020 and the upward trajectory certainly will be steeper now.
Conversely, we have not targeted funds whose investment philosophy was focused on companies which had challenged environments, low growth so low valuations. It was argued by many there was hidden value, we thought that incorrect. Our view being the structural issues for such sectors would worsen not improve (carbon-based car manufacturers, airlines, High Street retail such as M&S, insurance and supermarkets as examples).
I am deeply aware that writing to you about investing in such times as these is not likely to be your main concern. But we will continue to do our job the very best we can because it’s what we can do.
Our thoughts and love to you and your families.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.