The following is Ian Cowie’s column from last weekend’s Money section of the Sunday Times. Ian writes as a long-term personal investor whose insights and experiences I always find thought-provoking. I have highlighted a couple of the sections you might find particularly interesting:
“Next month will mark the 300th anniversary of one of the biggest ever stock market shocks, the bursting of the South Sea Bubble. Back then, investors bought into businesses with little or no understanding of how returns would be generated, and soaring share prices became detached from reality. Sound familiar?
Last week Japan, the third-largest economy in the world, reported that coronavirus had caused its gross domestic product to shrink sharply, following similar announcements from the US and Britain. Yet many shares — plus gold and government bonds — remain priced at or near record peaks.
So, this long-term investor asked seasoned experts, who have survived several booms and busts, how to spot a bubble before it bursts, and whether they can see any now. These are sensitive topics that many financial professionals would rather not talk about.
Terry Smith, one of the few “star” fund managers who has not fallen to earth, refused several requests for comment. What a difference from the last time we met, when I could hardly get a word in edgewise. James Anderson, fund manager of the only investment trust that is big enough to feature in the FTSE 100, was also uncharacteristically silent. Scottish Mortgage’s biggest holding is the electric car-maker Tesla, which has a stock market value of $308 billion (£237 billion), bigger than Toyota, Volkswagen and Honda combined, although Tesla has a fraction of their sales and only began to make a profit this year.
Fortunately, two senior fund managers were willing to break the taboo and talk. They are Nick Train, the manager of the £1.86 billion Finsbury Growth & Income, the top-performing UK equity income investment trust over the past five and ten-year periods, and Paul Niven, manager of the £3.8 billion global fund F&C, which has survived for more than 150 years.
Cutting straight to the chase — and my most valuable holding — Train told me: “Look at the stock market value of Apple, which stands today at £1.5 trillion [at close of play on Friday it had a market capitalisation of $2.13 trillion].
“As a UK Equity investor I can’t help comparing that to the current value of the FTSE all-share index, which stands at about £1.9 trillion. Can one American technology company really be worth more than the entire British stock market?
“Is that mad? Is Apple a bubble? Or is the UK stock market just very undervalued?”
His answer is based on deep and wide analysis, citing Charles Mackay’s 1841 classic study of financial booms and busts, Extraordinary Popular Delusions and the Madness of Crowds. It is also surprising.
“When you consider episodes that look as though they may be bubbles, it becomes clear that many are rational responses by investors to the promise of new technology and new industries,” Train said. “Yes, there are excesses. But without the gains from new technology and new industries, stock market returns over the decades would be lamentable. A big explanation for the disappointing performance of the UK stock market during the last five years is precisely that we have not produced an Apple or Amazon of our own.”
Turning to the question of timing and perhaps cashing out before prices fall, Niven pointed out: “Even experts find it hard to time the end of a stock market bubble.
“The chairman of the US Federal Reserve, Alan Greenspan, worried about ‘irrational exuberance’ in 1996, only to see the American market double before it peaked at the turn of the millennium in 2000.”
Looking further back, imperial monopolist and slave trader the South Sea Company saw its stock price soar by nearly ten times in the year before its bubble burst in September 1720. Fear of missing out had prompted many to invest, including Sir Isaac Newton, who noted ruefully: “I can calculate the movement of the stars, but not the madness of men.”
Even a blowout can present opportunities for long-term investors. “F&C Investment trust first purchased Amazon, our largest listed holding, in 2006,” Niven said. “The end of the dotcom bubble had brought these shares back to earth, but great companies can entrench their competitive position during a recession.”
Historic low interest rates may mean that present valuations are not as stretched as they look. Put another way, quantitative easing — or central banks pumping money into markets — causes the real value, or purchasing power of cash to fall while it pushes up the market price of investments.
Meanwhile, assets that produce low or no income, such as gold and many government bonds, are not as safe as they look. Bullion and bonds now invert their traditional promise and offer a return-free risk.
By contrast, funds and shares that confer ownership in businesses we expect to trade long after we are gone — and which pay us to be patient — look like better bets over the long term. Unfortunately, both will continue to shock in the short term.
The American Federal Reserve is the biggest central bank in the world and, as a general rule, it doesn’t pay to fight the Fed. Along with others, including the Bank of England, the Fed has indicated that it will do whatever it takes to prevent this recession turning into a repeat of the Great Depression.
City cynics say that bears (pessimists), sound clever but bulls (optimists), make money. So, apart from retaining a small amount of cash to take advantage of any opportunities that arise, I intend to remain almost fully invested.
I missed the rise of Apple but, it’s not too late for any of us
Here are three words of comfort for anyone who fears that they might have left it too late to participate in the technology boom by investing in the digital giant Apple: I did too.
For more than quarter of a century after I bought my first computer — since you ask, a black and white Apple Macintosh Classic in 1990 — I failed to buy the shares. As the price continued to climb, I became convinced that I had missed my chance.
Then I had a moment of epiphany when I realised there was no point worrying about the past because we can only invest in the present for the future. That was when I stopped dithering and bought Apple shares at $95 each in February 2016.
Since then, the stock has soared to trade at $497 last week and become the most valuable holding in my “forever” fund.
Despite two bouts of profit-taking, both involving five-figure sales, Apple accounts for slightly more than 7 per cent of the total value of my portfolio.
It’s only fair to add that when I reported my investment back then, there were several clever Dicks who claimed that I had left it too late and who predicted imminent doom. Critics have been calling the top of this bull run, or period of rising prices all the way up.
By contrast, I argued that the genius of Apple is to produce digital equipment for folk who are not that keen on new technology. More recently, I pointed out how the switch to services and wearables — including iTunes and AirPods — has enabled the company to continue growing, even as iPhone sales slow.
Most importantly for investors, Apple demonstrates why we must look forward, not backwards. At least until someone invents a Tardis or time machine we cannot trade at yesterday’s price.”
Email ian.cowie@sunday-times.co.uk and follow him on Twitter at @iancowie
As a footnote, at a Financial Planning Conference I once listened to an economist confidently predict a crash in the US market, only for a wag in the front row to shout, “You’ve said that at each of the last 6 of these conferences and it hasn’t happened yet, if I had listened to you 6 years ago, my clients would have missed out on a fortune!” The Cassandras of the world with their prophecies of doom and disaster will be right from time to time (much like a stopped clock is right twice a day) but in the interim, serious money is made by those prepared to stay invested through the inevitable ups and downs.
I hope you have found this communication of interest but if you have any questions, please do not hesitate to contact me at any time.
With best regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
