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Evidence Based Investing | Wells Gibson

Equity Markets and US Presidents

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When it comes down to the returns of stock markets under different Presidents – Democrat or Republican – does it really matter who is in power?  Should we change our portfolios?  Can we predict what is going to happen?  The quick answers are ‘no’, ‘no’ and ‘no’!

This is perhaps not really very surprising as the price of a company’s shares is based on the future cashflows that it will deliver discounted back to a present value, using a discount rate that reflects the risks associated with that company’s cashflows.  A Presidential term is four years, but a company’s cashflows run into the distant future.  Despite the partisan nature of US politics at this time, Democrats and Republicans are all still capitalists and believe in personal freedom, property rights and, yes – even if it does not feel like it at this moment – democracy.  In a broad political sense, Democrats and Republicans are simply variations on a democratic, capitalist theme.

Active fund managers may try to position portfolios to reflect world events, but predicting the future is very hard to do!  There was much talk of the ‘blue wave trade’ prior to the election to position for a Democrat clean sweep of all parts of government yet look how that seems to be turning out.  A few days ago, the prospect of a vaccine for Covid-19 sent airlines, banks and energy companies soaring and Zoom and other ‘lockdown’ benefiters, such as Ocado, down.

Random events and the release of new information moves the market’s view of cashflows and discount rates resulting in the movement of share prices.  Guessing against randomness is hard but taking on the known risk that equity returns are far less certain than holding cash, rewards investors who ignore this short-term noise and focus on the long-term.

The choice of the US President is important to some, but to the long-term investor it is largely irrelevant from an equity market perspective.

Not All US Shares have Gone Up in 2020

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“If the history of bubbles teaches us anything, it’s to be humble… Fama doesn’t think we can predict bubbles. Shiller thinks we can but doesn’t think we can ever know when they’ll collapse. What we need, but I know we’ll never get, is more of this type of thinking. I’m holding out for a humility bubble.”

[Fama and Shiller both received Nobel Prizes for economics for their diametrically opposed views on markets! – Ed.]
Morgan Housel – Author[1]

Well, 2020 has been a strange year so far for equity investors; the early gains of global equity markets in the first couple of months turned into material – and rapid falls – in all equity markets.  Yet, as we sit here in the early days of Autumn, global markets are more or less back where they were at the start of the year, although the UK is a laggard.  Thank goodness for diversification.  Across the pond, the US market has rebounded strongly and the tech shares such as Apple, Google, Amazon, and the electric vehicle firm Tesla have appeared to defy gravity.  Hands up all who wishes they owned more US tech shares.

Sometimes the disconnect between what is happening in the economy and what is happening on Wall Street is hard to reconcile in one’s mind.  However, we need to remember that the market looks beyond well beyond our current challenges and discounts all future earnings into prices.  To those who believe markets work, this represents the best guess of the value of a company today, given the information we have available to us.  To others it may feel like bubble territory and a big momentum play into a few companies getting lots of media attention and investor dollars.

We also need to remember that trading in the markets – buying Apple – is not as simple as saying that Apple is a good company, so the price should go up – but a process of estimating whether the market has over – or underpriced just how good Apple is.  Did Apple’s market value double from US $1 trillion in August 2018 to $2 trillion in August 2020 because the discounted earnings were expected to be far larger than the market thought, or are we in bubble territory?  If you are hoping for an answer, then you will be disappointed; no-one really knows.

If we look beyond these gravity-defying shares, we see that the returns from the vast majority of US companies is less than stellar, perhaps reflecting more closely how many feel about the current economic environment; in fact 335 shares in the S&P 500 sit below the market average for the year of around 12%.  Half of all shares have actually lost money, yet maybe some of them will be future winners. 

Fortunately, as systematic, long-term investors, clients of Wells Gibson have avoided the full brunt of the UK’s woes and picked up some of the benefits of owning US tech shares.  Could we have predicted this outcome?  Do we know what happens next with any certainty?  Let’s be honest, we don’t know, you don’t know and nor do any professional fund managers.

All we can really do is to remain well diversified, try to avoid the feelings of wishing we had more in the US tech shares, and be patient. Investing using the rear-view mirror is never advisable. If history tells us anything, it is that today’s winners are rarely tomorrow’s winners.

With a longer-term perspective and a disciplined approach, we can sit back confident in the fact that we will participate in tomorrow’s winners as we own them today, somewhere in our richly diversified portfolios.

[1] The Psychology of Money (to be published on 9th September 2020). Review: ‘Morgan Housel’s new book clarifies – with razor sharp and accessible insight – that building wealth is a mindset problem, not an investment problem. This is the first book any investor should read; in conjunction with a good index fund, becoming wealthy lies within everyone’s grasp.’ Tim Hale, MD at Albion Strategic Consulting, and author of Smarter Investing: Simpler Decisions for Better Results
Risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Header image by Dan Smedley on Unsplash

10 Tips for Surviving Inevitable Market Falls

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Just as turbulence is a characteristic of flying, volatility is a characteristic of capital markets!

As investors we have all experienced turbulence in 2020, yet if you stayed seated and fastened your seatbelt, as a client of Wells Gibson, you will have noticed the value of their portfolio has more or less recovered the falls you experienced in the first few months of the year.

Market falls are inevitable when investing and often these falls can be alarming and at an unexpected degree.  Although, we should expect falls at some point, we need to remember these declines are always temporary.  No one knows when and at what magnitude these falls will occur so here’s top 10 tips for your portfolio’s survival:

 

  1. Embrace the uncertainty of markets – that’s what delivers you with strong, long-term returns.

 

  1. Don’t look at your portfolio too often. Once a year is more than enough.

 

  1. Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact.  Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.

 

  1. If markets have fallen, remember that you still own everything you did before (the same, lower-risk, bond holdings and the same higher-risk shares in the same companies).

 

  1. A fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell?

 

  1. Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon, in other words, when you need your money.

 

  1. The balance between your lower-risk, defensive assets (high quality bonds) and higher-risk, growth assets (equities / shares) was established by Wells Gibson to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially, and that your portfolio has sufficient growth assets to deliver the returns needed to fund your lifestyle.

 

  1. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. Be confident that you have many investment eggs held in several different baskets.

 

  1. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking your income from your bonds, not selling equities when they are lower value.

 

  1. Last and by no means least, we are available to talk to you at any time and as your lifetime wealth partner, we will urge you to stay the course and be a source of fortitude, patience and discipline. In all likelihood we will advise you to sell bonds and buy equities, just when you feel like doing the opposite.

 

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Header image by Photo by Ewan Harvey on Unsplash

Cash Dividends – Don’t Bank on Them

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‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’

John D. Rockefeller

To this day we can still relate to the words of American industrialist John D. Rockefeller, despite their utterance over a century ago.   Be it a privately-owned business or publicly listed equities / shares, dividends come part and parcel with owning a portion of a business. Cash dividends have long been an effective tool used to attract investors to a company’s shares.  ‘A bird in the hand is worth two in the bush’.

Dividends have historically been a way to disseminate information.  A change in a company’s dividend could hint at financial health.  In a world becoming increasingly dominated by information, mostly available at our fingertips, the power of the dividend, from this perspective at least, has diminished.  Also, corporate finance departments have tools at their disposal, such as share buybacks, that have become increasingly popular.

Such phenomena, in addition to perhaps a shift in investor sentiment, have resulted in a reduction in the number of firms paying regular cash dividends to shareholders.  The volume of dividends, however, has not necessarily decreased meaning that dividends are concentrated in a smaller number of companies.  Dividend-targeting strategies, therefore, tend to be less diverse [1].

‘Do lower dividends mean lower returns?’

Not necessarily.  Once a company’s share goes ex-dividend, it’s price decreases by the amount of the dividend, ceteris paribus.  Not issuing a dividend would mean the cash remains in the company and thus is still part of the shareholder’s claim on assets.

Figure 1: Illustration of the impact of a dividend on stock price
‘Does it matter to me what my portfolio yields from dividends?’

Not really.  At Wells Gibson, we adopt what is called a ‘total return’ approach to investing [2].  We are agnostic to companies’ dividend policy and instead structure diversified portfolios with a focus on risk exposures.  Your portfolio will usually generate some income from dividends each year, and sometimes some capital appreciation too.  However, as figure 1 above illustrates, it doesn’t matter where that return comes from.  One does not draw out cash, stare at two £20 notes and wonder: ‘which of these came from dividends and which from capital appreciation?’. Return, after all, is return, is return.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Header image by Martin Sepion on Unsplash; Yorkshire, UK.
[1] Fatemi, A. & Bildik, R., (2012). “Yes, dividends are disappearing: Worldwide evidence,”
[2] For investors not requiring a ‘natural yield’ from the portfolio.

Good things come…

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… to those who wait

‘Patience is bitter, but its fruit is sweet’
Aristotle

Good things come to those who wait.  This was the strapline once used by Guinness to refer to the 119.5 seconds it takes to pour a ‘perfect’ pint of their iconic stout[1]. With investing, the time periods we are concerned about are measured in years, rather than seconds.  Looking at your investment portfolio too often only increases the chance that you will be disappointed.  This of course can be challenging at times, particularly during tumultuous markets.

We know that monitoring markets on a monthly basis looks rather stressful, as they yoyo through time whereby there are times during which the market is growing its purchasing power (i.e. beating inflation) and there are times when it is contracting.

The evident day-on-day and month-on-month yoyo is a consequence of new information being factored into prices on an ongoing basis.  Investors around the world digest this information, decide whether it will cause a change in a company’s cashflows (or the risks to them occurring), and hold or trade the company’s share accordingly.  These are the concerns of active investors casting judgements on an individual company’s prospects.

Over longer holding periods, the day-to-day worries of more actively managed portfolios are erased, as equity / share markets generate wealth over the longer term.  For instance, between January 1988 and June 2020, monthly rolling 20-year holding periods never resulted in a destruction of purchasing power.  A longer-term view to investing enables individuals to spend more time focusing on what matters most to them and to avoid the anxiety of watching one’s portfolio movements.

This is not to say that investing is a set-and-forget process, however.  Wells Gibson’s Investment Committee meets regularly on your behalf to kick the tyres of the portfolio, after reviewing any new evidence.  Over time there may be incremental changes to your investments (or there might not be) as a result, but the Investment Committee shares the outlook illustrated in the figure above – we have structured your portfolio for the long term, and it is built to weather all storms.

Delving deeper

If we look at longer term market data in the US back to 1927, the result is the same.  Furthermore, we can cherry-pick a 20-year period which is fresh in many investors’ minds: the bottom of the Financial Crisis. In this (extreme) 20-year period, to Feb-09, equity markets had barely recovered from the crash of technology shares in the early 00s, before falling over 50% in 2008/9, in real terms.  These were unsettling times to say the least.

Despite the headwinds, investors had been rewarded substantially for participating in the growth of capital markets over the longer term.  An equity investor viewing their portfolio for the first time in 20 years would have seen their wealth more than double, whilst at the same time the media was reporting headlines such as ‘Worst Crisis Since ‘30s, with No End Yet in Sight’[2].

Have faith in wealth-creation through capitalism and try not to look at your portfolio too often. As the adage goes: ‘look at your cash daily if you need to, your bonds once per year, and stocks every ten’.

Header image by Sarah Mitchell-Baker on Unsplash; York, UK, Looking over the River Ouse in York from Lendal Bridge.
[1] https://www.guinness-storehouse.com/en/guinness-academy
[2] Wall Street Journal, September 18, 2008