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Investing

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.

Coronavirus and Investing…

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The coronavirus is still very much with us, as is much of the economic dislocation occasioned by the resulting lockdowns.

Granted, we are evidently closing in rapidly on a vaccine, indeed, a number of vaccines.  However, it might be quite some time yet before most of us will get access to a vaccine, and frustration may abound. Furthermore, in the coming weeks we will have to go through a hyper-partisan presidential election in the US, with a variety of voting issues we’ve never had to deal with before.

So, before we’re further engulfed by these multiple unknowns, I want to take a moment to review what we as investors should have learned, or relearned, since the onset of the great market panic that began in February / March and ended when the 500 largest companies in the US, as measured by the S&P 500 Index, regained its pre-crisis highs in mid-August.

The lessons are:

    • No amount of study—of economic commentary and market forecasting—ever prepares us for really dramatic events, which always seem to come at us out of deep left field. Thus, trying to make investment strategy out of so-called “expert” forecasts — much less financial journalism—always sets investors up to fail. Instead, having a long-term Wealth Plan, and working that plan through all the fears (and fads) of an investing lifetime, tends to keep us on the straight and narrow, and helps us to avoid sudden emotional decisions;
    • The global equity market fell 26% in 25 days. None of us have ever seen such a speedy decline before, but with respect to its depth, it was just about average. When reviewing monthly returns data, this ranks 5th in the top declines dating back to 1970.  Declines of -49%, -35%, -33%, -29% have been experienced over that time period.  However, in those ~50 years to 30/09/2020, global equities enjoyed a cumulative return of 12,967% in nominal terms.  The lesson is that, at least historically, the declines haven’t lasted, and long-term progress has reasserted itself;
    • Almost as suddenly as global equities crashed, they completely recovered, surmounting its February 20 all-time high on September 2. Note that the news concerning the virus and the economy continued to be dreadful, even as the market came all the way back. I think there are actually two great lessons here:
    • The speed and trajectory of a major market recovery very often mirror the violence and depth of the preceding decline; and
    • The equity market most often resumes its advance, and may even go into new high ground, considerably before the economic picture clears. If we wait to invest before we see unambiguously favourable economic trends, history tells us that we may have missed a very significant part of the market advance.
    • The overarching lesson of this year’s swift decline and rapid recovery is, of course, that the market can’t be timed, that the long-term, goal-focused equity investor is best advised to just sit tight.

These are the investment policies you and I have been following all along, and if anything, our experience this year has validated this approach even further.

A word now, really just a repetition of what we’ve stressed before, about the US election.  Simply stated, it’s unwise in the extreme to exit global equities in which you’ve been invested during your lifetime because of the uncertainties surrounding the election.  Your chances of getting out the market and then back in advantageously are historically very poor, nor can Wells Gibson possibly help you in attempting to do so.

As we do before every UK or US election, we urge you to just stay the course.  As always, we’re here to talk through these issues with you.


Header photo by Sebastien Gabriel on Unsplash
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.

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.