Nowt About

By Paul Crocker, Investment Director FIM Capital

There is nothing like a plain-speaking Yorkshireman to provide a dose of common sense. Show jumping legend, Harvey Smith, is reputed to have said ‘you never earn owt out of what you know nowt about’ which rules out a cryptocurrency update from me, at least.  This aside, however, how can an individual create wealth? 

A bit of ‘Lady Luck’ in betting is one answer, improving the odds with a little knowledge, perhaps, but one must question whether the return justifies the risk, a rule universally applicable to investing. One must also consider whether to pursue a single opportunity or whether to diversify risk over a longer time frame. I have lost count of the number of people who received speculative share tips which went wrong, putting them off investing for life.

As a trainee broker, I recall a client seeking to invest in a zombie company called Rotaprint. Trading at around 6p, they wanted my thoughts. In those days, we would review the Extel card, which provided a snapshot of the company and its financial predicament.  On this occasion, it did not read well, so I discouraged the client. A few weeks later they returned, however, demanding to see me. The shares had doubled and several expletives were used to describe my prior advice. A bundle of cash was placed on the counter (quite acceptable in those days) and I promptly scuttled upstairs to execute the trade. The client left a short time later but was never seen again, as the shares were suspended shortly afterwards, pending clarification of the company’s financial position. It had gone bust.  

There is no quick or sustainable way to make money unless luck is consistently on your side. The boom we are experiencing in certain tech stocks and IPOs seems unsustainable but could continue for some time.  Once commentators start justifying a rating based on price-to-sales ratios (because it’s a growth stock) or suggesting that ‘this time is different’, alarm bells should be ringing. Good luck to anyone attempting to borrow against a price-to-sales ratio, as such companies must either quickly return a profit or be dependent on further stock issuance, diluting their original shareholder base. Fine, if the market is booming but more difficult if sentiment is deteriorating.   For anyone under the age of thirty, the dotcom bubble is market history, yet for those of us around at the time, they were crazy days. VA Linux (LNUX) came to the market via an IPO on the 9 December 1999 at $30 and surged to $239 within a day. Its name dominated NASDAQ over the turn of the century, yet a year later, it traded at $9. Those who made money at the time commanded heroic publicity, but have long since been forgotten. Indeed, the only person I can remember is Bernie Ebbers, CEO of WorldCom, a $180bn company. Today there is no sign of him either, spending his final years in jail for fraud. Could Nikola turn out to be the 2020 equivalent?

Robinhood investors are the ‘heroes’ of our time. How can we possibly suggest that they do not know what they are doing, when they have made massive gains on the likes of Tesla, sitting tight in anticipation of ever greater returns? My gains are pitiful by comparison but that is because I have the scars of experience.  There is no excuse for making the same mistake twice; once is bad enough.

Today, momentum matters, valuation seems irrelevant and there is a seemingly boundless belief in Elon Musk’s talent. Shareholders believe that incumbents will fall by the wayside in the same way that the Red Sea parted for Moses, but experienced investors are more sceptical, knowing that only a great company can justify an extortionate rating. George Muzinich, a corporate credit guru with decades of experience and the founder of New York-based Muzinich & Co., describes the current environment as ‘living in Disneyworld’; an artificial construct devoid of reality. Who can disagree?  The money printing presses are rolling, day and night, providing ever greater amounts of liquidity, resulting in selective but sometimes irrational euphoria. Often, Muzinich light-heartedly suggests that he is only just coming to the end of his apprenticeship in an industry where we repeatedly try to achieve credible returns, yet are bombarded by the unexpected. 

Capital markets are a wonderfully accessible means for everyone to make money, even with modest monthly subscriptions.  Retaining those gains, however, is a key challenge.  That is why an understanding of compounding and a modicum of patience are the two most important attributes of an investment manager, while diversification offers a strong third defence. From my own experience, I believe there are two simple approaches to investment: either seeking growth from a broad range of assets knowing that there will be winners and losers or focusing on a diversified income stream which can then be reinvested. Twenty years ago, I would have opted for the former.  Now, with several more market cycles under my belt, I would favour the latter, appreciating that it is difficult to make money by backing every horse in a race. An income stream keeps all options open, as the cash flow can be reinvested. If you are seeking a target return of 7% per annum and half of this might be underpinned by income, why take the extra risk? The odds of beating other strategies over the short term might be reduced but this is a long game and I suspect this is why I’ve never heard anything about JD Rockefeller’s insomnia.


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