Advisory Investment Service | Elliott Crowson
11 May 20
Weekly update - Value amidst the rubble
The past week has seen an abundance of gloomy headlines, one of particular significance is that the Bank of England has warned the UK economy is facing the sharpest recession on record. Despite this concerning news, we can’t let it mar the signs of progress in fighting COVID-19, with treatments and vaccines now being tested globally. Additionally, many regions have seen very few cases in recent days. It is therefore fitting that, as we celebrate the 75th anniversary of VE Day and the liberation of the Channel Islands, many countries are now being liberated of certain quarantine restrictions and life is, slowly but surely, returning to a level of normality.
We have also seen the dignitary conglomerate Berkshire Hathaway (“BH”) hold its highly anticipated AGM, at which Warren Buffett continued to chair but, this time, without his 96-year-old business partner and vice chairman Charlie Munger. I happened to be one of the few “cool kids” that stayed up late on a Saturday and into the early hours of Sunday to watch the AGM livestream on YouTube in order to behold whatever wisdom the Oracle of Omaha was willing to offer up in these telling times. When listening to Mr Buffett, it is interesting to reflect upon investment strategy and methodology, particularly when they all appear to be going totally wrong! His fundamental approach is “value based investment,” where he seeks stocks that are undervalued by the market.
Another popular investing approach is ‘Growth’ investing where the focus is on stocks that offer strong earnings potential, but these companies can often be overvalued, particularly if there is a lot of excitement around them. As a timely example, note how Elon Musk wiped $14bn off Tesla’s share price last week when he tweeted that he felt the share price was too high… what a guy! This is not to say that this method of seeking stocks is wrong but that it should be delicately handled. Back to Berkshire Hathaway, which holds more cash now than it has ever done before, leaving the business structurally sound and ready to spend on any ‘bargains’ it may come across. It must be mentioned that, because of its sheer size, it is more onerous for BH to acquire businesses that provide strong returns at a reasonable price; fortunately for us, as individual investors, it should be far easier. We can never know how far markets will drop or rise, but the greatest ever, in my opinion, practical investment thinker (and one of Buffett’s mentors) Benjamin Graham, held the view that “falling stock prices are good news, not bad, since they enable you to buy more for less money,” and that “instead of fearing a bear market, you should embrace it.”
In order to succeed at implementing a value-based approach to investing, it is essential that we remain most optimistic in times of uncertainty. It is in difficult times that securities can be picked up at a significant discount to their intrinsic value. In practise, of course, it can be difficult to maintain such positivity because it goes against our biological tendencies: perhaps the tao of Winston Churchill might help direct us:
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
Most would argue that in order to achieve long term success in any portfolio, it is essential to implement a coherent investment strategy. We would urge most retail investors to adopt a balanced strategy, according to their unique circumstances, which is diversified and can be maintained to last over the longer term. Occasionally, a portfolio will face the need to rebalance and restructure, depending on the macroeconomic environment or a change in personal circumstances. Even the most profound investors must make alterations to maximise returns - Buffett himself has spent the past couple of months selling the huge stakes held by BH in airline companies.
Recently, businesses have been eager to release statements and reports as they seek to address how COVID-19 is impacting their fortunes and how they are adapting: it is important to examine these announcements thoroughly and to pay close attention to the detail. It could be wise to favour large companies with strong cash flows, reasonable price-to-earnings ratios and stable dividend policies.
Now, whilst slightly astray from this week’s focus on core investment strategy, a small note on precious metals would not go too far amiss. It comes as no surprise that a mutual fund investing in gold has trumped all other investment products in Europe so far this year. It appears as though noteworthy investors are continuing to favour metals that can potentially act as a safe haven in times of market stress. Not everybody might know that Mr Buffett and Mr Munger are among the most influential advocates for silver (providing it is at the right price… of course!). Alongside being considered a traditional store of wealth, they tend to favour silver for its ever-growing eminent efficacy across a variety of industries. For anyone that is bearish (or perhaps ‘realistic’???) over the future purchasing power of fiat currencies, or the broader economic outlook, or maybe even for those bullish about the potential industrial applications that these illustrious metals may possess, a weighting to physical precious metals might be worth consideration, dependent on your risk appetite and individual circumstances.
Considering the complexities that can arise in particular market environments and how this may intertwine with personal financial goals and ambitions, it is natural for even the most astute and financially savvy individuals to feel slightly befuddled in certain conditions. We hope that it goes without saying therefore, that as always, the Ravenscroft team is available to anyone wanting to discuss their investment portfolio.
We hope you are all safe and well.