absolute valuation, Alphabet, annual review, buy and hold, coronavirus, Cpl Resources plc, Donegal Investment Group, Ebola, GARP investing, growth stocks, isolationism, KR1 plc, populism, portfolio performance, Record plc, relative valuation
It’s still January…so by now, I’m sweating to wrap this up by month-end (at the very latest!), while you’re probably feeling besieged (& bamboozled) by the media’s parade of talking heads who seamlessly re-write their broken #2019 narratives & still pitch their #2020 market prognostications with undaunted confidence. Which is a tad discouraging when I’m busy trying to come up with my own unique version & perspective…albeit, in the wake of a fantastic year (talk about looking a gift horse in the mouth!).
Seriously…name a market/asset class that actually declined!?
But rewind a year & check the gamut of their 2019 predictions, and (once again) you’ll remember/realise they’re full of highly paid shit! So before I even start – let alone, God forbid, pontificate – I’ll share the only piece of market wisdom you really need to know, above all else:
And that quote’s about the movie business! Granted, for anyone who cares, Hollywood probably seems like the most impressive Rube Goldberg contraption in the world…but frankly, figuring it out is a total cake-walk compared to grappling with & predicting what might actually happen next in the markets & the global economy! But unfortunately, that’s how we all step up & play the game:
Like useless office work expanding to fill all available time…useless market forecasts expand to fill all available airtime & news holes!
Probably my greatest investing achievement in the last year was switching off the financial media – and yeah, I stopped paying attention to brokers years ago – is it any wonder I reported such negligible portfolio activity? [It’s a real travesty seeing #buyandhold investors re-classified as chumps over the years (& decades)]. And in reality, markets are primarily focused on trying to discount a 12-18 month time-horizon, which means a diet of narrative manufactured to simply explain yesterday & today’s market/stock zig-zags is just irrelevant & misleading anyway. And so, I recommend you do the same: Go on, just switch off that guy on the box, you know the one…he just happened to attend some ‘school in Boston’, and is now an instant expert on epidemiology and up & to the right #coronavirus charts! Again:
‘Nobody knows anything…’
And what better example than 2019 itself? Cast your mind back – last January, who on earth was genuinely predicting (let alone betting on) across the board market returns like this?! Here’s the actual scoreboard – as per usual, my FY-2019 Benchmark Return is a simple average of the four main indices which represent the majority of my portfolio:
A +23.5% average index gain…oooh, that’s a bloody tough act to follow!
And I mean that personally & professionally – at first glance, the prospects for 2020 look a little terrifying in the wake of such annual returns. And it’s unnerving to see the S&P 500 power ahead like that – inc. dividends, that’s a 30%+ total return for the year – esp. when you consider its relative size & consistent leadership globally in recent years!
But after such a marvelous (and dare I say…easy?!) year, I suspect we’ve all happily forgotten 2018 wasn’t so pretty. In fact, it was pretty grim! Let’s not ruin the party with a chart, but here’s a link to my FY-2018 Benchmark Return…which averaged a (13.5)% index loss! So in reality, we’re looking at a sub-10% pa index gain for the S&P over the last two years, not much different from its long-term average annual return.
As for the other indices, blink & you’ll miss ’em: Over the last two years, the ISEQ only managed a 1.0% pa index gain, the Bloomberg European 500 a 2.9% pa gain, while the FTSE 100 actually recorded a (0.9)% pa loss. And soooo…
…nothing to see here!
Yeah but, market Cassandras will immediately spot the trick…none of those CAGRs actually imply markets are NOT ridiculously over-valued!? Oh, give me strength – where do we start? Well, first, let’s acknowledge their sacred long-term narrative: We’re now almost 11 years into a bull market, the S&P’s up almost 400% since & a crash is therefore inevitable! Which seems like the most ridiculous cherry-picking case of torturing the data (& charts) I’ve ever seen… Look again, the S&P went nowhere for almost 6 years – from late-2007 to mid-2013 – what kind of bull market is that? And since then, it’s clocked two 15-20%+ declines/corrections/bear markets – in 2015/2016 & 2018 – which experts assure us were technically NOT bear markets. Talk about splitting bear hairs… While the other major markets are studiously ignored, because they’ve been mostly going nowhere/getting cheaper for years & even decades now.
But again, it’s all about valuation in the end. And here, it starts getting even more ludicrous, with naysayers screaming blue murder about over-valued markets. So let’s run the numbers, while keeping in mind long-term developed market averages tend to be in the 14.0-16.0 P/E range:
Not to be exhaustive, but…the S&P’s forward 18.4 P/E doesn’t seem like all that much of a premium, while Canada on a 14.9 P/E & Mexico on a 14.5 P/E round out the North American average nicely. Europe’s a bit cheaper, with the UK on a 13.3 P/E & EMU markets on a 14.6 P/E. [Germany, 14.4 P/E. France, 15.0 P/E. Italy, 11.8 P/E. Spain, 12.0 P/E. And Ireland on a 16.6 P/E, aided by a booming local economy (not that you’d ever know it from some of the more ludicrous #GE2020 campaigning/doom-mongering recently!)]. And Asia’s cheaper again, on a 13.4 P/E, with China on a 12.1 P/E & Japan on a 14.5 P/E, while overall Emerging Markets offer a 12.8 P/E.
[If you really want to worry about a market valuation/two (esp. if you think China’s relevant & fragile), consider Australia on a 17.9 P/E & New Zealand on a 29.5 P/E!? Then again, far be it for me to second-guess nearly three decades of Aussie expansion…]
Not to mention, valuation’s also relative, both in terms of sentiment & versus risk-free/alternative returns. Current P/E multiples certainly don’t look extraordinary in relation to those prevailing in 1999 & even 2007…and sure, we can definitely nominate some ridiculously overvalued stocks & sectors today, but there’s no pervasive sign(s) of the kind of rampant/systemic financial leverage & excess we saw back in the glory days, while the average man in the street still isn’t participating (directly) in the market (let alone betting on sure things).
[One of the market’s dirty little secrets today is how few investors/strategists actually lived through the entire dotcom bubble & crash – or even the #GFC itself – and have any real visceral understanding/appreciation of the sheer irrational mania of everyday Mom & Pop investors actually believing they just can’t lose!]
As for alternative valuation benchmarks, we live in a #ZIRP & #NIRP world starved of yield, with over $10 trillion of global debt offering a negative yield…which inevitably makes it a #TINA world for equities! Well, except when it comes to equity valuations, apparently: Model-dependent experts insist we should pretend we still live in an average world with average P/E ratios based on average bond yields/discount rates…even though that average world of 4-6% risk-free rates is long gone. But still, zero/negative risk-free rates don’t work so well in DCF models, today’s environment is surely an anomaly (still!), and who knows…rates could be dramatically higher next year!?
Even though the aggregate wisdom & consensus of the world’s bond investors tells us actual risk-free rates in the major markets may average less than 1.0% over the next 30 years!? And even though we’re possibly on the cusp of permanently negative real interest rates…an inevitable consequence of a newly-identified centuries-long supra-secular decline in real rates globally? And ignoring the fact that today’s ZIRP & NIRP rates are irrelevant anyway, when it comes to justifying a high valuation multiple for the right stocks – i.e. high quality growth stocks – as per these fascinating historic analyses from Lindsell Train, and Ash Park:
In the end, I’ll keep asking the same question here: We’re over a decade now into what’s surely the most unprecedented fiscal & monetary experiment in the history of mankind…is it so crazy to ask/wonder whether this ultimately leads to the most unprecedented investment bubble in history too? And no, I don’t have the answer, nor am I arguing it’s actually #DifferentThisTime – right here, right now, the market continues to make sense to me both in a historical context & from a current (rate) perspective, so there’s still plenty more time & thought left before I even need to contemplate tackling such a challenging question. Meanwhile, it stands as the ultimate market template & scenario I should continue evaluating…and if/when the facts change, I (can always) change my mind. What do you do, sir?
[And since we’re talking Keynes, it’s worth remembering his other famous quote – ‘The market can remain irrational longer than you can remain solvent’ – may equally apply to shorting!?]
And meanwhile, we live in what seems an increasingly fragile & volatile developed world, where economies feel increasingly precarious despite multi-decade lows in unemployment, where populism & isolationism are spreading relentlessly, and government debt & deficits are treated as irrelevant. And this time, maybe it is actually different…because we’re looking at up & coming generations who may end up worse off than their parents, and a middle class where many feel just as threatened (by technology) as the working class are already in terms of living standards & job/career prospects.
That kind of anxiety & insecurity hasn’t been experienced by the middle class for almost a century now – no wonder we’re all discussing universal basic income, potentially a far more palatable middle class label for social welfare – and it may underwrite a much greater wave of populism, polarisation & isolationism to come. [Ironically, #BigCorporate & #BigTech may be the best line of defence/antidote to such trends]. And this may be esp. true in America, whose exceptionalism was arguably a unique & happy accident of history, granting the working class a few idyllic post-war decades where they could actually attain & live a middle class life…a life that’s been slipping through their fingers ever since, with real median incomes stagnating for decades now while the rest of the world continues to catch up.
It’s hard to parse & predict a world like that – esp. as we’re in the midst of an accelerating #DigitalRevolution & are on the verge of an #AIRevolution. For an active stock-picker, this means buying high quality growth stocks has become more important than ever – namely, companies that can (ideally) deliver growth regardless of the economic environment, and which can survive, adapt to & exploit (technological) disruption. I’ve obviously been stressing this strategy here & slowly adapting my portfolio to reflect it (retaining a value mind-set is a tough but necessary hurdle!) over the last few years. But more recently I see a bifurcation – with investors choosing one, or the other – i.e. they’re buying revenue growth stocks (at all costs…or should I say, losses!) (yes, right or wrong, the Netflix/Tesla/etc. stocks of the world), OR they’re buying high quality stocks (whose revenue growth may be relatively anaemic, but is also highly durable, dependable & economically insensitive) (the FMCG stocks of the world). And as above, a strong level of conviction – in either category of growth stocks – can more than justify today’s/much higher valuations, esp. if today’s risk-free rates are fully incorporated.
[Leaving everything else trailing in the dust…call them value stocks, if you wish!]
And frankly, there’s an uncanny valley between the two, where I believe the real value stocks are to be found in today’s market…companies that are high quality but present that little bit more of a risk, that grow consistently but opt for profits rather than super-charged revenue growth, the 10-15% to 20-25% revenue & profit machines which (in relative terms) seem to bizarrely miss out on the kind attentions of so many growth investors today. For example: It may seem counter-intuitive, but peeling back the layers, I placed Alphabet (GOOGL:US) in this new value category of growth stocks (& still do today). While Cpl Resources (CPL:ID) is another very recent & different example.
And more of the same to come…
Which, alas, brings us full circle back to my own portfolio…a bit of an unintended anti-climax.
Here’s the Wexboy FY-2019 Portfolio Performance, in terms of individual winners & losers:
[All gains based on average stake size & end-2019 share prices (vs. end-2018 prices, except Cpl Resources). NB: All dividends & FX gains/losses are excluded.]
And ranked by size of individual portfolio holdings:
And again, merging the two together – in terms of individual portfolio return:
So yeah, a +14.9% portfolio gain obviously falls well short of a magnificent +23.5% benchmark return.
In fact, I literally couldn’t help checking my numbers – at first glance, it didn’t seem possible for my winners to be diluted so much – alas, to be reminded how bloody difficult active stock-picking (i.e. genuine eclectic non-index hugging stock-picking, with a value bent) can be when the market’s notching up fantastic returns. Inevitably, some stock picks rack up negligible/negative returns – which ideally, prove an error of timing, not stock selection – which, in turn, can demand (as all budget slaves will know) gargantuan out-performance from the rest of one’s portfolio (last year, arguably that implied 40-50%+ returns from my best stocks!?). Needless to say, that just didn’t happen…
In the end, my overall return effectively came from just three stocks: i) Alphabet (GOOGL:US), a high quality growth stock, ii) Record (REC:LN), a high quality stock (at a value price), and iii) Donegal Investment Group (DQ7A:ID), a value stock that has since evolved into a special situation stock (as expected, a gradual liquidation).
Fortunately, all of the above isn’t entirely representative of my evolving investment strategy, or my overall (disclosed & undisclosed) portfolio…
KR1 (KR1:PZ) reverted to its periodic role as a portfolio diversifier in H2-2019 – by which I mean negative diversification, with Bitcoin steadily declining – if it had broken even in H2, my overall portfolio performance would have been (rather astonishingly) just shy of my benchmark at +23.0%. At least KR1’s negative impact was diluted in my overall portfolio (vs. here, where KR1 is effectively 11% of my disclosed portfolio).
And perversely, the write-up & inclusion of Cpl Resources (CPL:ID) ahead of year-end actually diluted my disclosed portfolio returns – my 2019 portfolio performance would have been almost 1% better, if I’d waited ’til January to publish! Of course, it would be absurd to game the system like that – when in real life, Cpl ended up 6.4% on the day, up 9% by year-end & up 12% ahead of last week’s interims, vs. my December write-up, on substantially higher daily trading volumes & no subsequent news-flow – so I’ll happily take credit for the vast majority of that real-money gain. Not to mention, it’s now up 19% since!
And fortunately, most of my undisclosed portfolio hews much closer to my high quality growth stock creed – I can even boast a near-100% return on one large-cap, so much for efficient markets! So my pride may be a little dented here in public, but privately my cheque-book (you what..?!) is enjoying an overall portfolio gain north of 20%.
And that’s it for now…the numbers can do the talking, 2019 post-mortems for each individual stock really won’t add all that much to the discussion at this point. Esp. when everybody & their mother is now obsessing over the #coronavirus. Personally, I think Ebola’s far more terrifying – but hey, who remembers the 2014 Ebola ‘outbreak’ now? Maybe, just maybe, there’s a lesson to be learned there…need I say more?! [And once things die down, hopefully I can circle back & focus on the current prospects of my disclosed portfolio]. So stand firm, don’t panic, and just make sure you’re holding great stocks…and if the market does reverse, try & swap/buy into even better high quality growth stocks!
OK, as a final placeholder, I’ll list each of my disclosed portfolio holdings again, their respective FY-2019 gains & individual portfolio allocations as of end-2019:
And thanks for reading, to both my new & faithful readers – as always, I welcome all your comments, ideas & interactions. And:
Best of Luck in 2020!