Hedge Funds Scale Back Big Bets

An interesting article published over the weekend was one in the Financial Times headlined “Hedge funds scale back big bets”. It said “         Hedge funds focused on US equities are pulling back sharply on their bets after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses”. It also reported that “Long-short equity funds, which pitch themselves on the ability to protect client money in down markets, have lost 18.3 per cent for the year up to and including Wednesday, according to Goldman Sachs estimates”.

The opaque and murky world of hedge funds is well described in a book I am currently reading entitled “Hedge Hogging”. This is by Barton Biggs a former hedge fund manager and contains lots of interesting stories about his experiences. For example, he covers going short on oil stocks based on fundamental analysis when the market started going in the other direction and he was in danger of clients taking their money out of the fund.

But it’s a book that any investor can learn from. Just looking at some of the chapter titles gives you some flavour of the content: The Odyssey of Starting a Hedge Fund: A Desperate Frantic Adventure; The Violence of Secular Market Cycles; Nature’s Mysticism and Groupthink Stinks; The Internet Bubble; Great Investment Managers are Intense, Disciplined Maniacs; Three Investment Religions – Growth, Value and Agnostic; Bubbles and the True Believer; Divine Intervention or Inside Information – a Tale That Will Make Your Blood Run Cold.

It makes it clear that the hedge funds world shows the natural survival of the fittest in the extreme. Those who make big bets and win are the survivors but those who make big bets and lose disappear and are soon forgotten as investors move their money elsewhere. Whether there is clear out performance in the long term by anyone is not clear but the high fees charged mean it can be very lucrative for the fund managers who can stay in business.

In summary it covers a wide range of topics including the dangers of shorting stocks if anyone has an urge to dabble in that as the market falls.

Ideal summer reading on your holidays.

FT article is here: https://www.ft.com/content/8495545c-74e1-4150-8207-4855c66c9750

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Stock Market Musings – Are You an Ostrich or a Trend Follower?

It’s Friday morning after another week of stock market volatility on top of a persistent trend downwards. In such an environment the investment community tends to fall into two camps – the value investors who hold on to stocks regardless (the ostriches of the market who allegedly bury their heads in the sand in the face of danger); and the momentum traders or trend followers.

The former say that if you have purchased a sound company based on good fundamentals you should stick with it, i.e. you should ignore the noise created by the frantic crowd. The latter say that that you need to sell to avoid worse losses or to retain what unrealised profits do exist in your portfolio.

I suggested in a previous blog post that this might be a good year to sell in May and go away. That was simply because I suspect this is not a short-term market correction from excessive exuberance but a realisation that the economic prospects are in fundamental decline. Higher inflation and higher interest rates to try and bring it under control are never good for the economy.

Technology stocks listed on Nasdaq have been particularly hard hit. The Nasdaq index is down by 17% in the last month with stocks such as Tesla, Amazon, Apple, Alphabet, Facebook and Netflix down substantially. This probably reflects the fact many new investors were pulled into the market in the last couple of years when it seemed impossible to lose money on such stocks. They are now pulling out and liquidating to protect their profits.

The short-term speculators are being hit hard and this is particularly obvious in the cryptocurrency markets which are down substantially as holders panic. It’s like a run on a bank where panic feeds on mania as holders choose to take their money and run. There was a good article in the Telegraph yesterday on that subject.

Should stock market investors choose to hold and ignore the panics or bail out? It is a dangerous approach in my view to take one extreme or the other – and particularly to switch from one to the other midway during a bust. If you choose to sell out completely on the premise that one can buy stocks back at the bottom you are likely to have two difficulties. One is that it’s impossible to identify where the bottom is and secondly the bounce back can be so rapid that one can miss out and incur high trading costs. That’s apart from the psychological difficulty of going back into a stock on which you have lost money.

But following the trend downwards does protect your portfolio from a massacre and will ensure you will never go totally bust. The trend does tell you what other investors think about the attractiveness of stocks in the stock market beauty parade, i.e. tells you the views of other investors who hold the stock.

It’s best to look at individual stocks when managing a portfolio and not to move in and out in a wholesale fashion. Sometimes the valuations put on individual stocks by Mr Market can appear irrational and in that case it can be better to hold them rather than sell. That particularly applies to small cap stocks where illiquidity can magnify panics. But it’s important to manage your overall exposure to the market and not to ignore major trends.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Ideagen Offer and Inspiration Healthcare Webinar

I mentioned a possible offer for Ideagen (IDEA) in a previous blog post (see https://roliscon.blog/2022/04/15/possible-offer-for-ideagen/ ). Today one was announced – a cash offer of 350p per share from HG which is a massive premium to the last listed price of 243p. The directors are recommending it so at such a premium I think it is likely to be a done deal. I will be accepting for my shares.

That should at least offset the losses today from the rest of my portfolio as the market heads south. We are surely in a bear market now. Perhaps folks read my previous blog post which suggested it was a good idea to sell in May and go away.

This morning I attended a preliminary results webinar by Inspiration Healthcare (IHC) in which I have a very small holding. The company sells neonatal products for premature babies. The share price has been drifting down like many technology companies. But revenue and EBITDA were up. Margins were also up as they concentrated more on their “own brand” products which is something I always like to hear. Distributing products from other companies is never very profitable in the long run.

The company has been investing in facilities, R&D and IT systems. But there have been logistic challenges as many other companies are facing. With purchased items increasing in cost also and they are changing suppliers in some cases.

Only 4% of revenues are from the Americas so there is big potential there if they can get regulatory approval and develop their marketing.

The company is cash generative and has no borrowing.

Project Wave is aimed a developing a new product and was delayed by the Covid pandemic but is now progressing – it’s now in clinical trial with possible commercialisation next year.

There was interesting discussion of ESG initiatives and staff support. Some 40% of staff are now working from home and one third of staff on a 4 day week (4 days at 8.00 to 6.00). They are using the Charities Aid Foundation (CAF) to distribute donations to charities – an organisation I seem to be coming across more frequently of late and worth knowing about if you make charitable donations.

There were a couple of questions from the audience. One on the increased costs of EU regulation for medical products. The second question was on a possible share buy-back. The answer was that it was not a benefit and “not on the cards”. It was suggested that it is important to maintain a strong balance sheet and to invest the capital. I cannot but agree as I almost always vote against them except in investment companies.

This webinar was on the Investor Meet Company platform and it was a helpful one. I recommend you watch the recording if you have an interest in small tech companies.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Sell In May and Go Away?

Rhododendron Odee Wright now in flower

An old saying in the stock market is “Sell in May and Go Away”. This is because historically the market tends to fall during the summer months for reasons that are not altogether clear. Bearing in mind the transaction and tax costs involved in selling shares and buying them back later in the year, and the fact that like all supposedly reliable investment rules, it tends to be traded away by the anticipation of knowledgeable investors, I do not normally take any notice of this theory.

But I feel this year it might be a good idea to follow. Inflation is forecast to rise to over 10% and GDP forecasts are falling so we might even enter a recession later his year. There is doom and gloom all around with the war in Ukraine not helping and commodity prices rapidly rising impacting both businesses and consumers.

A good example of the concerns of many companies was evident in the announcement by 4imprint Group (FOUR) this morning. Their trading statement said: “The Board is conscious that only four months of the year have elapsed and that current geo-political and broad economic factors may well affect the Group’s performance during the balance of the year. In particular, we are cognisant of potential issues relating to possible further COVID variants, supply chain disruption, inventory availability, increasing cost of product, availability and cost of labour, the effect of inflation on our customers’ budgets and the general threat of economic recession”. They are talking about the USA which is their major market but they could just as well have been discussing the UK.

Despite the fact that revenue so far this year has been up 27% over the last normal year of 2019, the company is clearly worried about the future. There have been similar statements from many other companies.

Another good example of the problems faced by many companies was a comment by Up Global Sourcing (UPGS) in a webinar yesterday. Everybody might be back in the office but the impact of higher shipping costs is having an adverse impact of 4% on their gross margin. They are looking for automation to reduce man hours and hence other costs.

We might currently have full employment but that is not going to last I suggest.

I think this might be one year to exit stock market holdings which will at least enable you to avoid monitoring your market holdings while you are on your summer holidays. Or at least move to holding shares that may be less volatile or less impacted by current economic trends.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Strategic Investment Review

As it is a new Tax Year when one can put another £20,000 in one’s ISA I have reviewed my investment portfolio and tax position. To become an ISA millionaire and maximise the tax advantages of saving via ISAs you need to put the maximum in each year if possible and the sooner during the year the better.

One thing that has occurred to me is that with my portfolio showing good returns in the last few years I need to increase the amount in my will that I give to charity so as to reduce my IHT bill. The rate of Inheritance Tax is reduced by 10% — from 40% to 36% — where at least 10% of the net estate is left to charity. So I shall add a codicil to my will to amend the figure I give to Leicester University who are doing some good work on kidney disease.

In the short term we are also donating to the DEC Ukraine Humanitarian Appeal – see https://www.dec.org.uk/ . I recommend it because it looks like the war will continue for some time and the need for basic support such as food and shelter is urgent.

As regards investment strategy, with inflation rising I think property companies are good bets. They often have indexed linked rent reviews and some sectors of the commercial property market such as warehouses and self-storage companies have been doing well. I expect those trends will continue and property is a defensive investment in the current uncertain financial environment. But I will avoid retail property investments unlike my local Bromley Council who I have just discovered are overweight in them in an investment fund. It seems like other Councils they saw investment in property as a way to increase income at little risk – Croydon came seriously unstuck with this strategy and effectively went bankrupt as a result eighteen months ago.

Another area which is surely worth adding to is the renewable energy sector following the publication of the Government’s energy strategy. The AIC have published an interesting note on this subject which gives the performance of Alternative Energy Trusts over the last few years. Most have done well over the last 5 years and have good yields. I own several of the companies listed in the AIC note and am likely to increase my holdings in them.

The comments of some of the fund managers on nuclear energy are unfortunate. It is a relatively safe technology and one of the few alternatives that can supply a good base load while wind and solar are so intermittent which batteries can only help with to a degree. But the Government is moving much too slowly in building new nuclear plants.

The AIC press release is here: https://www.theaic.co.uk/aic/news/press-releases/must-do-better

Am I giving up on technology stocks? No because many of them have pricing power that can protect their profits against inflation. Software companies for example are not affected by inflation in commodity prices and should have no supply chain difficulties although staff costs can rise. I will simply be selective about new investments in technology companies.

A good example of the defensive quality of some technology companies was given by a trading statement from Diploma (DPLM) this morning. They said “The Group’s trading performance so far this year has been strong, with double digit underlying growth in Q2 (consistent with Q1) driven by our organic revenue initiatives, market share gains and robust demand”. The share price is up over 10% at the time of writing and there is a positive “outlook statement”. But the share price is still less than it was last year when technology stocks were all the rage.

Having lived through the 1970s I do not fear inflation. But it’s clear that it is best to invest in assets even by borrowing to do so as inflation will wipe out your debts. But I won’t be borrowing to invest in the stock market which can be called “gambling with other people’s money”. This is not the time to gear up a portfolio in my view. Maybe I should buy a new car?  Average rates on car loans are still low.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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An Exciting Week for Investors

Last week was certainly an exciting week for stock market investors. The FTSE 100 index fell sharply on Thursday but recovered to rise almost 4% on Friday. The US S&P 500 showed a similar pattern. This was no doubt from the initial reaction to the Russian invasion of Ukraine with an initial panic followed by a more considered response.

Sanctions against Russia might have some impacts particularly on oil/gas prices but Russia is not the only producer.

I thought it interesting to look at the Ukrainian and Russian stock markets. Yes Ukraine has more than one but all trading was suspended by their regulator on Thursday. Moscow’s stock market was hit by a big collapse with the RTS index falling by 38% on Thursday and the rouble plunged to a low against the dollar. But there was a significant recovery on Friday. The bounce back on Friday in the markets seems to be based on some relief than sanctions were not as extreme as feared.

But there is a call to exclude Russians from the Swift international payment network. I recall reading a note some years ago that explained how interbank settlements still took place during the Second World War between the combatants. It would seem unwise to block access to Swift which would be damaging not just to Russia particularly as there are alternative payment networks that are already in place or could soon be created.

There is a book that was recommended by Jonathan Davis at a Mello event last week entitled “Wealth, War and Wisdom” by Barton Biggs which covers how the turning points of World War II intersected with market performance. I have ordered a copy to read and may write a review of it later. In my experience big political events have a big short-term impact as investors hunker down and cease buying or selling until the picture is clearer. With no trading prices rapidly fall. But markets can soon recover as soon as the long-term picture is clearer. It is best not to take hurried decisions about your shareholdings in such circumstances.

As it stands the Ukrainian army is apparently putting up a better fight than was expected although the fog of war is clouding the picture with reporting of military activity being mainly anecdotal. I recall looking at the comparative armed forces numbers of Russia and Ukraine a week ago and the 190,000 Russian troops surrounding Ukraine did not seem enough to ensure a quick victory even if Russia had more heavy equipment to hand. Russia does not seem to have captured the main communication centres, the TV and Radio stations or the heads of Government which is the typical prerequisite for a coup d’état. Even if Russia manages to install a puppet government it could be a long-drawn out conflict and Ukraine is a big country. As Russia and the US learned in Afghanistan, it’s easier to get into a country than to get out. Establishing long-term regime change is very difficult when most of the population opposes you. That is particularly so when there are lots of weapons in the hands of the population which is apparently now so in the Ukraine with many volunteers willing to fight. They may be short of ammunition in due course so the question to ask is how they might get resupplied? We may simply end up with another proxy war with Russia and the West fighting a guerrilla war in Ukraine by supporting local militias with very negative impacts on the local civilian population.

The outlook is bleak unless there is some desire for a political settlement that meets the aspirations of both Russia and Ukraine which does not seem impossible to me.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Are We in a Bear Market?

There are a number of ways of defining a bear market. One is that it describes a condition in which securities prices fall by 20% or more from recent highs amid widespread pessimism and negative investor sentiment. In my stock market portfolio we have not quite reached that level and the FTSE All-Share index has certainly not declined that much mainly because it’s full of big oil and mining companies where commodity prices have been rising. But I certainly have a feeling that many investors who have been pulled into technology stocks or small cap companies in the last couple of years have been running for the hills.

The economic and political news is bad with rising inflation and rising taxes, and potentially a war in Ukraine. Any sanctions against Russia will have negative economic consequences both for us and Russia.

It is this combination of factors that are likely to create the conditions for a declining stock market particularly if liquidity is taken out of the market by rising interest rates.

One hates to predict where the market is headed as unpredictable events can have as much influence as human emotions, but trends are certainly worth following.  As a result I had been moving more into cash over the past few months and if I have bought any shares it’s in high-yielding stocks and short duration bond funds. Holding cash is of course a good hedge against stock market volatility or declines, but there is a limit as to how much cash you should hold in a portfolio and for how long. Most very successful investors seem to remain fairly fully invested and with inflation rising it would be a mistake to be holding too much cash whose value is eroded by inflation.  

I am not yet convinced that it is time to move back into more speculative stocks in a big way – they still don’t seem cheap enough to me. But here’s a good tip from Chris Dillow in last week’s Investor’s Chronicle: “In the long run, there is no correlation across countries between growth and returns”. In other words, don’t bet on making money by investing in apparently high-growth economies or sectors. He says “in the past 10 years, for example, China’s fast-growing economy has delivered worse returns for equity investors than the slow-growing economies of many European countries such as France, Switzerland or the Netherlands”.

That is one lesson I learned many years ago. It’s a simplistic approach to investment to back the obvious growth economies but it simply does not work.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Year End Review of 2021

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2021. I’ll repeat what I said last year to warn readers that I write this is for the education of those new to investing because I have no doubt that some experienced investors will have done a lot better than me, while some may have done worse.

It’s worth bearing in mind that my portfolio is very diversified across FTSE-100, FTSE-250 and smaller company (e.g. AIM) shares listed in the UK. I also hold a number of UK investment trusts which gives me exposure to overseas markets, and some Venture Capital Trusts (VCTs). Although I have some emphasis on AIM shares, they are not the very speculative ones.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool. Consistency is not applauded on social media. But here’s a summary of my portfolio performance which turned out to be a good year despite the damage done to economies by the Covid pandemic. Total return including dividends was up 19.3% which I consider a good result bearing in mind that the FTSE All-Share was only up 14.56% which I use as my benchmark (the latter figure does not include dividends though). But the FTSE All-Share is dominated by FTSE-100 companies – the dinosaurs of the financial world in many cases – of which I hold relatively few.

During the year, and in the previous year, I had moved to a more defensive portfolio position as I thought the market was somewhat overvalued although I retained a strong emphasis in technology stocks. Cash holdings increased as I sold out from a number of companies early in the year when over-optimism for a quick recovery from the pandemic seemed common. I did purchase more holdings in property companies where REITs and property investment trusts seemed to me to be on excessively high discounts and warehousing companies such SEGRO and Urban Logistics benefited from more internet retailing. Self-storage property company Safestore also contributed. Bigger holdings in property companies also helped total dividends received to increase, with good pay-outs from VCTs also making total dividends received to be the highest level for 4 years.

Smaller technology stocks were a very mixed bunch – Tracsis was up substantially despite the fact that I expected train companies to cut back expenditure as their passenger revenue must have fallen. Clearly it’s a sector more reliant on government subsidies than simple economics to make money. Other smaller winners were DotDigital, SDI and Judges Scientific but GB Group fell substantially. Diploma and Reach were other winners supported by takeovers at Ultra Electronics and Wey Education. I had no substantial individual company losses during the year which always helps overall portfolio performance. Perhaps I am getting better at avoiding the duds.

My investment trust and fund holdings all did well often because they have substantial US holdings. I failed to beat Terry Smith’s performance at Fundsmith for yet another year but Scottish Mortgage and Polar Capital Technology produced only moderate performances as all but mega-cap technology stocks fell out of favour.

What does the future hold? Inflation is rising as Governments pump money into the economy in response to the epidemic while interest rates are still at record low levels. It’s certainly no time to be holding bonds or other fixed interest stocks. It’s a return to the good old days when you could buy a house that was rapidly inflating in price when the mortgage cost was much lower than the inflation gain. So I expect house builders to continue to do well as there is still a shortage of housing in some parts of the country despite a few people returning home to the EU. Brexit turned out to be a damp squib so far as most UK people are concerned and I see no great change in that regard in the coming year.

A year ago I said “some things may permanently change as we have become used to doing more on-line shopping, working from home, travelling less and getting our education on-line”. Those are the trends that will continue I suggest. The movement to improve the environment and halt global warming which is requiring substantial changes to the UK and other economies continues to be a priority for the Government and many businesses although there is too much hot air spouted on the subject. One has to be very careful about enthusiasm for “hot” market sectors – they often turn out to be flashes in the pan.

It looks like we will need to learn to live with Covid-19 as variants arise which hopefully will be less virulent. You can expect to receive repeat vaccinations against Covid variants – I already have my fourth lined up. Life may gradually return to normal – at least I hope so.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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A Bumper Edition of Investors Chronicle

Over the Christmas period we were treated to a bumper edition of the Investors’ Chronicle. And I have to say that this magazine has improved of late under the editorship of Rosie Carr. Whether she has a bigger budget or is just picking better writers I do not know but she certainly deserved the job after working for the magazine for many years.

I’ll pick out a couple of interesting articles from the latest edition:

“What does it cost to be an effective private investor” by Stephen Clapham. He comments that “private investors are, in my experience, not nearly willing enough to invest in tools and education to improve the performance of their portfolios”. I would agree with that. They tend to rely on broker/platform recommendations, newspaper articles, or tips from bulletin boards instead of doing their own research using the tools that are available.

Stephen mentions services such as SharePad, Stockopedia, VectorVest and Sentieo. I am not familiar with the last two but I use both SharePad/Sharescope and Stockopedia as they provide slightly different functionality. Plus I use spreadsheets to record all transactions and dividends and to monitor cash. This enables me to manage several different portfolios held with multiple platforms/brokers comprising 80 different stock holdings with some ease. I have been doing this since my portfolios were much smaller and less complex so I would recommend such an approach even to those who are starting to invest in equities.

As the article mentions, half the members of ShareSoc have a portfolio of over £1m and may be representative of private investors so they may be making profits of well over £50,000 per year from their investments, particularly of late. A few hundred pounds per year to help them manage their portfolios and do research should not be rejected if it helps them to improve their portfolio returns by just a fraction of one percent, which it should surely do.

Altogether the article is a good summary of what a private investor should be using in terms of services to help them.

The other interesting article is entitled “The Generation Game” by Philip Ryland. It highlights the declining performance of UK stock markets since the 2008-09 financial crisis. He shows graphically how the FTSE-100 has fallen way behind the S&P 500 and the MSCI World Index. It makes for pretty depressing reading if you have been mainly investing in UK large cap stocks in the FTSE-100.

It reinforces the message that if you want a decent return from your equity investments you need to include overseas markets in your holdings and small and mid-cap companies in the UK. That is what has worked in the last few years and I expect it to continue to be the case.

Why? Because the growth is present in those companies while the FTSE-100 is dominated by dinosaurs with no growth. Technology stocks are where growth is now present when there are few in the FTSE-100. In fact the market cap of Apple now exceeds the whole of the FTSE-100.

The UK has become particularly unattractive for technology stock listings due to excessive regulation and over-arching corporate governance rules that divert management time. Meanwhile the UK economic environment still relies a great deal on cheap labour provided often by immigrants while our education system fails to encourage technical skills.

The Government has taken some steps to tackle these issues but not nearly enough while politicians have spent time on divisive arguments about how to deal with the Covid epidemic and about trivia such as Christmas parties and redecoration of the Prime Ministers apartment.

There are of course bright spots in this economic gloom and generalising about the state of the country is always going to lead to mistaken conclusions. We are probably no worse than most countries if you examine their politics and the UK economy does seem to be relatively healthy.

But the key message is that if you want to make real money investing in equities you need to be selective and not just follow the crowd, i.e. don’t just rely on index trackers.

Those are my thoughts for investment in the New Year.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Stock Market Investing – It’s a Doddle

An amusing announcement today was by AJ Bell. They are launching a new app-only investment platform to be called “Dodl”. Clearly they wish to suggest that stock market investing is a doddle when I think it is anything but. After 30 years of investing, I still find that some of my new share picks don’t turn into profitable ones. There is no simple formula for picking successful investments, but experience does seem to help a lot.  They should have called the app “Tricky”.

AJ Bell clearly intend to attract new investors by making stock market investment appear simple and fun. To quote from their press release: “Investing needn’t be scary, with Dodl’s friendly monster characters on hand to guide people through the application process, as well as providing information to help people make their investment decisions”. To make it even more attractive the new app offers zero commission trading but there will be an annual charge of 0.15% of the portfolio value for each investment account with a £1 per month minimum charge.

This may prove a competitive threat to other investment platforms and encourage even more consolidation among providers. And it’s clearly a response to the zero commission platforms such as eToro that have been attracting new investors of late.

Is this a positive move? Or will it encourage people to become stock market traders and speculators rather than long-term investors? If you make investment too easy, i.e. to be done at minimal cost and without prior thought or research is that not positively dangerous?

I also feel it could be that these new low-cost platforms might be gaining business without a sound understanding of the real cost of doing business, i.e. they are using it as a loss-leading marketing approach in the hope of making money later. That was the reason many alternative energy suppliers recently went bust.   

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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