Good Articles in Latest ShareSoc Informer Newsletter

Are you fed up with reading about the antics of media personalities in the national press? I know I am. For some more intelligent and useful material, ShareSoc has just published its latest Informer Newsletter on stock market events.

It does include a couple of short articles from me which is not unusual but other interesting ones cover:

  • Can AI give me an edge by Marcus Breese. His conclusions seem to be similar to mine, i.e. probably not as AI cannot be relied upon to give the right answers.
  • A report on the “digital only” AGM of Marks & Spencer by Cliff Weight. Amusing to see my former colleague Gavin Palmer turned up physically regardless. It’s clear that digital-only meetings are unsatisfactory in several regards. Hybrid events are surely preferable.
  • Some comments on the Flint Interim Report on digitisation which is quite rightly called “a betrayal” as the recommendations therein might remove shareholder rights and defeat shareholder democracy.
  • A note on the threat to investors in SIPPs if the manager goes into administration based on events at the Hartley Pensions manager. This certainly needs pursuing.

In summary, an exceedingly useful newsletter and shows how ShareSoc is doing a great job at representing retail shareholders’ interests.

Roger Lawson (Twitter  )

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Are We Nearing the End of the Bear Market?

There were glimmers of light in the UK stock market last week. I actually purchased a few shares to add to my current holdings although I still have a lot of cash in my portfolios. It is worth repeating what Mark Slater of Slater Investments Ltd said at the end of the week:

“The bear market that started in late 2021 is now getting fairly long in the tooth. It has led to significant de-ratings across the board, with a small number of exceptions among the megacaps that dominate the FTSE 100 index. We have now seen a run on a major bank. Many investors are trying to work out which is the next shoe to drop – perhaps a real estate collapse, perhaps a worse recession than expected. We are well and truly into the disillusionment phase. Sir John Templeton said that “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Conversely, bear markets kill off the euphoria of the previous phase quite quickly and then grind away at any residual optimism until almost all market participants are deeply pessimistic. Given the current mood, the odds are that this bear market is nearing its end.

We are not advocates of market timing for the simple reason that it is extremely hard to get it right, both at the point of entry and exit. Investors who can do this are extremely rare, and most of them get it badly wrong at some point. Instead, we prefer to buy businesses we understand that can compound their earnings over time. We expect the majority of the companies we own to do this even though the economic backcloth is challenging. Some other companies we own will probably see their growth rates slow temporarily but we expect them to improve their competitive positions during tough times by taking market share or by making cheaper acquisitions. Only a handful of companies in the portfolio have experienced problems but these are typically due to unforced errors or things like China’s lockdown, issues that are temporary or fixable.

We have not seen so many companies we own trade on single digit PE multiples since 2008-9. Now, as then, as companies grow their earnings while their multiples fall they are getting cheaper and cheaper. It is analogous to holding a beach ball under water. Sooner or later you cannot hold it down any longer and it jumps above the water. For a more accurate analogy, someone would also be pumping air into the beach ball while you try to keep in down.

It is fashionable to be “down” on the UK, especially after the Truss budget. It is therefore worth remembering that the UK is not all doom and gloom. The Mid 250 index has broadly matched the earnings of the S&P 500 over the past twenty years. The UK market also produces a higher proportion of “tenbaggers” than the US market. Michael Caine might say that “not a lot of people know that” and he would be right. Our view is that we saw peak gloom about the UK last autumn.

While we cannot predict the end of the bear market with any accuracy we also believe we should not try to do so. We are comforted that we own good businesses that are cheaper than they have been for a very long time. If we look ahead a couple of years rather than a couple of months, we expect to make money When things are going wonderfully, people can rarely imagine that they can go wrong. Similarly, when times are tough, people often struggle to imagine that they will one day be wonderful again.”

These are wise words from a very experienced stock market investor.

Roger Lawson (Twitter: )

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Warren Buffett’s Letter to Shareholders

Warren Buffett has published his latest annual letter to shareholders in Berkshire Hathaway. As usual it contains several words of wisdom on investment and I’ll pick out a few interesting points:

He does not believe in efficient stock markets and says: “It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. Efficient markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.

He relates how his capital allocation decisions and stock picking have been “no better than so-so” offset by a few good decisions and good luck. He emphasises this lesson for investors of holding on to your winners but selling your losing investments: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well”.

Buffett justifies share buy-backs which Berkshire did in 2022 as did some of their investee holdings. He says: “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases”.

Comment: Management often have a strong incentive to advocate share repurchases as their incentive schemes are often based on earnings per share. Also they think it might help the share price. I frequently vote against share buy-backs because there are usually better ways for a company to use any surplus cash. Buffett may be one of the few people who can rationally value the benefit of share buy-backs and can be trusted to act in the interest of shareholders.

Charlie Munger, Warren’s partner and aged 98 has some interesting comments on railroads (they own BNSF). He says: “Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never”. As railroads are a natural monopoly because it’s very difficult to build new ones, one wonders why British railways consistently lose money while BNSF is very profitable. Management is surely the difference.

Warren continues to “bet on America” but the key message is invest in companies that can grow and compound their earnings and then have patience.

Full Newsletter Text:

Roger Lawson (Twitter: )

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It’s All Good News Today

With my stock market portfolio picking up in value, the even better news was that Nicola Sturgeon is resigning as First Minister of Scotland. I don’t often comment on politics but Ms Sturgeon was a very divisive leader who chose to push for Scottish Independence in the face of any rational analysis of what might happen to Scotland economically if that was achieved. Even after she lost the referendum vote on it she persisted in pushing for it. She also managed to mismanage the Scottish NHS and more recently fell over backwards over what is a woman.

Whenever she spoke on television I was revolted by her ignorance of the outcome of the policies she was pursuing. Like Sadiq Khan in London, she blamed all her problems on central Government when they were of her own making.

Other good news is that inflation has fallen slightly to 10.1% and the sun is coming out. Crocuses are flowering in our garden and spring is on its way.

In addition I had a phone call from Computershare about my problem with Diploma dividend payments (see previous blog post) and it seems they are going to waive the claimed administration fee. It always pays to complain!

What cheered me up also was reading about the problems of Rolls-Royce (RR.) in Investors Chronicle. The article headlined “Is Rolls-Royce in decline?” and covered recent comments by the new CEO such as “Every investment we make, we destroy value”, “We underperform every key competitor out there…” and “This is out last chance. We have a burning platform… it cannot continue”. What a way to demotivate staff or put a rocket under their backsides.

I worked very briefly for Rolls-Royce 50 years ago and did hold the shares a few years back – sold at 300p in 2015 when they are now 108p. So I missed that falling knife. I sold way before the pandemic hit airline travel and sales of jet engines because I came to the conclusion that their accounting was way too optimistic.

Incidentally I am currently reading a book entitled “Power Failure” on the rise and fall of General Electric who are of course one of the competitors for Rolls-Royce in the aero engine market. I may write a review of the book at a later date. It’s only 800 pages long. Oh so I hate these lengthy tomes when the authors could have communicated their message in so many fewer words.   

Roger Lawson (Twitter: )

The New Realities and Private Healthcare

The editorial in this week’s Investors Chronicle was full of doom and gloom. Under the headline “Facing up to new realities” the editor said “The threats identified by the WEF (World Economic Forum at Davos) include climate change, the cost of living crisis, geopolitical confrontation, high debt levels, recession, low growth, social unrest and cyber crime. These crises are converging, it says, to shape a unique, uncertain and turbulent decade to come”.

All I can say is that I have seen all this before and the problems we face are actually relatively minor in comparison with the difficulties faced in previous decades. Having lived through the 1970s when the UK economy was on its knees, we only face minor handicaps now in my view. The WEF is talking us into a recession as when confidence in the economy falls then businesses stop investing for the future. But this is a temporary phenomenon and when we get out of the gloom of winter the picture may be a lot brighter.

Another interesting article in Investor’s Chronicle was on private healthcare which had the headline “Private care likely to boom amid NHS crisis” and I would not dispute that comment. It covered Spire Healthcare (SPI) one of the few medical companies that are UK listed. I was particularly interested in the article because Spire have recently acquired The Doctors Clinic Group who provide private GP services mainly in the London area. I actually used the service a month ago when I got fed up with trying to book an appointment with my NHS GP who have a dysfunctional web site and hopeless phone service. Doctors Clinic was a very efficient, slick and relatively low cost service which I would recommend. Appointments can be made and in person relatively quickly.

But the acquisition by Spire was a relatively small one for them. The financial results of Spire over the last eighteen months do not inspire confidence. Profit margins are poor with only “unadjusted” profits of £4.2 million on revenue of £598 million in the last 6 months. The results were apparently hit by cancellations due to the covid epidemic and staff absences for the same reason.

There is clearly great potential to expand the private GP service as people give up on the NHS but Spire seem to be no better than the NHS at operating a service that more than covers the costs of provision.  And this is one of those companies that “polishes” their financial figures by reporting Adjusted EBITDA and even adjusted cash flows so interpreting their financial figures is not easy.

Investors would have more confidence in the company if they focussed on unadjusted financial figures plus better profit margins and return on capital which have never been brilliant in the last decade.

Roger Lawson (Twitter: )

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Lifting the Gloom, But Not at Halfords

I think I have been suffering from Seasonal Affective Disorder (SAD). It seems to have been raining and cloudy since before xmas and the stock market did not perk up until the last few days.

Even today one of my holdings, Halfords (HFD) issued a profit warning which caused the share price to drop by 20%. But the losses on that were offset by significant rises in a number of my other holdings including some technology stocks and property REITs.

Is this the end of the bear market? I don’t know but I doubt it. The economic prospects are still poor. However I have cautiously purchased a few small AIM company shares including GB Group (GBG), Eckoh (ECK) and RWS (RWS). These are not share tips but more a strategic move to increase my holdings in smaller companies which now seem good value when I have a large cash balance at present.

What was the problem at Halfords? Softer than expected cycling and tyre markets was one aspect but enthusiasm for cycling is bound to fall in very cold and wet weather. Another problem was difficulty in recruiting skilled labour in Autocentres.

These might both be temporary problems so I am not planning to reduce my holding which was mainly purchased before the recent ramp up in the share price after it was enthusiastically tipped in several publications. That shows the danger of following the crowd.

Roger Lawson (Twitter: )

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Fundsmith Annual Investor Letter

Terry Smith has published his thirteenth annual letter for investors in the Fundsmith Equity Fund (which I hold). As usual it’s a good mixture of sound analysis of market events and witticisms. I’ll cover a few significant points:

The fund underperformed the MSCI World Index with a total return of minus 13.8%, which was better than my own portfolio. As he points out the only way to beat the market last year was to hold energy stocks and nothing else. But both I and Fundsmith have a focus on growth companies so we have been under-weight in the dinosaurs of the investment world.

As Terry says: “Whilst a period of underperformance against the index is never welcome it is nonetheless inevitable. We have consistently warned that no investment strategy will outperform in every reporting period and every type of market condition. So, as much as we may not like it, we can expect some periods of underperformance” which is a fair comment.

Terry points out that we have gone through a period of “easy money” when central banks ignored the consequences of their actions. He says “One of the problems of easy money is that it leads to bad capital allocation or investment decisions which are exposed as the tide goes out”.

He is particularly critical about the management of Paypal and Facebook  (Meta) plus makes negative comments on Alphabet and Amazon and their expenditure on non-core businesses. He is scathing about the failure of some companies in which the fund has holdings to engage or even to provide information about the return they are getting on investments. He says: “What I am complaining about is the bipolar response some companies have to long-standing shareholders versus newly arrived activists”.

He has a particular attack on Unilever as in previous years and makes this acerbic comment on their marketing of soap: “When I last checked it was for washing. However, apparently that is not the purpose of Lux, the Unilever brand, which apparently is all about ‘Inspiring women to rise above everyday sexist judgements and express their beauty and femininity unapologetically”.

Lastly he attacks the exclusion of share-based compensation from financial reporting which can completely distort comparisons with other company’s figures.

In summary, another thoughtful report from Terry Smith and I am happy with the funds continued focus on investing in companies with a high return on capital and high margins with good cash conversion.

The Fundsmith EquIty Fund letter can be read in full here:

Roger Lawson (Twitter: )

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Year End Portfolio Review of 2022

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2022. 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.

I have a relatively large proportion in smaller company and AIM shares with a strong emphasis on growth technology stocks. This explains my relative poor performance this year.

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 – this year it is certainly the latter. Here’s a summary of my portfolio performance which turned out to be a very poor year. Total return including dividends was a negative 19.3% which matches exactly my positive return in the previous year. In other words I managed to completely wipe out the previous years’ gains!

This is my worst yearly performance wise since 2008. The chart below showing capital returns on our portfolios since 1997 versus the FTSE All-share highlights the impact:

The negative return last year compares with the FTSE All-Share down 3.2%, the FTSE Small Cap down 30.6%, the FTSE AIM-100 down 30.5%, the S&P 500 down 14.2% and the NASDAQ down 27.7%.

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.

I sold a significant proportion of the portfolio during the year as prices declined and moved into more defensive stocks such as big miners and oil companies. This resulted in total dividends rising by 29% over the prior year so at least income is keeping up with inflation!

I also purchased more holdings in property trusts and REITs which proved to be a mistake as they fell substantially although that contributed to the increase in dividends received. The enthusiasm for warehouses and self-storage companies disappeared during the year. SEGRO, Urban Logistics, Safestore and TR Property Trust were big fallers, but I continued to hold them.

VCTs tend not to move with the market in most years but not this year. They also fell substantially because their AIM holdings fell and unlisted holdings were revalued down to match, but dividends held up.

Smaller technology stocks were a very mixed bunch –DotDigital fell substantially as did GB Group after a possible bid was rejected. Bids for EMIS and Ideagen helped to offset the otherwise broad-based losses in the portfolios mainly in my small cap holdings.

Large technology funds such as Polar Capital Technology and Scottish Mortgage were big fallers. My investment trust and fund holdings were all affected by the depressed US markets.

Note I am not giving up on small cap or technology stocks – just buying a few at opportune moments until market prejudice changes.

What does the future hold? This is what I said a year ago: “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”.

And so it turned out except in the last few weeks we have had an abrupt U-Turn in Government and Bank of England policy to try and tackle rampant inflation. This has dampened the housing market and house prices are forecast to fall substantially this year (not a concern to me as we paid off our mortgage after I retired from a proper job over 25 years ago).

Interest rates may still rise further until we near the next general election when economic stimulus and more QE may look attractive, but I have no urge to move into bonds in a big way. Not until the Government stops trying to manipulate financial markets.

Postscript: Interesting to note that the CFP SDL Buffettology Fund managed by Keith Ashworth-Lord achieved a return of -23.4% for the year. This is an “unconstrained” fund with a focus on growth stocks and with a good historic record. Similarly reports on the web of the performance of private investors indicate a very mixed outcome. Perhaps my performance was not so bad in comparison after all.

Roger Lawson (Twitter:  )

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The Outlook for Stock Markets and Bank Runs

It’s that time of year when financial commentators like to pontificate on the future for the stock market in the coming year and tip sheets give their hot share tips for the New Year.

As regards economic forecasts and how the stock market will perform I can do no better than quote John Littlewood in his book “The Stock Market”:

The sequence of bull and bear markets in the 1950s shows a reasonably strong correlation with changes in the direction of Bank rate. This most simple of yardsticks has been underestimated as a guide to the direction of equity markets. It was to prove to be the perfect indicator in 1958 when there were 4 further reductions in Bank rate, in half-point steps, to 4% on 20 November 1958, and the FT Index established a new all-time high of 225.5 on literally the last day of the year, passing its previous peak of 223.9 set 3.5 years earlier in July 1955.

The reason for a correlation between changes in direction of Bank rate and the occurrence of bull or bear markets is simple. Bank rate sets the interest rate for money on deposit and the yield earned on government securities. If it falls from, say, 4% to 3%, yields will settle at lower levels, prices of government securities will rise, and money on deposit will earn less. Conversely, if Bank rate is increased from 5% to 7%, as happened late in 1957, yields rise, the prices of government securities fall sharply and money on deposit earns more.

Two consequences follow for equities. There is always some broad correlation between the yields on equities and government securities, and equity yields will move upwards or downwards in the same direction as government securities. Second, if money on deposit earns more, it will make equities seem less attractive and cash more attractive, or if it earns less it will make equities look more attractive and cash less attractive. Subsequent changes in Bank rate will also tend to move in the same direction, upwards or downwards, and will further enhance the strength or weakness of equities”.

I shouldn’t need to tell readers that we are in a period of rising bank interest rates as the Bank of England tries to clamp down on inflation. That does not bode well for stock market indices although some of this has already been anticipated. The S&P 500 is down 20% over the past year which tends to lead the UK market and the FTSE-Allshare is down 2%.

Another consequence of rising bank interest rates is that high yielding shares will be favoured over those yielding little or nothing. We have already seen this process at work.

With more rises in bank rate forecast (as it should be as it is irrational that it should be lower than the rate of retail price inflation) this process is likely to continue. But readers are warned that all economic forecasts are subject to gross error so the key is to simply follow the trend. In other words, this might not be the time to be putting more money into stock markets.

I am not suggesting that investors should move wholesale out of equities and into gilts and bonds. Equities provide the best long-term hedge against inflation while fixed interest bonds lost value in high inflation periods.

As regards share tips these are subject to even bigger errors than economic forecasts although they can be worth reviewing. As someone who always falls for a good story I know not to plunge into large purchases of new share tips. I might buy a small holding and wait to see the direction of travel while I learn more about a company and its management. In other words, I buy more of the winners while selling the losers in my portfolio. This might not maximise my returns but it ensures the avoidance of big mistakes which can be so damaging to one’s wealth.

For similar reasons I never publish share tips. If I do comment on companies, it is simply to report on news, good or bad, not to try and predict the future.

Bank Runs

One of my favourite films was shown on Christmas day television. Namely “It’s a Wonderful Life”. It stars James Stewart as the manager of a small town savings and loan bank which runs into a cash flow crisis as an employee mislays $8,000 on the day a Bank Examiner visits. A run on the bank follows as news spreads around and folks queue to withdraw their savings. Stewart has to tell people that their money is not in the bank but is out on loan to people to buy their houses. Bank runs are still taking place but latterly on cryptocurrency exchanges.

The film reminded me of a seminar I attended during the crisis at Northern Rock which likewise faced a temporary cash flow problem. The panel of speakers from the financial media, including Andrew Neil, were opposed to any Government bail-out. But one member of the audience asked “would they have let Bailey savings and loan go bust? This question stumped the panel as they did not understand the reference which was a pity because the answer from anyone who had remembered the film would have been “NO” because the bank was clearly a positive contributor to the community and was only suffering from temporary problems.

James Stewart aims to commit suicide but is rescued by an angel when shown the negative consequences if he had never lived. It’s an emotionally warming story that is marvellously well acted and directed. One of those films one can watch several times over the years and still weep with joy at the happy ending. The outcome at Northern Rock was much sadder of course as the Bank of England chose not act.

Roger Lawson (Twitter: )

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PRIIPs Consultation Response, Market Close and BHP Legal Case

With the market winding down I have had the time to write a response to HM Treasury’s public consultation on the PRIIPs regulations. They include the requirement for KIDs (Key Information Documents) which I now completely ignore because there are better sources of the required information on funds and trusts.

My consultation response is present here: . I agreed with most of the recommendations.

There is a complementary consultation on the “Future Disclosure Framework” from the FCA which I may or may not get around to over the holiday period.

The UK stock market has just closed for Christmas. If there was a “Santa Claus” rally it was barely perceptible in my portfolio. There was a minor hiccup after the announcement that there will be a court hearing next April to determine whether BHP Group should face a trial over the damn burst in Brazil many years ago.

There are 400,000 Brazilian claimants and it will be the largest group litigation in English civil court history if the case proceeds. BHP said: “BHP fully refutes the claims made by the English plaintiffs and will continue to defend itself in the case, which we believe is unnecessary as it duplicates issues already covered by the existing and ongoing work of the Renova Foundation — under the supervision of the Brazilian courts — or are objects of legal proceedings in progress in Brazil”. Looks like a beanfeast for lawyers that will run for years.

As a holder of BHP shares I doubt BHP will have a problem with this lawsuit so I will continue to hold until more information comes to light.

I will probably give a full analysis of my stock market portfolio later in the New Year as I do a calendar year analysis and it takes me some time to do a full analysis.

I look forward to the New Year with my usual perennial optimism and I hope my readers have a good Xmas.

Roger Lawson (Twitter: )

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