A Correction or the Start of a Bear Market?

This week saw sharp declines in stock markets. My portfolios headed downhill consistently this week. It’s not just technology stocks that have declined but big miners also despite the fact that there have been several press articles suggesting that commodities are in a “super-cycle” and that the price of products such as copper will rise due to the inadequate supply to meet the needs of electrification required for a low carbon world. At the same time there are concerns about inflation rising with April’s consumer prices index in the USA surging by 0.8pc equivalent to an annual rate of over 4%. That may be a short-term blip but with Governments pumping cash into their economies to offset pandemic impacts, there are certainly worries that sooner or later interest rates will have to rise. If they do then the stock market may become less attractive than bonds despite an otherwise booming economy.

Is this a market “correction”, i.e. a short-term response to excessive exuberance, or the start of a bear market? Or perhaps it’s the normal “sell in May” syndrome as markets enter a quieter period during the summer as has historically been the case?

I doubt we are entering a bear market. Bear markets arise from a combination of economic circumstances and where stock market investors suffer from a deep depression about the future and head for safer havens. But there are certainly sectors of the stock market that appear to be in bubble territory and need calming down.

How this will play out is ultimately unknowable though. Predicting overall stock market trends is rather like predicting overall economic trends. Something that only fools will try to do. One can only follow the trends to see if there is a bear market developing or not. Reacting to short-term trends by selling stocks because the major indices have fallen is not likely to be a wise policy in my experience. But selling individual stocks, or a proportion of your holding, when they appear to be overpriced or in bubble territory is something worth considering.

However, moving in or out of stocks based on the vagaries of the stock market is surely the wrong approach. The prices of individual stocks are driven as much by emotion as fundamentals. Hot stocks and hot sectors can rise disproportionately because sometimes there are only buyers and no sellers as enthusiasm for their future prospects overcomes any doubts about the future risks.

The answer is surely to invest in stocks that are fundamentally sound and show all the qualities of good long-term investments, i.e. forget the short-term and look at the long-term prospects. So I won’t be selling in May because that does not match my investing style. And I will need convincing to sell at all unless I am clear that overall sentiment to a company or to the economy has changed.  

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

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Rampant Speculation, Cryptocurrencies, Buffett Meeting and Ridley Blog

With a long weekend for the May bank holiday, I took the opportunity to prepare the information required by my accountants to submit my and my wife’s tax returns (it’s many years since I completed my own Self Assessment tax returns – my financial affairs got too complicated).

After reading a good article in this weeks Investors Chronicle on Inheritance Tax (IHT), entitled “Eight things executors need to know”, I think I should have simplified my financial affairs long ago! My executors are going to have quite a job on their hands. But IHT is just ridiculously complicated. It looks like a “make work” scheme for accountants.

I have of course tried to simplify matters recently by consolidating two SIPPs on different platforms into one. The process was started on the12th January and is still not complete although most of the assets have now been transferred. As I have said before, the time and effort required to move platforms is disgraceful so I will be preparing a complaint to go to the Financial Ombudsman this week.

Having reviewed my income and expenditure figures for last year, it’s also a good time to review the state of the market. Should I “Sell in May and Go Away” as the old adage goes? Not that one can go far these days without a lot of inconvenience and expense.  

My portfolios contain a mix of individual shares and investment trusts, with a strong focus on technology stocks and small cap stocks. I certainly have some concerns about small cap technology stocks which seem to be fully priced at present, even if their futures look rosy. There are a large number of new IPOs of late where the valuations seem very optimistic. Meanwhile there is rampant speculation being pursued by inexperienced investors, particularly in cryptocurrencies and NFTs.

This is what Warren Buffett’s partner Charlie Munger said at the recent Berkshire Hathaway Meeting: “Of course, I hate the Bitcoin success and I don’t welcome a currency that’s useful to kidnappers and extortionists, and so forth…Nor do I like just shuffling out billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air. So, I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization. And I’ll leave the criticism to others”. That’s very much my opinion also.

Government debt has been ramped up to meet the Covid epidemic and interest rates are at historic lows. The concern of many is that inflation will increase as a result requiring Governments to clamp down on the economy to stop it overheating. This was a useful comment recently from the editor of Small Company Sharewatch: “The solution to the problem of lower interest rates is self-evidently higher interest rates. But the US Federal Reserve is having none of it. In the 1970s. inflation of around 15% was the problem. This was cured by higher interest rates, which got inflation down, and allowed interest rates to fall – for the next 40 years! The problem has now flipped. Low interest rates are the problem. Debt is encouraged: complacency grows; savers take on more risk; and investor mania grows. These are all likely to persist until the Fed acts”.

The economy is certainly buoyant. I learned today from attending a webinar of Up Global Sourcing (UPGS) that even pallets are in short supply. Commodities are also increasing in price as a result. I have not lost faith in technology stocks but perhaps it is best to look for new investments in other sectors of the economy – and certainly UPGS is a very different business which I now hold.

For another topical quote, here’s one from Matt Ridley in an article in the Telegraph (he always has something intelligent to say):

“The whole aim of practical politics, said HL Mencken, ‘is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.’

It is hard to avoid the impression that officials are alarmed rather than pleased by the fading of the pandemic in Britain. They had a real hobgoblin to hand, and boy did they make the most of it, but it’s now turning into a pussy cat. So they are back to casting around for imaginary ones to justify their draconian – and deliciously popular – command and control over every detail of our lives. Look, variants!

And yes, the pandemic is fading fast. The vaccine is working ‘better than we could possibly have imagined’, according to Calum Semple, of the University of Liverpool, based on a study which found that it reduced hospitalisation by 98 per cent……”.

If the pandemic and the associated fear of the population is over, no doubt the Government will ramp up the concern about global warming despite the fact that we had the coldest April for almost 100 years. Government actions in this area are already having a significant effect on some sections of the economy and I have been putting a toe into that pool. No I am not buying electric car stocks but the power generation area is certainly of interest. How to avoid the speculations and just buy good businesses that are not totally reliant on Government funding is surely the key.

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

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Soporific Webinars, Property Market, Portfolio Performance, and It Helps to be Older.

I attended three on-line company meetings yesterday – AGMs and results presentations. I have to admit that I fell asleep watching one of them which shows how soporific many of these events are. It does not help when the presenters read from a script that they have rehearsed beforehand which causes them to drone on. There is much less spontaneity than in a physical meeting.

The other common failure is that they show presentation slides at the same time that are not easily readable. That would be OK if the slides just contained bullet points in large type or graphics that reinforced the points the speaker was making but they frequently contain masses of small font text that are barely readable on a small laptop screen.  If hybrid meetings are going to be the norm in future, then more attention needs to be paid to how to do them well.

One of the presentations was by Equals CEO Ian Strafford-Taylor who had gone to his office in the City on the day. Surprisingly he said he had not managed to get a seat on the tube and there were queues at sandwich shops. So it seems life might actually be returning to City offices.

Perhaps it was coincidence but the share price of Schroder REIT (SREI) rose by 2.6% on the day and has been rising steadily since it bottomed out last July. The trust holds a mixed portfolio of commercial property. This morning the trust gave an update on rent collection which said “The Company has collected 88% of rents due on the 25 March 2021 for the quarter ending June 2021, after allowing for agreed rent deferrals.  This is ahead of the equivalent date in the previous quarter.  The breakdown of collection rates between sectors is 98% for industrial, 96% for office, 83% relating to ancillary uses and 51% relating for retail and leisure.  The Company remains in active dialogue with tenants for all rents due to be paid and expects to recover a significant portion of the outstanding amount”.

Clearly the retail sector is still one in difficulties, but the discount to NAV of SREI shares as reported by the AIC is 26% so I think there is value there if one has the patience to wait some time.

I don’t know how readers portfolios are faring of late but mine seems to be zooming up in valuation – up over 60% since the low point of the start of the pandemic in March 2020 (that’s ignoring dividends received and cash movements). There is clearly a lot of enthusiasm among retail investors for stock market investment. Is the market becoming irrational and over-valued? I would not like to say. But as a dedicated trend follower I have had some difficulty in keeping up (I tend to buy more when share prices are rising and vice versa).

It was interesting to see a report from Interactive Investor (II) who published the chart below of the performance of their clients in the first quarter of the year. Clearly there is a benefit in being old when it comes to stock market investing!

They report “all age categories trailed the FTSE World Index, which was up 4.09%, while the FTSE All Share did even better after a poor 2020, up 5.19%”. They also say though that “the average interactive investor customer portfolio – in median terms – is up 32.09% over the year to end March 2021, ahead of the FTSE All Share”.

They explain these results by saying “The outperformance of the 65 plus age group could be in part due to lower cash weightings in a rising market, and their low exposure (in median average terms) to tech stocks like Apple, Tesla or Amazon, which had a shaky Q1. No tech stocks appeared in the top 10 holdings by value (in median average terms), amongst the over 65s”.

In a quarter in which the FCA warned that some younger investors are taking on board too much risk this does not seem to be an overall trend amongst Interactive Investor customers. They have a high weighting in investment trusts but less in individual technology stocks.

But as Alliance Trust (ATST) reported at their AGM yesterday, I have underperformed global stock market indices because I don’t have big holdings in the mega technology stocks such as Tesla or Apple. They are held by some investment trusts I hold but they tend to be under-weight in them like ATST. I am not unhappy to be under-weight in very large tech stocks which certainly look to be in bubble territory to me.

I hold the stocks mentioned above.

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

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Margin Calls Not Met – $Billions Lost

On the 23rd March I warned about the dangers of the rise in speculation among small retail investors. I said this: “I suggest that buying shares on margin should be accompanied by very strong health warnings to investors and tougher regulations. It was one of the reasons for the collapse of the US stock market in the 1930s. Too many folks geared up with broker loans that were unsupportable when the market headed down. Investors were unable to meet margin calls, and the lenders then went bust”.

But this is also a problem among larger investors. Today the FT reported that Credit Suisse and Nomura – two of the world’s largest banks – faced large losses after their client Archegos Capital Management, for whom they acted as prime broker, failed to meet margin calls.

Nomura said it estimated that its claim against the client might be $2 Billion or more if asset prices continued to fall. The share price of Nomura fell by 16% as these events might wipe out its second half profits. The losses at Credit Suisse might be even higher at between $3 Billion and $4 Billion it is suggested in the FT article.

Archegos, an investment company, has been dumping shares after sharp declines in ViacomCBS and Chinese technology stocks.

The problem is that whenever a few big players become over-leveraged their failure can have the effect of falling dominoes as they trigger the collapse of other players. Even if the lenders don’t fail, the sales of holdings when margin calls are not met depresses the share prices of those holdings. In summary there are too many people betting on rising markets and trading on margin. Financial market regulators seem to have taken no notice of the growing risks attendant on this structure.

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

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The Promotion of Speculation

I was flicking through some TV channels last night and I saw an advertisement for Interactive Brokers Inc. You know the market is getting too speculative when you see they are offering margin rates of as low as 1%, i.e. you can borrow money at that rate to purchase shares.

This is some of what they say on their web site:

“Lowest Financing Costs:

We offer the lowest margin loan interest rates of any broker, according to the StockBroker.com 2021 online broker review.

Earn Extra Income:

Earn extra income on the fully-paid shares of stock held in your account. IBKR borrows your shares to lend to traders who want to short and are willing to pay interest to borrow the shares. Each day shares are on loan you are paid interest while retaining the ability to trade your loaned stock without restrictions”.

That last statement is truly surprising. So it seems you could sell all the stock you purchased on margin even though it has been lent out.

Interactive Brokers (IBKR) is a US listed company with revenues of over $2 billion. They are authorised by the FCA. The fact that they are now actively promoting their services in the UK tells you that the mania for share trading by small investors is spreading from the USA to the UK.

I suggest that buying shares on margin should be accompanied by very strong health warnings to investors and tougher regulations. It was one of the reasons for the collapse of the US stock market in the 1930s. Too many folks geared up with broker loans that were unsupportable when the market headed down. Investors were unable to meet margin calls, and the lenders then went bust.  

Borrowing to speculate on shares is like gambling with other people’s money.

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

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The Death of the High Street, and All Physical Retail Outlets

A couple of items of news today spelled out the dire situation of retailers with physical shops, whether they are on the High Streets, in shopping malls or out of town locations.

Firstly chocolate seller Thorntons are to close all their 61 shops and rely on internet orders and partner sales alone.  Thorntons has been a feature of the retail scene for many years but it had been losing money even before the pandemic hit. I did hold the shares for a time when it was a listed company but it is now owned by Ferrero. I even sold the company some software over 20 years ago and remember visiting their factory more than once. It was indicative of changing shopping habits with supermarket sales and local convenience stores taking over from specialist shops for much of their business and with internet sales being the final nail in the coffin. Some 600 jobs will disappear as a result. The vertically integrated structure (both making and selling their products) gave them some competitive advantage but not enough.

Another indication that shoppers have changed habits, and probably permanently, was the announcement from payments company Boku (BOKU) this morning. In their results for the last year the CEO said this: “Industries dependent on face-to-face contact have been decimated. Some – hospitality, for example – will bounce back when restrictions are released, but for others, the pandemic has accelerated pre-existing trends. It turns out that many people didn’t really like driving into town to go shopping and for many types of goods the switch to online will be permanent”.

I hold some Boku shares and although revenue shows another healthy increase, it still lost money last year mainly because of a big write down of goodwill in the Identity Division. One might consider that an exceptional item, although the division is still reporting a loss.

Another interesting announcement this morning was that by Smithson Investment Trust (SSON) which I also hold. In their final results, the fund manager said this: “In the Investment Manager’s view, a high-quality business is one which can sustain a high return on operating capital employed and which generates substantial cash flow, as opposed to only creating accounting earnings. If it also reinvests some of this cash back into the business at its high returns on capital, the Investment Manager believes the cash flow will then compound over time, along with the value of the Company’s investment…….the Investment Manager will look for companies that rely on intangible assets such as one or more of the following: brand names; patents; customer relationships; distribution networks; installed bases of equipment or software which provide a captive market for services, spares and upgrades; or dominant market shares. The Investment Manager will generally seek to avoid companies that rely on tangible assets such as buildings or manufacturing plants, as it believes well-financed competitors can easily replicate and compete with such businesses. The Investment Manager believes that intangible assets are much more difficult for competitors to replicate, and companies reliant on intangible assets require more equity and are less reliant on debt as banks are less willing to lend against such assets.

The Company will only invest in companies that earn a high return on their capital on an unleveraged basis and do not require borrowed money to function. The Investment Manager will avoid sectors such as banks and real estate which require significant levels of debt in order to generate a reasonable shareholder return given their returns on unlevered equity investment are low”.

This formula of ignoring physical assets is proving very successful and demonstrates how the world is changing. I am not quite so pessimistic about real estate companies but certainly those holding retailing assets are surely to be avoided.

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

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Market Speculation and Attacks on Shorters

The UK stock market has been falling this week while rampant speculation continues in US markets. It seems there was an attack by retail investors, who follow such Reddit forums as WallStreetBets, on short sellers in GameStop. Even UK investors are getting involved. This is what one investor was reported as saying in the FT: “I saw chatter about GameStop earlier this year when the share price was still below $50. The narrative was about ‘sticking it to the man’ by targeting hedge funds which had shorted the stock, such as Melvin Capital and Citron Research. I didn’t know what shorting was at the time but thought it was pretty cool that small investors could have a large impact on big ones.”

The share price of GameStop was up 63% by 11.00 am US time yesterday. In other words, it’s a typical “short squeeze”. Their market cap is $22 billion with revenue of $5 billion but no profits. The share price might not be totally illogical. Gamestop is a video games and other products retailer and has over 5,000 retail stores, but it has been closing stores of late.

One definitely gets the feeling that there are lots of new, young, unsophisticated investors in the USA speculating in the market using zero commission trading platforms. Being in lockdown, perhaps that is one of the few ways to get some excitement in their lives.

They are also trading fractional amounts of shares rather like in the old “bucket shops” in the 1920s. The growth of spread betting and CFD trading also tells you that speculation is rampant and it’s not just in the USA. It’s also happening in the UK. There is a big encouragement to market manipulation by spreading stories about companies on bulletin boards. That’s not just for ramping up the share price of a company, but for driving it down to benefit shorters.

One name the FT article mentioned was that of Jesse Livermore, an expert in stock speculation in the 1920s. It’s worth reading his book (written under a pseudonym) with the title “Reminisces of a Stock Operator”. It will tell you how it is done. But bear in mind he went bust more than once and committed suicide after the final bust.

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

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Ideagen Results, Stock Speculation and Verici DX

Ideagen (IDEA), which is one of my long-standing holdings, announced their interim results this morning. There were no surprises in them but it included a note that David Hornsby, Executive Chairman, would be retiring this year. I think I first met David at a Mello event in 2012 and I purchased some shares soon after because I was impressed by how much he knew about selling software. That turned out to be a wise investment as he has grown the business many times subsequently. My shares were originally purchased at about 15p and are now 285p.

A recent conversation with David did give me the impression that it might be time for him to retire. I submitted a written question to the AGM in October, but it was not answered so I took it up later. The question related to the write off of past sales transactions as being uncollectable which were treated as an exceptional item in the accounts. David then calls me and tells me he did not consider the question reasonable (or “somewhat crass” as he later called it). He also suggested if I was not happy, I should sell my shares. This is not the kind of aggressive response I expect from a Chairman to questions that might have been “pointed” but not unreasonable. I also tried to attend the on-line results presentation this morning but for some technical reason it did not allow me to register. Not at all satisfactory. Anyway thanks for the ride David.

Stock Speculation

There is a very good article in the Financial Times today under the headline “Retail investors rush to find the next stock market unicorn” by James Bianco. It reported how investors have piled into technology stocks in recent months. A Goldman Sachs index of non-profitable tech stocks has risen by 400% since March.

It notes three things have dramatically changed retail investor perceptions of investment in small cap stocks: 1) the cutting of broker commissions to zero; 2) the adoption of fractional purchases; and 3) the increase in savings helped by Government assistance payments (which Biden promises to increase further). In effect money is being spent “chasing unicorns”.

If you read my recent review of the book “Boom and Bust” you will realise that these changes (a rise in liquidity from lower trading costs and money being pumped in) are common drivers of speculative bubbles. It is surely time to be wary.

Verici Dx

I am still on the look-out though for interesting small cap stocks. One company I thought I might understand is Verici Dx (VRCI). The company is focused on producing better control of immunosuppression in kidney transplant patients who often suffer from damaging graft rejection. That may not be obvious from current blood tests used to monitor transplants.  As a transplant patient of 20+ years standing I thought I might understand the business.

So I read the prospectus for their IPO on AIM last November. Market cap is now over £100 million but with no revenue or profits. The company is a spin-off from Renalytix AI (RENX) with a similar financial profile and market cap of £640 million but they do expect some sales in 2021.

Both companies have some interesting technology which might certainly be beneficial to kidney disease patients, but the technology is not just unproven but adoption by clinicians might be slow and there are potential competitors.

I consider the valuations way too high for such early-stage businesses even if the potential markets for the technology might be large. A frothy market for such companies puts me off investing until they actually show some revenue. Perhaps these are companies to keep an eye on rather than jump in now.

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

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More on Year End Review and Impact of Population Fall

After writing a review of my portfolio performance for last year (see https://roliscon.blog/2021/01/04/year-end-review-better-than-expected/ ), which I only considered as “satisfactory” being well ahead of my FTSE-AllShare benchmark, I have noticed quite a number of investors on Twitter claiming to achieve 40%, 50% or even higher returns. How did they achieve that? Or was it a case of only those who achieved good returns reporting them?

By comparison Citywire ran an article that compared the performance of professional fund managers which suggested a balanced growth portfolio might have returned 5% – see  https://citywire.co.uk/funds-insider/news/how-did-your-portfolios-performance-in-2020-compare-to-the-pros/a1447576?  

First 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.

It’s interesting to look at the Annual Reports of two VCTs which were recently issued – Unicorn AIM VCT (UAV) and Baronsmead Second Venture Trust (BMD) and which I hold. Unicorn reported a total return of plus 20.3% to the end of September when historically they have been somewhat pedestrian and seem to buy any AIM shares on offer with the result that they have a very large portfolio and probably track the AIM index.

The FTSE AIM 100 Index total return was 20.6% over last year, massively outperforming the FTSE 100. It is very clear that unlike in most years, when AIM VCTs tended to be outperformed by private equity VCTs, last year was very different. AIM market shares, which often have a focus on technology, clearly benefited greatly in comparison with FTSE shares which includes many retailers, property companies, banks and oil companies.

BMD own a mixed portfolio of unlisted and AIM shares and this is what the Chairperson had to say on their performance: “The recovery of the public portfolio emphasises the benefits of having a mixture of private and publicly listed companies in the portfolio. Over the long-term, the return profiles of the quoted and unquoted portfolios have proved to be complementary with both asset classes delivering robust performance”.

It is very clear that the way to achieve great portfolio performance in the last year was to run a very concentrated portfolio of a few AIM shares and ignore the FTSE-250 companies (down about 5 % over the last year at the time of writing) and the FTSE-100 companies (down about 12%). But such a portfolio would be very risky of course and require very active monitoring and trading. It might also be great in any one year but perhaps not so consistently good over several.

This is the time of year when tip sheets publish their reviews of last year’s recommendations and their tips of the new year. Techinvest have a good track record in that regard but their 2020 tips only delivered an average gain of 9.8% so I am not feeling too unhappy about my own portfolio performance. Am glad to see I already own a number of their 2021 tips.

What are my expectations for the coming year? I rather expected the stock market to fall in the new year after the “Santa Rally” and some stocks have but it still seems to be remarkably buoyant. Is this because all those wealthy octogenarians who own shares have booked their Covid-19 vaccinations and so are in a positive frame of mind? Perhaps so and it has certainly improved my morale having just got a date booked for one despite me being only 75.

The other very good news was an article in the Daily Telegraph today that reported that the UK population is “in the biggest fall since the Second World War”. The over-population of our crowded island, particularly in London and the South-East, has been one of my major concerns for some years. This has led to congested transport systems and a major shortage of homes.

The population reduction is not because of deaths from Covid-19 which have only risen slightly above the normal levels but an “unprecedented exodus of foreign-born workers” resulting in a fall of 1.3 million in 2020. The largest fall was in London where it may have been 700,000. The article also suggests there is likely to be a “baby bust” as couples delay starting a family which might push the birth rate to its lowest on record according to estimates from PWC.

Such a reduction in the population will have negative consequences for the economy in general and particularly for the finances of Transport for London which are already in a dire state after people have been avoiding public transport.

The euphoria over the fact we might survive the epidemic surely needs to be tempered by the gloomy prognostications for the UK economy.

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

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Year End Review – Better than Expected

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2020. 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.

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 lot better than expected earlier in the year.  Total return including dividends was up 10.7% which I consider a very good result bearing in mind that the FTSE All-Share was down 12.5% which I use as my benchmark (the latter figure does not include dividends though). It was helped by having significant US holdings and technology company holdings via investment trusts and funds. Dividends received were down by about 17% as many companies reduced their dividends or cut them altogether.

It was partly a good year because I had no bad failures but when you have a large number of holdings, as I do, then there are always one or two disappointments. The worst loss was on trading in the shares of 4Imprint (FOUR). This is an AIM listed seller of promotional products, mainly in the USA. In March I was reducing my stock market holdings, particularly in those companies that were being badly affected by the pandemic or seemed likely to be. The share price of FOUR was 3480p at the start of the year and I sold a large proportion of my holding at about 1390p (i.e. near its bottom). The share price has since recovered to 2565p so that’s a good example of the volatility of small cap stocks when everyone wants to get out, or how it is foolish to exit prematurely when the news appears bad. I chose not to buy back into the shares of FOUR but instead chose other companies, particularly investment trusts that had moved to high discounts. That partly compensated but not altogether.

My holdings in investment trusts focused on technology or US markets did particularly well such as Polar Capital Technology (PCT) – share price up 43% during the year, Scottish Mortgage (SMT) – share price up 107%, or Fundsmith Equity Fund – share price up 19%.

I avoided big FTSE-100 companies such as banks, insurance companies, pharmaceuticals and retailers which was all to the good, although I did make money on miners BHP Group (BHP) and Rio Tinto (RIO). Only minor aberration was a punt on AstraZeneca (AZN) which I rapidly exited.

My portfolio also includes some Venture Capital Trusts (VCTs) which would have generated a less good overall return because they tend to be vehicles for turning capital into tax free dividends. As usual they mainly showed small capital losses although two VCTs focused on AIM stocks (Amati and Unicorn) did relatively well for the second year running so the overall result was a small capital profit. My own AIM portfolio holdings were a very mixed bunch with technology companies showing a good profit but others showing losses as small caps generally fell out of favour. I analyse in detail the profits and losses on all my individual holdings during the year so as to try to learn from my mistakes. But last year was dominated by a rush to safe havens and into stocks that might benefit from the epidemic so it undermined my previous choices and required some rapid portfolio re-allocations during the year.

What will happen in the coming year for stock markets? I have no idea and simply prefer to buy good companies and hold them for as long as it makes sense to do so. But certainly the discounts, or premiums, on investment trusts in popular sectors seem to suggest some optimism for the future when surely western economies are going to be severely damaged. Meanwhile Governments are borrowing in a very big way to keep their economies afloat (or printing money to do so) while taxes are surely to rise to cover the cost of the pandemic. The stock market has become detached apparently from the real-world economy which cannot bode well for the future. But that’s not necessarily a basis for making decisions about stock market investment where investors have longer time horizons and still expect the epidemic to be under control this year.

But 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 one should follow I suggest. Plus of course the movement to improve the environment and halt global warming which is requiring substantial changes to the UK and other economies. But one has to be very careful about enthusiasm for “hot” market sectors – they often turn out to be flashes in the pan.

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

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