How to Protect Your Wealth When Wars Threaten

I mentioned in a previous blog post a book entitled “Wealth, War and Wisdom” by Barton Biggs which covers how the turning points of World War II intersected with market performance. I have now read it and I am surprised that this book is not better known. It’s a very good analysis of how the wars of the 20th century impacted stock markets and the wealth of individuals. It probably should be essential reading for residents of the Ukraine at this moment in time, but it’s worth everyone reading it.

Does the stock market predict wars and their impacts is one question he tackles. The answer is yes and more accurately than political commentators it seems in many cases.

Here are some tips from the book that might be helpful:

  • Stock markets recover when the news stops getting worse, and before good news appears.
  • Equity markets have been a good protection against loss of wealth even in countries that suffered defeats, particularly in the long-term. The economic recovery of Japan and Germany after the Second World War soon offset their losses during the war.
  • Bonds are a losing investment in real terms whether you are on the winning or losing side. Inflation erodes their value because Governments print money to finance wars.
  • Buying gold only works if you bury it in the back garden, as otherwise it’s likely to be confiscated.
  • Property, particularly farms you live on, or small businesses you operate, are good investments even in the worst times.

The author actually covers the history and battles of World War II in some depth and it’s a refreshing and well researched analysis even for someone like me who is old enough to have read about a lot about the era in the 1960s and since. It provides some wonderful anecdotes and facts about how those wars created suffering for many millions of people.

The book was published in 2007. The author, Barton Biggs, was born in the USA and was an investment manager and strategist for Morgan Stanley. He made his name by forecasting the dotcom boom and bust which he called “the biggest bubble in the history of the world”. There is a fuller biography on Wikipedia.

Altogether a very original book which I highly recommend.

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

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Warren Buffett Letter and Culture

Warren Buffett has published the latest Berkshire Hathaway letter to shareholders (see https://www.berkshirehathaway.com/letters/2021ltr.pdf ). As usual it makes for an amusing and educational missive including his comment on the $3.3 billion the company paid in taxes. He says “I gave in the office” is an unassailable assertion when made by Berkshire shareholders.

The company improved its per share value by 29.6% in 2021 which was slightly ahead of the S&P 500 with dividends included. That’s a big improvement on the previous two years when Berkshire lagged the index.

What has been one of the key reasons for the success of the company over the last 55 years? I would suggest culture is one. A culture of honesty, integrity and rational behaviour if you read the latest and prior newsletters.

Meanwhile the Chartered Institute of Internal Auditors (CIIA) have published a report entitled “Cultivating a Healthy Culture” (see https://www.iia.org.uk/policy-and-research/research-reports/cultivating-a-healthy-culture/ ). It suggests based on research among its members that culture is important and that 66% believe that the UK Corporate Governance Code should be strengthened in regard to the responsibilities of company directors. The Financial Times reported this as one of the causes of several company collapses in recent years such as at BHS, Carillion, Greensill and Patisserie Valerie. But if you read the reporting on this issue there is discussion of Environmental, Social and Governance issues (ESG) and equality issues as if adding those to the Governance Code might assist.

Yes I suggest culture is important but the key question to ask when looking to invest in a company from my experience is simply this “Is the Management Competent and Trustworthy?” (that’s a quote from my book on investing). If you don’t trust the management walk on by. And if you are holding shares in a company and news comes out that undermines your confidence in the directors, then sell the shares. Don’t wait for them to reform.

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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Another Bad Day for Small Cap Shares

It looks like it’s going to be another bad day for small cap shares and even the FTSE-100 index is down by 2.8% at the time of writing – but that might have been affected by mega miner BHP going ex-dividend today.

This is what the Chairman of Abrdn UK Smaller Companies Growth Trust (AUSC) had to say in their half-yearly results statement this morning:

“The Board has noted the fall in the share price and the NAV per share since the end of the period, each by more than 19%. This is evidence of the significant and severe rotation that we have seen in the market where investors have been moving out of quality and growth stocks and into value. This is an established phase in the market cycle and, while it makes for grim reading, the Portfolio Managers do not believe that they should try to become timing experts to try to time the change in market sentiment. Past experience leads them to conclude that this phase in the cycle should not be long lasting and that this will, over the longer term, come to be seen as a blip. The Board understands the premise and supports the stance that the Portfolio Managers have taken and I hope that we will be able to confirm this to have been the case when we report on the full year results in the summer”.

They could be right and let us hope so as I hold some shares in the company although I was selling some of them late last year as it seemed that some of their holdings were becoming over-valued.

But some of the abrupt market falls on fears of war in the Ukraine are now providing some buying opportunities.

Anyone who has studied the complex political history of Ukraine will realise that it is rather simplistic for western powers to claim that Russia is simply invading the country in an aggressive show of military power. Ukraine has had close links with Russia since the time of the Cossacks in the 16th century. The Cossacks served Russia in the Napoleonic wars and in the first world war. Ukraine was part of the USSR from 1922 until its breakup in 1991 and a significant proportion of the population speak Russian in the Eastern side of the country.  

The notion that Ukraine is not a country in its own right, but a historical part of Russia as Putin has claimed, is not totally unrealistic or unreasonable. One can also understand that Russia might be concerned about the expansion of Nato to include Ukraine when Russia would prefer to have Ukraine as a “buffer” state on its borders.

Peace won’t break out until both sides choose to take less extreme stances in my view.

For those who wish to listen to some great music about the Cossacks from the film Taras Bulba, here is composer and conductor Franz Waxman in a recording: https://www.youtube.com/watch?v=CovY06K3NnY

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

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A Great Article from Matt Ridley on Global Warming

Matt Ridley has issued a great blog article on “How Global Warming Can Be Good For Us”. The author of many books on science which are all worth reading, he argues in his latest article that global warming is real, but so far it is mostly beneficial. The biggest benefit from emissions is global greening as forests expand and more rainfall means more land can be cultivated. But there are several other advantages which are ignored by the prophets of doom and popular media who prefer to report only bad news.

For a more balanced view of the problem, read the article here: https://www.rationaloptimist.com/blog/how-global-warming-can-be-good/

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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Not Enough Wind

You might think that we have all had enough wind in the last few days, but not for some companies. The Renewables Infrastructure Group (TRIG), coincidentally with the worst storm for the last 30 years, reported their annual results on Friday (18/2/2022). They operate many wind turbine farms and reported that “Wind resource in 2021 has been unusually weak…” and as a result overall production was 12.6% below target.

But when there is plenty of wind, as on Friday, the price obtainable for the electricity generated fell according to one newspaper report. High winds last week also caused a huge 300ft wind turbine to collapse at a wind farm near Gilfach Goch in Wales. A large wind turbine can cost several millions of pounds so a few incidents like that would be expensive. It’s a case of too much wind is as bad as too little wind.

Is this going to be one of those companies who always complain about the weather? Such as ice cream makers, and garden hose suppliers. Or retailers who complain that spring is too early or too late for their new clothes collections?

I am sceptical so this is one shareholding I have that is definitely “on probation”. I will wait to see if they use a similar excuse in future years.

Meanwhile I hope readers weathered the storm with equanimity. It was not nearly as bad in South-East England as the one in October 1987 which I remember well. Eighteen people died in that one and trees were uprooted over a wide area closing many roads. But there have been much worse storms in the past. For example as many as 15,000 people died in the Great Storm of November 1703.    

Please don’t blame these events on climate change or global warming. They are just random events.

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

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Baronsmead VCT AGM and P.J. O’Rourke Obituary

This afternoon the Baronsmead Venture Trust (BVT) is holding its Annual General Meeting. I made some very negative comments about corporate governance at this company in a previous blog post – see  https://roliscon.blog/2021/12/24/baronsmead-vct-more-corporate-governance-issue/ . But the good news is that long-standing Chairman Peter Lawrence is stepping down in March according to a recent RNS announcement. And about time too, one might say.

Unfortunately I will be unable to attend the AGM as it is only being held as a physical meeting so will be unable to raise the other issues mentioned in my blog post. I hope somebody else will.

The bad news yesterday was the death of wit and comic writer P.J. O’Rourke from lung cancer at the age of 74. A writer on a wide range of subjects including politics and economics and it’s not many writers who can make those topics amusing. He wrote a digest and analysis of Adam Smith’s book “The Wealth of Nations” which I commented on previously and he wrote on the war in Iraq and on motoring stories in such books as “Give War a Chance” and Holidays in Hell” which are also worth reading.

A sad loss to the world indeed and it always makes one feel depressed when someone younger than you dies – but his lifestyle certainly did not encourage an extended career.

There are lengthier obituaries in the national media which you can find on the web and which shows how influential and popular he was.

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

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How the World Really Works – Book Review

It is important for investors, and indeed for everyone, to understand what factors are driving the world’s economies. This is particularly so when there are concerns about global warming and the alleged degradation of the environment as the world’s population continues to increase.

A good primer on this subject is a recently published book by Prof. Vaclav Smil entitled “How the World Really Works”. The author covers wide ranging topics from energy supply to food supply in a very analytic way based on established facts rather than polemics which he criticises as being far too common in the modern world.

His chapter on food production is particularly interesting and he shows how we now manage to feed 8 billion people reasonably well which would have been inconceivable 100 years ago. How do we do it? By using energy supplied mostly from fossil fuels to create fertilizers and by manufacturing farm machinery and road/rail/shipping transport to distribute the products efficiently. The author points out that if we reverted to solely “organic” farming methods we would be lucky to feed half the world’s population.

He covers the supply of key products such as steel, plastics and cement which are essential for our modern standard of living and how they are not only energy intensive in production but that there are few alternatives. He clearly supports the view that the climate is being affected by man’s activities but points out that the changing of energy production, food  production and the production of key products cannot be easily achieved. Certainly it will be difficult to achieve that in the timescales demanded by European politicians when the major carbon emitters of China, India, USA, and Russia are moving so slowly.

Meanwhile any forecasts of the use of oil declining or reserves running out should be treated with scepticism as the price of oil reaches a 7 year high of $95 per barrel. Perhaps investors in oil companies (I hold none) should not be too keen to exit the sector rapidly particularly as the book teaches you that forecasts of economic activity are notoriously difficult.

The author looks at the risks in the future for the world, many of which are uncertain. He mentions the risk of a big “Carrington event” – a geomagnetic storm occurring today would cause widespread electrical disruptions, blackouts, and damage due to extended outages of the electrical grid. If that is not enough to scare you he suggests that another pandemic similar to Covid-19 is very likely as such epidemics have happened about every 20 years in the past and might be more virulent in future. But planning for such events, which were historically well known, was minimal and continues to be so.

He does not propose solutions to global warming other than that we do have many tools to enable us to adapt and cope with the issue. For example, farming could be made more efficient and wasted food reduced. Electrification of vehicles might help in a minor way and he is particularly critical of the increase in the use of SUVs in the last 20 years which has been particularly damaging (I cannot but agree with him on that point). But this is not a book containing simple remedies to the world’s problems. It is more one that gives you an understanding of how we got to where we are now and where we might be going.

For example, the use of coal in energy generation can be much reduced, and oil/gas also to some extent. Nuclear fission is a good source of clean energy and fission is a possibility even if he was not aware of the latest announcements on the latter. But it is inconceivable that there will be short-term revolutions in energy supply.

Altogether the book is worth reading just to get an understanding of how the world currently works – as the book’s title suggests.

Incidentally some of the events covered in How the World Really Works are also discussed in my own recently published book entitled “A Journal of the Coronavirus Year” which covers not just the recent pandemic but the changes that have happened in the last 75 years of my lifetime. It’s now available from Amazon – see https://www.amazon.co.uk/Journal-Coronavirus-Year-2020-2021-Biographical/dp/0954539648/ for more information.

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

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Should BP Pay a Windfall Tax?

There have been calls for BP (BP.) to pay a “windfall” tax out of their record profits which were announced yesterday. For example Richard Tice, leader of the Reform Party, had this to say on Twitter: “BP highest profit for 8 years. Even bigger profits likely in 2022, not thanks to own efforts but to Putin’s warmongering. Shareholders likely above average wealth. So higher energy prices transfer wealth from poorer to richer. Windfall tax right in moment of crisis”. [I corrected a couple of grammatical errors]

The Labour Party has also put the Government under pressure to tackle the cost-of-living crisis by calling on MPs to support its bid for a windfall tax on gas and oil companies.

But is BP actually that profitable a company? Not being a shareholder in it I thought I would have a quick look at its numbers over the last few years. They are in fact quite abysmal. The company lost $20 billion in 2020 and in the previous 5 years never achieved a better return on capital employed of more than 7% in any one year and averaged only 1.4% over those 5 years.

Prior to that they tripped over the Deepwater Horizon Gulf oil disaster which meant not just profits disappeared but also dividends.

BP said “Generally, a windfall tax on UK oil and gas producers would not encourage investment in producing the UK’s gas resources”; and “”Very importantly, we also believe the UK should continue its [low carbon] energy transition as fast as possible. BP is committed to playing our part here.”

I think this is a “we need the money” kind of argument. But the simple fact is that BP’s profits, like those of oil companies, are very sensitive to the market prices of oil and gas. They have to invest billions of pounds on likely future profits in researching and developing new resources with no certainty that market prices will reward them. The level of profitability of BP over the last few years is not an encouragement to anyone to invest in this business. Taxing them with a windfall tax would discourage folks even more.

It’s unfair and unreasonable to penalise them when profits rise in a good year. They have to ride the peaks and troughs of market prices because nobody is going to protect them against market forces, unlike the Government’s unwise attempt to protect the public from them.

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

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