Is Location Important?

The issue of where a company chooses to locate itself came to mind on reading an FT article about the Financial Conduct Authority (FCA). They have moved to Stratford in East London when they were previously at Canary Wharf. It seems that some staff are unhappy.  Will the FCA really recruit high quality staff when based in Stratford? I doubt it.

This issue also arose when I spoke to DotDigital CEO Milan Patel after their results webinar last Friday. The discussion made it clear, as I thought, that all had not been well with their US business which is why forecasts had to be downgraded. DotDigital chose to set up their US headquarters in Manhattan, New York City and they are still there. To my mind that is the worst possible US location for a technology company. It would make recruitment difficult and expensive. It now seems they have staff mainly working from home.

I do get the impression that DotDigital have made the same mistakes as many British companies entering the USA, i.e. not understanding the culture, not spending enough on marketing, not talking in American rather than English, etc. But they are learning.

Does it matter where the office is located if everyone is working from home to avoid catching Covid? I think it does. Not meeting colleagues regularly, if not everyday, is very important for motivation and for management to understand their concerns. I speak from experience of both managing remote teams and working in the USA. OK we can hold Zoom meetings but those are not quite the same as they are more formal events. They do not provide the opportunity for casual conversations.

Another webinar I attended today was a results presentation by Bango (BGO). At least I got my question answered this time which was: “The big loss in the associate was of some concern. Please explain the reason for that and its prospects”. The brief answer given was that the joint venture was still in the development phase and revenues were starting to come through. But a lot more explanation would have been preferable.

The stock market seems to have stabilised as the news from the Ukraine does not get much worse and I perceive glimmers of a possible peace settlement on the horizon – along the lines of what I suggested in a previous blog post. But I don’t think the comments of my M.P. Bob Neill about the pursuit of war crimes by Russia were helpful. They might have made for good politics for UK listeners but are not likely to encourage peace to break out.

With oil/gas prices at record levels this week should I have piled into their producers as others have done? I think not as I hate commodity businesses. Earnings are volatile and unpredictable. But there certainly will be a big focus by Governments to ensure countries are less reliant on imports of oil and gas. I have therefore been investing in alternative energy suppliers (wind farms, grid stabilisation, etc).

There are also possibilities in the defence sector where there will be an increase in expenditure no doubt as people come to realise that peace does rely on strong defences.

In the Ukraine they did have a big nuclear weapons arsenal which they inherited from the USSR after its break-up. But they gave them up after assurances by major powers (including Russia) of their security. What a mistake that was!

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

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Ukraine – A More Balanced View

I attended a meeting of investors on Sunday and the main subject discussed was the war in Ukraine. Most attendees clearly had a gloomy prognosis for the outcome mainly because of a belief that Vladimir Putin was a lunatic who desired to restore the USSR, i.e. he would not stop at Ukraine but would thereafter move into Moldova, Estonia, Latvia, Lithuania, Romania et al.  This view is very much reflected in the Western media with concerns that the war could very rapidly develop into a nuclear one.

President Zelensky is clearly a masterful politician. He came from nowhere to win the election for President when historically he was simply a comedian who pretended to be President. There are few more unusual biographies. He also became a master of social media and has won the hearts and minds not just of Ukrainians but of most of the western world – the British do of course love underdogs. Meanwhile Putin has failed in terms of public relations by not putting his case well and has even publicly suggested that Ukraine should not be considered an independent country.

I take a somewhat different view to the popular consensus although I would not want this to be seen as an apology for the acts of the Russian military. As in any war it is unfortunately the civilians who are suffering the most. A peaceful solution needs to be found because if the war is escalated, with more sanctions being imposed on Russia, then the economic damage will be severe and widespread on both Russia and many European countries.

I think when looking at political conflicts which lead to war then it is best to look at the conflict from the point of view of the enemy when pursuing a solution.

Ukraine has historically been closely linked to Russia after being dominated by Poland. To quote from Wikipedia by the Treaty of Perpetual Peace [surely a wonderful name for a peace treaty], signed in 1686, the eastern portion of Ukraine (east of the Dnieper River) came under Russian rule. As a result a large proportion of the population (about 30%) speak Russian, particularly in the Eastern region and the Crimea. In fact President Zelensky was brought up in a Russian speaking family. In other words there are strong cultural ties with Russia. Ukraine was also a founding member of the USSR until that was dissolved in 1991.

Russia is clearly concerned about the encroachment of NATO and the EU eastwards that could both militarily and economically threaten Russia. Only Belarus, Moldova and Ukraine are not in the EU but Zelensky has indicated his desire to join. There is also the problem of the insurgency in the Donbas region which was long-standing before the latest events plus the takeover of the Crimea by Russia which Ukraine wants back. The longer the war goes on, the more difficult it will be to reach an amicable solution as attitudes harden on both sides and people look for revenge. As has been pointed out, Russia might be able to achieve a complete occupation of Ukraine but that might be followed by many years of constant insurrections and guerrilla warfare against them.

Russia has now offered to cease fighting on the following conditions: Ukraine changes its constitution to enshrine neutrality, acknowledges Crimea as Russian territory and recognises the rebel-held areas of Donetsk and Luhansk as independent territories.

This appears to be a reasonable basis for a settlement that would halt the damaging fighting and cease the escalation. If all military forces were withdrawn by Russia from the rest of Ukraine and Ukraine itself committed to the above (including no applications to join the EU and NATO), then a modus vivendi could be achieved.

Many people suggest that Putin might be removed as sanctions bite and his economy collapses or the war goes against Russia. But that seems very unlikely to me. Opposition to Putin in Russia is quite small and exaggerated by western media. Putin re-established Russia politically and economically after the collapse of the USSR so many people respect him for that. The war in Ukraine will not undermine the regime in Russia unless it broadens into a much wider conflict with bigger military losses which seems unlikely to me. NATO is not likely to get involved and quite rightly because to do so would simply damage western European countries even worse as Russia retaliated by halting exports of gas and oil. Sanctions on Russia will not halt the fighting alone and will take too long to have an impact – they can only encourage Putin to reach some kind of settlement.

A settlement that gives time for countries like Germany and Italy to wean themselves off Russian gas is a better solution. There are many worse options.

Here’s a good quotation from the book by Barton Biggs I mentioned in a previous blog post:

“ Disregard the ranting and raving of the self-proclaimed elite thinkers and alleged experts on wars, economies, politics, and, above all, the stock market” and “History doesn’t evolve in a slow and orderly way; often it leaps forward in disorderly, chaotic jumps. People with wealth should assume that somewhere in the near or far future there will be another time of cholera when the Four Horsemen will ride again and the barbarians expectedly will be at their gate”.

So far as Ukrainians are concerned, those circumstances have already arrived.

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

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A Week to Forget in the Stock Market and DotDigital

Last week was certainly one to forget with Friday particularly bad for most portfolios (the FTSE-100 was down 3.5% on Friday and tech stocks were again hit – Nasdaq was down 1.7% on the day). With the war in the Ukraine continuing the economic outlook looks bleak. We already had sharply rising inflation and sanctions against Russia are driving up the price of oil and gas which is never good for the economy. As anyone who has received a utility bill of late will realise, consumers and industry are going to be hit by sharply rising prices in the next few weeks which will affect many businesses.

There was already a downward trend in the market and I expect this will continue unless peace breaks out in the Ukraine which does not look likely until Russia has achieved its objectives which might take some weeks, if ever. Taking over a country where the population is totally opposed to you is never easy, particularly when outside assistance is being provided and sanctions are biting. Ukrainians are not apparently going to accept defeat.

One of my investments which was worst hit last week was DotDigital (DOTD) but not because of the war. The company provides an “omnichannel marketing automation platform” as they call it (email and sms messaging). The share price fell by 60% after an interim announcement on Wednesday that suggested the forecasts for the second half were not going to be met. In addition the CFO and Chairman are departing (the latter on health grounds).

This is a company I have held for some years first buying at around 8p in 2011 and selling some at around 200p in 2021 when enthusiasm for technology stocks drove the price up to unsustainable levels. The price now is 58p.

The company is profitable, has no debt and lots of cash on the balance sheet and has shown steady growth so there is much that is positive about the company. But clearly the expansion of US operations on which forecasts relied has gone seriously wrong. I attended the results webinar on Friday and submitted the following question:

“Clearly one of the reasons for reduced forecasts is the disappointing figures from the USA. Why after several years has DotDigital not established itself well there? Why has the management of that region not been changed as a result?  There does not seem to be anyone on the board with experience in the USA. As you are looking for a new Chairman could you please ensure that a suitable person is appointed with some knowledge of operating in the USA”. The question was not answered but there was enough information disclosed to make it clear that all was not as it should be.

A question on margins got a response that margins will be lower in the second half because marketing spend will be going up. As regards the US management issues, it was indicated that a couple of management teams had been poached by competitors offering higher salaries. Lots of money from VCs and private equity was going into competitors. It was mentioned that “customer attrition had stabilised” which was a remarkably negative comment. With this kind of product (which I use myself) where there is high recurring revenue people are generally reluctant to change platforms. They should not be losing customers! But the figures suggest they are losing some customers and gaining very few new ones in the USA.

So it would seem that after some years of trying to make a success of the US market they are back at square one with a new management team. It looks like another example of a UK business entering the USA but falling flat on its face in terms of marketing approach.

I will try and find out more next week but I have not quite given up on the company completely as yet. These issues might be minor ones if they take appropriate steps.

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

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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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