Chancellor’s Budget Speech – Positive for Business

I listened to Rishi Sunak’s budget speech today and here is a summary of some parts of it with some comments from me.

He said that £280 billion of support had been provided, but the damage to our economy despite this has been acute. However our response to the coronavirus epidemic is working. Employment support schemes are being extended and business rates holidays also. The OBR is now forecasting a swifter recovery but the economy won’t be back to normal until the middle of next year. Unemployment is expected to rise to 6.5% but that is less than previously forecast.

There will be another £65 billion of support for the economy when we have borrowed £355 billion this year which will be a record amount.

The stamp duty holiday is extended to September. That should please my oldest son as he is trying to move house at present and delays are happening in the chain because of local authorities not responding to inquiries. There will also be a new mortgage guarantee scheme which as Keir Starmer pointed out may simply encourage a rise in house prices – OK if you already have one but not otherwise. Fuel duty will be frozen as will beer, wine and spirit duties.

Now the bad news: personal allowance tax thresholds will be frozen at the end of the next tax year until April 2026. That effectively implies a rise in tax equivalent to inflation over that period. Inheritance tax thresholds will be maintained at their current levels until April 2026 and the adult ISA annual subscription limit for 2021-22 will remain unchanged at £20,000. There is no mention of changes to capital gains tax as widely rumoured and the pension Lifetime Allowance will be maintained at its current level of £1,073,100 until April 2026 when it really should be increased to match inflation (high earners already have problems with the current limit).

Corporation tax will rise to 25%, but there will be a taper for larger companies. Only 10% of companies will pay a higher rate. Comment: that will still be a competitive rate.

The Chancellor said we need an investment led recovery. Therefore for the next 2 years companies can reduce their tax bill by 130% of the cost of capital expenditure. This is the biggest business tax cut in history he claimed.

There will be a new UK infrastructure bank and a new handout for small businesses to fund IT investment and obtain management support (see https://helptogrow.campaign.gov.uk/ for details). He also mentioned a review of R&D tax reliefs which are quite generous at present. It is planned to cap the amount of SME payable R&D tax credit that a business can receive in any one year at £20,000 (plus three times the company’s total PAYE and NICs liability), but a review is also mentioned.

There are a number of hand-outs for greening of the economy, as one might expect, but there are also more hand-outs to protect jobs and to support Covid-19 vaccination roll-out and research projects.

The FCA will be consulting on Lord Hill’s review to encourage companies to list in UK markets.

There will be more Freeports with 8 locations already identified.

In summary, this budget should be good for business but small software companies may be concerned about the changes to R&D tax credits.

More details of the Chancellors speech here: https://www.gov.uk/government/news/budget-2021-sets-path-for-recovery

Postscript: Reaction to yesterday’s budget was generally negative, but nobody likes higher taxes. The general view is that the Chancellor has just kicked the bucket down the road. More borrowing in the short term to finance the recovery and keep people in employment, but much higher taxes later. I think the budget is a reasonable attempt to keep the economy afloat and could have been a lot more damaging for business if he had taken a tougher line.

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

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Retail Investor Participation in IPOs – A Good Thing?

Shares magazine have reported that the CEOs of major platform operators AJ Bell, Hargreaves Lansdown and Interactive Investor have written to Government Minister Jon Glen asking him to consider the rights of retail investors in IPOs. Long gone are the days when new company listings were advertised in newspapers and retail investors could subscribe, and frequently “stag” the issue to make a quick profit. Nowadays institutional investors are typically offered shares in a placing and retail investors are excluded from participating.

The letter quotes recent examples of THG (Hut Group), Dr Martens (DOCS) and Moonpig (MOON) where retail investors could not participate and also says that between 2017 and 2020 they were excluded from 93% of share launches.

Bearing in mind that those companies now trade at a premium to their launch price, you might think that retail investors have been missing out, although there was nothing stopping investors from buying the shares in the market soon after they launched when you would have had to pay little more. Are these platform operators really acting in the best interests of retail investors in promoting the idea of wider retail participation though? I tend to take the contrary view.

Share prices after an IPO can be extremely volatile in the short term. That is particularly so now that so many companies launch an IPO with a short track record and no profits. In the long term, IPO stocks actually underperform the market. A paper by Jay Ritter noted this: “in the long‐run, initial public offerings appear to be overpriced. Using a sample of 1,526 IPOs that went public in the U.S. in the 1975–84 period, I find that in the 3 years after going public these firms significantly underperformed a set of comparable firms matched by size and industry”; and “There is substantial variation in the underperformance year‐to‐year and across industries, with companies that went public in high‐volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity”.

In other words, companies take advantage of good market conditions and insiders know best when to sell. Recent market conditions have therefore been good for IPOs.

I did have a quick look at the prospectus for Doc Martens as a long-standing wearer of their boots and shoes which I can highly recommend. But I was not impressed enough to buy the shares. For example, the company does not even own the brand names it uses. The product is easy to copy also.

Moonpig also appears to me to be wildly optimistic about future prospects given that its business model (delivering cards via internet orders) is surely highly replicable once other businesses realise how much money there is to be made from such a simple business model. Moonpig has also benefited from the short-term impact of the Covid epidemic which has reduced conventional retail sales of greeting cards.

THG certainly have a very well designed and flashy web site, but its cosmetic and health brands hardly seem unique in a crowded market for such products. The company also has a patchy record of profits.  

In essence I can understand why platform operators would like to support the demand by retail investors to get into the next “hot” stocks when launched but the investors would be wiser to step back and wait for the initial enthusiasm to abate. Or at least take a very skeptical view of new IPOs and take a careful read of the prospectus which few retail investors do. Those companies that are IPOs of companies held by private equity investors which they have geared up with debt are ones to be particularly careful about as they know when is a good time to sell and often look to get out in the short term.

Of more concern to me is the discounted placings of shares in existing listed companies where private investors are definitely disadvantaged. That is a problem that does need tackling I suggest.  

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

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Selling Technology, Intercede at Mello, and Sir Frank Whittle

I have just listened to a recording of the Mello event which took place on Monday evening. In the “Bash” section one of the companies presented was Intercede Group (IGP). This company sells security software and is based in Lutterworth, which is in Leicestershire in case you have never been there. Bearing in mind the company’s client list of banks, US Government bodies and companies such as Boeing and Wells Fargo you might think the location a bit odd.

I first purchased the shares in 2010 and I still hold them. But it became clear to me very quickly that this was a typical example of a company with great technology but unable to convert it to profits. The company was founded by Richard Parris who remained Executive Chairman for a very long time – until 2018 in fact when a new CEO took over. Losses have been turned into profits although revenue is still not great (£10 million last year).

I did visit the company’s AGM in Lutterworth a few times and at one meeting I discovered that the company’s operations director was actually Richard’s wife under a different surname. It’s always interesting what you can learn from attending AGMs! The problem was the dominance of the company by someone with a technology background rather than a sales or marketing background. At least that was what I perceived. The culture was I suspect a negative.

Oddly enough there was another company based in Lutterworth which I only recently learned about which had an analogous history. Great technology which became a world beater but where the owners never made much money out of it. This company was Power Jets Ltd which was the baby of Sir Frank Whittle – the inventor of the jet engine.

A recent biography of Whittle is called Jet Man. Its author is Duncan Campbell-Smith and it’s well worth reading. Whittle lost control of the invention and associated patents (being a serving RAF officer did not help) and his company was eventually nationalised. Rolls-Royce acquired some of the technology and it was also given to the USA for nothing. What should have been a great money-spinner for the UK and for Whittle after the war years was lost due to commercial incompetence.

There is apparently a memorial to Frank Whittle and a small museum in Lutterworth if you ever visit Intercede.

Will Intercede ever make real money? It’s a bit early to tell I think but I am certainly more confident in the new management than the old. A slight downside is the recent announcement that they are rewriting the LTIP to reduce the share price targets. I never like to see options rewritten but there may be some justification in this case and certainly the CEO, Klaas van der Leest, has achieved a remarkable turnaround. I’m even finally showing a decent return on my investment in the company.

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

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Scottish Investment Trust Review

This article first appeared on the ShareSoc blog.

One of my contacts has asked me to look at the Scottish Investment Trust (SCIN). This is a self-managed global investment trust which seems to have the same problems that Alliance Trust had before they had a revolution. Namely persistent under-performance. As a result, it is trading at a discount of 10.4% to the net asset value despite doing considerable share buy-backs in the last few months, presumably to try and control the discount. But as we saw at Alliance Trust, which was also self-managed prior to the revolution, share buy-backs rarely solve the discount problem if investors have become disillusioned with the company.

The AIC reported performance figures show a share price total return of -9.2% over one year and -3.1% over 3 years. That compares with global sector returns of +52.2% and +108.4% respectively. Only over 5 and 10 years do they match the sector figures. In other words, recent performance is the issue. This performance is surprising bearing in mind that 34% of their portfolio is in North America which should have been a recipe for success last year.  

What’s their investment strategy? Their last interim report spells it out. They have a “High conviction, global contrarian investment approach”. In more detail they say: “We are contrarian investors. We believe markets are driven by cycles of emotion rather than dispassionate calculation. This creates profitable investment opportunities. We take a different view from the crowd. We seek undervalued, unfashionable companies that are ripe for improvement. We are prepared to be patient. We back our judgement and run a portfolio of our best ideas, selected on a global basis. Our portfolio is unlike any benchmark or index and we fully expect to have differentiated performance. Our approach will not always be in fashion but we believe it delivers above-average returns over the longer term, by which we mean at least five years”.

This kind of comment makes me very skeptical. This looks like a “pick the cheap dogs because the fundamentals will eventually pay off” kind of approach. But I never found that worked. The dogs tend to remain dogs. Being a contrarian in the investment world can be very dangerous.  

Terry Smith of Fundsmith has been attacking the concept of chasing “value stocks”, i.e. those that look cheap on fundamentals. I believe he is quite right. The stocks with a high return on capital, good cash generation and sales growth are the ones that are more successful even when a recession hits.

I have not looked at the SCIN investment portfolio in detail but I would certainly question some of their holdings. I would suggest investors need to tackle the board on this, and ask whether their investment managers are really making good investment decisions. Such substantial underperformance over as long as 3 years certainly raises doubts.

This is what the Chairman said in the last Annual Report: “Global markets continued this year to be dominated by a momentum style of investing which seemingly pays scant regard to valuation, and is an anathema to our value-focused style of investing. To have kept pace with global markets this year, our portfolio would have required a proportionately large exposure to a very small number of companies that we believe are greatly overvalued and a lot less exposure to the names which we consider offer the best potential for long-term gains. This influence, unfortunately, has been a hallmark of markets during the five years since we adopted our contrarian approach and has become greater in more recent years. The result is an extreme divergence between the most and least expensive parts of the market. Such extremes have, historically, proved unsustainable and we believe that a new phase for markets is overdue, one that may favour those who, like us, do not follow the crowd.

Notwithstanding our lack of exposure to what we consider irrationally priced momentum driven investments, there were two particularly advantageous decisions made during the year. The first was our Manager’s decision to take pre-emptive action to preserve capital at the onset of the Covid-19 crisis by selling out of some of the companies we believed would be most impacted. The second was a large exposure to gold miners, which participated strongly in the recovery. Unfortunately, the benefits of these decisions were masked in the second half of the year as markets rewarded stocks deemed impervious to the challenges facing the real economy, such as information technology stocks. In contrast we invested in companies we believed would be less impacted by the travails of the real economy, but were considered dull in the feverish monetary environment created by central bank support, which has fueled momentum investing.

Our contrarian approach explicitly aims to take a different view from other managers and invest without regard to index composition in order to avoid the herding around popular investments that is an inherent trait of active management. We therefore expect our portfolio, and its returns, to be unlike any index”.

It would appear that they adopted the new investment style five years ago which might be identified as when under-performance took off. If an investment strategy does not work, how long should you persist with it? Not many years in my experience. It’s too easy to hold the dogs longer than you should.

Shares magazine have this week published a list of 15 global trusts and gave their 5-year share price total return performance. SCIN came bottom with a total return of 43% whereas the best was Scottish Mortgage at 476%. What a difference! Scottish Mortgage might be exceptional because of their big bets on technology companies, including some unlisted companies but Alliance achieved 106% and Witan 79%. Monks achieved 272% which reminds me that I used to hold it years ago but sold due to consistent poor performance – they had the same investment philosophy as SCIN but they changed it in 2015 after a change in individual fund managers and after I sold the shares. They have been on a roll every since. Does that suggest that patience can eventually be rewarded? No it suggests to me that less patience would have been preferable.

One problem with self-managed funds, even if it does enable a low charging structure, is that it can be difficult to fire the fund managers. A multi-manager approach now followed by Alliance and Witan is I suggest a better option.

The directors got an average of 18% against their re-election at the last AGM so clearly there is a strong demand for some change from investors.

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

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Stockopedia Stockslam Report

I think I am attending too many investment webinars. Last week I fell asleep in one after ten minutes and missed most of the presentation. That can be a particular problem with evening events. But last night’s Stockslam event was lively enough to keep me awake.

These events are run by investment web site Stockopedia and consist of a number of presenters covering their favourite stocks in 3 minutes followed by a few questions. This was the first on-line version and it worked well. I’ll cover the companies presented briefly and add a few comments:

  • Caledonian Mining. A gold miner based in Zimbabwe. All gold miners are very dependent on the price of gold and the other big factor to consider is the political stability of the country in which it operates, which was not mentioned. Looks cheap but needs to be.
  • Unite. Provider of student accommodation. Has been hit by the Covid epidemic, particularly for foreign students. Will students want to return to use such accommodation as most of their education is now done on-line rather than working from home? I think I agree with the presenter that they will as I have a grandson who has just gone to university and is living in such accommodation in Oxford. Might be worthy of further research.
  • RWS. Patent translation and other IP services. I used to hold these shares but I sold after they acquired SDL which I had also held in the past but never seemed to generate real profits. An expensive acquisition perhaps but the Chairman has a good track record.
  • Braemar Shipping. This is a smaller shipping company apparently focused on tanker supply but the financial track record looks very unimpressive – declining or static revenue and profits for some years. Shipping companies are very susceptible to global shipping rates which they have no control over. Looks cheap on fundamentals but needs to be.
  • Renold. Industrial chain supplier. Presenter argued that the management are reviving the business which otherwise looks very mature. I cannot see where growth is coming from although profits are forecast to rise short-term. Big pension deficit was mentioned. It looks like an “old technology” business to me.
  • SDI. Acquirer of small technology businesses. Has been growing profits rapidly and share price has been rising by leaps and bounds as a result, driven by active CEO. As one of the two presenters said “You wouldn’t exactly say it is cheap!” As I hold the shares, I will say no more.
  • Cake Box. A purveyor of personalised “celebration” cakes via a franchise network. An interesting company that is growing rapidly and has a good financial profile. May be worth a closer look if you are not put off any cake retailers by the failure of Patisserie.
  • Gear4Music. On-line music equipment retailer. Looking at the recent share price trend, the epidemic seems to have helped them.
  • Halfords. Car accessories/servicing and bike retailer. Have held this company in the past. Sold at 380p in 2016 – share price now 265p, which tells you a lot. Might have a relatively good year this year from the demand for leisure cycling in the lock-downs but surely otherwise operating in very mature markets. Return on capital has been low in recent years.
  • Atalaya Mining. Copper mining in Spain. Demand for copper is rising due to electric cars etc. Low historic return on capital and lack of dividend mentioned. They are operating in a sector with some very large players, and like any miner are dependent on commodity prices over which they have no influence. Forecasts for next year does make it look cheap.

All the presenters and the host (Damian Cannon) spoke clearly although I think some presenters could have been clearer on the “USP” of their selected companies. For example why buy Atalaya Mining rather than one of the big copper miners?

But an interesting event overall which was oversubscribed and I shall try to attend the next one.

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

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The Courage to Act, or Not

Some of us have plenty of time to read good books while under house arrest. Here’s one I have been reading. It’s a memoir by Ben Bernanke, former Chairman of the Federal Reserve under the title “The Courage to Act”. It covers the major worldwide financial crisis of 2007/8 created by the defaults in sub-prime mortgages. The book includes a very good section on how that came about and how packaging up such mortgages eventually led to a complete lack of confidence in banks and other financial institutions.

Bear Stearns, a major US investment bank was one victim, but the failure of Lehman Bros which collapsed into bankruptcy had the worst impact. This was a “systemically important” bank because of its size and spread of activity and the US Government could not stop it. It demonstrated that the Federal Reserve (the US equivalent of the Bank of England), the US Treasury and other US institutions were powerless to prevent the debacle. Or at least did not have the courage to act in the face of public opposition to taxpayers bailing out financial businesses.

Another victim was AIG, the largest insurance company in the world but the reality of what happens when everyone becomes scared of the value of financial assets became very clear. Numerous “runs” on banks and savings institutions occurred.

The contagion spread worldwide and affected most large banks including those in the UK where Northern Rock had depositors queuing at their doors, and Royal Bank of Scotland and Lloyds were forced by the Government to take part in “recapitalisations”. It was clear that many financial businesses were grossly under-funded and had gone into more risky business sectors without increasing their capital to match.

The spectre of “moral hazard” reared its head both in the UK and USA, i.e. supporting companies that had pursued risky strategies might encourage others to do the same in future rather than discourage them. That seems to have been one reason why Lehman was abandoned to its fate, as was Northern Rock. That was despite the fact that Northern Rock appeared to have a positive asset position and hence should have qualified for “lender of last resort” loans from the Bank of England to cover a temporary cash flow shortage.

This is an interesting quotation from Bernanke’s book where clearly he changed his stance on the matter:

“You have a neighbor, who smokes in bed…..Suppose he sets fire to his house, I would say later in an interview. You might say to yourself….I’m not gonna call the fire department. Let his house burn down. It’s fine with me. But then of course, what if your house is made of wood? And it’s right next door to his house? What if the whole town is made of wood? The editorial writers of the Financial Times and the Wall Street Journal [who had opposed bail-outs] in September 2008 would presumably have argued for letting the fire burn. Saving the sleeping smoker would only encourage others to smoke in bed. But a much better course is to put out the fire, then punish the smoker, and if necessary, make and enforce new rules to promote fire safety.”

The latter was what was subsequently done of course in the finance world.

Coincidentally I have seen an email from Dennis Grainger who is still campaigning for some recompense from Northern Rock shareholders who lost their savings in the nationalisation of the company. Apparently he wrote to the Prime Minister on the subject and got a response from the Treasury. You can read the letters here: https://www.uksa.org.uk/sites/default/files/2020-03/NRSSAG-letter-to-PM-28-2-2020.pdf and here: https://www.uksa.org.uk/sites/default/files/2021-01/Treasury-Response-20-March-2020.pdf

The gist of what Mr Grainger says is that bearing in mind that the Government subsequently made a large profit on the transaction the shareholders should be compensated. From my knowledge of events at the time I think it was clear that the Government always expected to make a profit. The response from the Treasury provides very poor excuses for not supporting private sector offers to rescue the company. The major reason was surely not financial, but that the Labour Government and its supporters were unwilling to see any taxpayers’ money rescuing a financial institution – just like the opposition in the USA. The Governor of the Bank of England, Mervyn King, also appeared to lack the “courage to act”.

The failure to support Northern Rock and subsequently Bradford & Bingley undermined the whole UK banking sector as the assets of all of them came under scrutiny and money markets closed. This caused a fall in the stock market and an economic recession.

This was indeed a very sad episode in the financial history of the world. I did of course lose money having invested in Northern Rock shares as I did not anticipate the Government and Bank of England would be so stupid as not to support the company, at least temporarily. But I probably recouped all my losses by picking up other shares that fell to very low levels and recovered in a few years (not banks though – I still do not trust their accounts!).

Bernanke’s book is well worth reading if you wish to understand the details of what happened. If anything it’s rather too detailed at 600 pages as if the author was writing for historians. But it does throw some interesting light on the events of 2008.

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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Why I Won’t Be Investing in Bitcoins

In the current market manias, investing in Bitcoins or other cryptocurrencies is a popular thing to do. Who could lose money on Bitcoins that seem to be on an unstoppable upward trajectory? Well a lot of people can. It was down 8% yesterday in sterling terms as I was writing this and it has been both very volatile and on a downtrend since the start of the year.

Apart from those folks who like to gamble on a throw of the dice or on the turn of a card, why would anyone “invest” in it? I suggest nobody because there is no fundamental value underlying the asset. That’s apart from the security issues and people just losing their passwords and hence being locked out of the asset.

If you buy shares in a company, you are actually purchasing part ownership of a business. That business will be producing something that people actually want, such as products or services they wish to consume. So long as people, or other businesses, have an urgent need for what a company produces then they will pay for it (typically by exchanging their labour or productive capacity (assets) using currency as a means of exchange). It is possible that Bitcoins might in future be that means of exchange but it is not ideally suited to that purpose.

The value of assets in the modern world is not identified by reference to gold or other physical assets and central Banks can print money whenever they wish. So there is no intrinsic value in cash holdings. The value is not limited by supply, and even with Bitcoins, more can be produced (albeit at enormous environmental cost because of the electricity consumed to do so).

When you buy a share in a company, you are purchasing a small part of a business that produces something useful. When you buy a Bitcoin all you are purchasing is a token to sell to someone else at a higher price – if you are lucky and can persuade them it has some value.

What’s the difference between Bitcoins and Gold you may ask? The majority of gold is not mined for just keeping in a bank vault or converting into coins. Some 50% is used in the production of jewelry and 37% in electronics. In other words, there are applications for it that are well established and consistent demand. Yes there is some speculation in gold and some uses of it as a simple store of value but the mining of gold would be sustained by industrial applications. You can actually wear gold jewelry to impress people with your wealth (just like people buy expensive cars and watches), but you cannot wear Bitcoins. All you can do is to go around boasting about how many you hold but that is not quite as effective as wearing gold.

The Financial Conduct Authority (FCA) has recently warned against speculation in cryptocurrencies by retail investors, and quite rightly. There is no intrinsic value in a Bitcoin. With company shares the intrinsic value may be somewhat uncertain and share prices subject to the emotions of investors but there is at least a way to determine the value by looking at the discounted cash flows generated by a company. The future cash flows help you to determine the current value. But with cryptocurrencies there are no associated cash flows. No dividends paid out and no profits generated directly from the assets as with company shares.

If you buy cryptocurrencies you are simply buying a “pig in a poke”.

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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