Bernard Baruch – Speculating in the Twentieth Century

Someone on Twitter recently mentioned Barnard Baruch as a legendary investor. I have just read his autobiography which is entitled “Baruch – My Own Story” and it is indeed interesting for several reasons.

Firstly he had a long life and the book covers the period from the American civil war until the 1960s. So it covers more than one period of financial crisis such as the 1929 Wall Street crash and two World Wars. Baruch’s father was a doctor and surgeon in the Confederate Army. For those interested in American history, as I am, it’s a revealing account of why the USA became so dominant in the world financial scene.

Baruch became a stock market speculator and a millionaire by his thirties when a million dollars was worth a great deal. He later became an advisor to Presidents and was involved in US responses to both major wars. But he also was almost wiped out at times in his early career. One thing he learned to do was to always reflect on and try to learn from his mistakes so as not to repeat them – sound advice for all investors.

He is scathing about share tips. So he says about his losses in American Spirits that “Nothing but my own bad judgement was responsible. My course violated every rule of speculation. I acted on unverified information after superficial investigation and, like thousands of other before and since, got just what my conduct deserved”.

It covers an age before the second world war when stock market manipulation was very common and there is an interesting mention of “bucket shops” and how they operated to wipe out their patrons (I mentioned the resurgence of bucket shops in a previous blog post).

Baruch is particularly good on the manias that sweep stock markets. He was adept it seems at knowing when the market was too high and when it was time to get out. He has a chapter on his investment philosophy that includes this advice:

  1. Don’t speculate unless you can make it a full-time job.
  2. Beware of barbers, beauticians, waiters – or anyone – bringing gifts of “inside information” or “tips”.
  3. Before buying a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
  4. Don’t try to buy at the bottom and sell at the top. This can’t be done – except by liars.
  5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
  6. Don’t buy too many different securities. Better only a few investments which can be watched.
  7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects…
  8. Study your tax position to know when you can sell to greatest advantage.
  9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.
  10. Don’t try to be a jack of all investments. Stick to the field you know best.

These are all wise words indeed.

In summary, the book is an interesting read as Baruch is a good communicator as well as it being a slice of America’s financial history when it was dominated by J.P. Morgan, the Rockefellers and other giants of the age.

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

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New Year Share Tips – Are They Worth Following?

It’s that time of year when financial magazines and newsletters analyse their past share tip performance and give their New Year tips. Are the tips worth picking up or even reviewing?

One approach you might think would be effective would be to simply back those publications who had the best historic performance. One review I picked up on Twitter (I am not sure of the original source) gives the Investors Chronicle (IC) as the winner in 2019 with a 37% return with The Independent bottom of the table. However, the performance varies from year to year – for example the IC had a negative year in both 2017 and 2018, while the Guardian had negative returns in all three of the previous years. Perhaps not many investors read the Guardian but that may be to the good.

One problem of course is that the tip writers may vary even within a publication from year to year and few put their names to the articles. In essence backing the share tips based on the “form” of the publications or the writers is not going to work. Even if the writers stay the same, and their “styles” of investment such as a focus on growth or value, what works one year might not work in another.

Another failing is that some writers rely on advice from well known fund managers who tend to “talk their own book”. So the Questor column in the Daily Telegraph, written by Richard Evans, tipped Bioventix (BVXP) as “AIM stock of the year” on Friday (10/1/2020). That was after talking to Keith Ashworth-Lord of Sanford DeLand Asset Management who has a big holding in the company. The share price rose 9% on the day this tip was published which as a holder of the stock I am quite pleased with, but I would not previously have rated it as other than a “hold” personally.

Many share tips in the national media and reputable investment newsletters will rise in price on the day the tip is issued – indeed even before you have got up for breakfast. Investors then pile in further over the next few days and if you follow that herd you are going to lose money. After a few weeks, when the company’s performance does not instantly shoot up or there is little news, the speculators lose interest and the share price falls back again.

It’s worth pointing out that it does of course depend on whether you are a long-term investor or a short-term speculator. Such share price movements may be great for speculators , most of whom I suspect lose money, but for long-term holders like me share tips can be positively dangerous. My approach is therefore as follows:

I use share tips as ideas for research. Only one in ten is worth more analysis and if I consider it worthy after that I would buy a few shares and see how the company and its share price develops. Most companies fail on the “due diligence” phase. I am not a “plunger” who bets a lot on any new holding. I am looking to find companies that I can hold for the long term and in which I wish to take an opening position. Apart from anything else, moving a lot of cash out of existing holdings to invest in new ones is often a mistake, I have learned from past experience. It’s the syndrome of looking for the pot of gold at the end of the rainbow, i.e. picking new investments you don’t know much about but which someone else thinks are a great proposition, and abandoning ones that you do know.

What are the kinds of tips that I avoid?

Firstly I hate the “recovery story” kind. These are where a company with a pretty dismal historic performance has improved analyst forecasts (which is what most tipsters focus on). For example, Investors Chronicle has Burberry (BRBY) as one of their 2020 tips. The supporting article has lots of positive comments about the changes taking place in the company and its “transformation”, but a quick look at the financials gives me doubts. Revenue in the last 3 years, which is a key metric for any retailer, was static or falling and the forecasts for the next two years are only slightly higher. Earnings per share follow a similar pattern. Even under new management, is this a growth business or a just another rather mature company in a crowded sector (revenue about £3bn) flogging expensive clothes to suckers? Is there any real innovation or growth above inflation taking place is the key question?

Another example of a recovery story is Momentum Investor tipping Marks & Spencer (MKS) based on their move into on-line groceries via the joint venture with Ocado. But the wisdom of this tip was soon disproved after the company issued a trading statement on the 9th of January with dismal figures for clothing sales. The share price is down 12% since then. Too many “skinny” fit men’s trousers was one problem as the company tried to be more fashionable so that’s just another management failure partly arising from the sclerotic supply chain at the company. Tipping shares can be a quick lesson in humility of course which is one reason why this writer does not do it. Let those who get paid for their alleged wisdom continue to do so though so we can have the occasional laugh at their folly.

Window supplier Safestyle (SFE) was tipped as a recovery story by ShareWatch but is likely to still make a small loss in 2019. Are profits really going to come back in 2020 and will investors regain confidence in the business and its management? I do not know the answer to those questions so I am unlikely to invest in it.

Secondly, I ignore sudden enthusiasm for boring companies. Another of IC’s tips was Johnson Service (JSG) which provides textile rental and cleaning services – hardly a new business and one that I doubt has barriers to entry. The company is growing, but on a forward p/e of 19 and relatively high debt, I cannot get enthusiastic.

Apart from drain-pipe trousers, something else I used to favour in the 1960s that is back in fashion is ten pin bowling. Two companies that were tipped by Momentum Investor and mentioned in Investors Chronicle – Ten Entertainment (TEG) and Hollywood Bowl (BOWL) may be worth looking at. TEG (which I hold) was also tipped by ShareWatch. These companies are changing from not just being bowling alleys but indoor family entertainment centres with other games available and good food/drink offerings. Some also stay open long after the pubs have shut. You can see why they are experiencing a revival in demand with more centres opening. The key with share tips is to follow the new trends, not the old ones.

Thirdly I ignore tips that back racy stocks already on high valuations. For example Shares Magazine tipped Hotel Chocolat (HOTC). This is a chocolate retailer that seems to have a good marketing operation and decent revenue and profits growth but on a prospective p/e of 45 it seems too expensive to me. The slightest hiccup would likely cause a sharp drop in the share price so there looks to be as much downside risk as upside possibility to me.

Lastly, I ignore tips in sectors I don’t like or businesses I do not understand – the former includes oil/gas and mine exploration, airlines and banks. Shares magazine tipped Wizz Air (WIZZ) and Lloyds Banking (LLOY) for example but they are not for me. Businesses I do not understand might include some high tech companies with good stories of future potential but no current profits.

To reiterate, share tips are useful for providing ideas for research but blindly following them is not the way to achieve superior investment performance.

Preferably share tips should confirm your views on shares you already hold – such as Bioventix, Ten Entertainment and several others I hold which have been tipped in the last couple of weeks. That may be a reason to buy more, but not in any rush.

As regards other tips like the best countries, or the best sectors, or whether to invest at all based on economic forecasts or Brexit prognostications here’s a good quotation from John Redwood in the FT this week: “The safest thing to forecast at the beginning of the 2020s is more of the same”. An economist with real wisdom for a change.

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

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Share Tips, Debenhams, Jaguar (JLR) Layoffs and Brexit

Private Eye published its annual review of national press share tips this week. It makes for amusing reading and rather shows that financial journalists are no better than you and me at picking winners – indeed worse in most cases. The Guardian was noted as remaining “keen to empty its readers’ pockets”. It’s top ten share tips underperformed the FTSE100 by 28 percentage points, repeating the same dire performance as in 2017. One big loser was Footasylum (FOOT) which was down 90%. The Sunday Times was also mentioned as a provider of duff tips including Faron Pharmaceuticals, Clipper Logistics and William Hill. Also collecting brickbats were the Independent and Mail on Sunday. The moral is that relying on share tips from newspapers is not a sound investment strategy.

Several big stories in the national media today and yesterday are worthy of note. Debenhams (DEB) have lost their Chairman when he got a majority of votes against him after Mike Ashley of Sports Direct voted their 29% stake against him at the AGM, with support from another major shareholder. The new CEO, Sergio Bucher, also failed to get elected to the board but retains his executive job which is somewhat unusual. The company is clearly in need of refinancing as it is being overwhelmed by debt of £520 million. The share price is now down to 4p valuing the business at less than £50 million – not much for a business with revenue of £2.3 billion! But trading over Christmas and before was dire – see the trading statement issued on the date of the AGM. Mike Ashley has offered to refinance the business in return for more equity but has been rebuffed by the Debenham’s board. Comment: Can traditional department stores survive even if they dump their debt and reduce their property costs by a CVA? John Lewis still seem to be doing reasonably well but reported challenging trading and may cut their staff bonus this year. But most traditional department stores disappeared years ago. Debenhams do have a good on-line web site but will shoppers think of them and go there? Men’s shirts at 70% off, i.e. for £11.70, look good value but what margins are they making on those one wonders. Damn all I would guess. Some retailers like Dunelm do seem to be achieving a change to on-line customer service but Debenhams will be hobbled by its financial structure unless some vigorous action is taken. But it may simply be too late.

There has been much teeth gnashing over the thousands of job cuts announced by Jaguar Land Rover (JLR Group). Is that due to Brexit or other reasons? In fact it’s been hit by facing the unpopularity of diesel vehicles with a car product range that has very few petrol or hybrid/electric models unlike other up-market car makers. It has also been hit by a slow down in sales in China and by the fact that a new production plant has been built in Slovakia with state aid, i.e. jobs have moved there to a lower cost venue. That decision was taken before the referendum on Brexit in the UK. Jacob Rees-Mogg apparently drives one of their vehicles and said “Brexit has not happened. The reason it is making all these cuts is because it produces too many cars with diesel engines and its top of the range cars are not as reliable as you would want them to be”. As a Jaguar driver I agree with the first part but not the second

On the issue of the Brexit Referendum it is worth noting that the City of London Corporation Council have voted 60 to 31 against the suggestion of a second referendum – or “people’s vote” as some call it when the people already voted. This seems to be a very unpopular idea in general mainly because most “people” are rather fed up with the politicking over Brexit. And would just like to see the matter concluded.

Another big story in the media yesterday was that of the lady who had received two hand transplants (Corinne Hutton). She lost all her hands and feet from sepsis. I can understand her desire for the operation but I am not sure it is at all wise. Transplant recipients of any organs (and I am one) need to take drugs that are nephrotoxic to suppress the immune response, i.e. they damage the kidneys long-term. This means that they may need a kidney transplant after a few years and there is also a high risk of short-term graft failure. I know this not just from my knowledge of the field but from meeting a heart transplant patient in hospital who had also subsequently had to have a kidney transplant. Let us hope it works out well for Corinne though. But for the wealthy investors who read this blog, bear that in mind before you start shopping for new body parts.

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

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