Hello Darkness My Old Friend

“My advice for success comes down to three things: be curious, show up, and stay in touch. You have to keep reading, listening, thinking, finding out how people think and what they do. Then chase down anything that seems interesting”
- Ari Emanuel

“Question everything. The opposite of question everything is question nothing. And if you don’t question things, there’s no knowledge, no learning, no creativity, no freedom of choice and no imagination. So I always ask why? And why not? I ask question, question, question?  And then I listen. That’s how I discover something new”
- Heston Blumenthal

“These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto, but to minister to ourselves and to our fellow men”
- US President Franklin D Roosevelt 1933

“Never forget that technology fuels the three P’s: Productivity, Problem-Solving and Prosperity. It did it in the 1920s after the 1918 pandemic and it is already doing it again in the 2020s”
- Mike Williams, Truvestments.

On Friday the 20th March, days before Covid19 fears shut down the world economy and put politicians and a nerd armed with a Nintendo computer in charge of our lives whether we liked it or not, I wrote my March Letter from Linlithgow and called it the ‘Age of Unreason’.

Usually, these days we remove Letters more than three months old from our website, but I decided to leave that one available to remind readers what our thoughts were at a time when widespread ‘expert’ and ‘media’ views predicted that the best we could hope for was a ‘tick-shaped’ recovery and years of misery.  Good job that Ofqual weren’t asked for assistance. I hear that ABBA are disgusted to be downgraded to DAGB.

Hardly anybody foresaw a V-shaped stockmarket recovery. I mentioned this in the Letter and added “we don’t know when that will be but it wouldn’t surprise me if it -(the V-shaped recovery)- happened sooner than pessimists think.” And in the final paragraph I quoted US fund manager Bill Miller, who was derided at the time for saying that this was only the fifth exceptional buying opportunity of his long successful investing career.

Ed Clissold of Ned Davis Research described the last 6 months as “unprecedented”. Looking back over the last 100 years it was the fastest 30%+ collapse in the US stockmarket. But you’ll probably know that, given the hysterigentsia’s delight in reminding us every hour. Oddly however I haven’t seen them report that it’s also been the fastest-ever rebound to new all-time US stockmarket highs. At less than 6 months it’s 17 months faster than the previous record, following the 1987 crash, and 5 years faster than the 100 year average.

I recall at the time of the 1987 crash, a finance reporter saying to me “your problem is that you’re too optimistic”. It was the first time I’d been aware that optimism qualifies as a problem. Thanks to my innate curiosity I look for patterns. And one pattern had already stood out for me by then - the relationship between extremes of sentiment and subsequent stockmarket movements. Let me give you examples of this over the last 21 years, taking us back just prior to the DotCom bust.

In the US, at Yale, they’ve been running investor sentiment surveys since 1999. One survey is their “Crash Confidence” reading which gauges how worried investors are about a stockmarket crash in the next 6 months. What the survey shows is that the higher the level of worry the more likely it is for the stockmarket to rise. Last month the ‘worryometer’ was the highest level seen since April 2009… the beginning of an 11 year Bull Market. Wow.

Let me also share with you the Sentiment findings of the BoA B&B Indicator. No, that’s not the Bridge of Allan Bed & Breakfast price comparison, it’s the Bank of America Bull & Bear Indicator which measures how confident or concerned stockmarket investors are every week. Getting near 10 is an extreme of complacency/optimism typically signalling danger. The lower the number, the better the opportunities for the brave.

In late January 2020 the Indicator was 7.1. On the 25th March (2 days after lockdown) it was 0!  Never been that low. And it’s still low today. Oddly enough, sentiment indicators flashing extremes in optimism lie in other areas including Gold and Bonds which are currently attracting heavy inflows of investors’ savings. Watch this space.

Over the years I’ve come to depend increasingly on crowd sentiment (and contrarianism) as superior measurements of investment opportunity or concern. The light at the end of the tunnel might not be hope. It could be an onrushing train. When experts talk about ‘the market’ or ‘its yield’ or ‘it’s P/E’ or this ratio or that ratio compared to this year or that year, or “the market fell today because ‘one thing happened’” (you fill in ‘the thing’) it’s probably all meaningless twaddle. I’ve never understood the obsession with GDP for example. Like an Index it’s a completely meaningless ‘number’.

If you want to read more about all such Gobbledegook, do read Christopher Mayer’s excellent book “How Do You Know?”, and google “Spurious Correlations” where you’ll find such classics as how “per capita cheese consumption” correlates with the “number of people who died by becoming tangled up in their bedsheets”. I’m not making this up!

Last month I read a fascinating report by Paul Graham, “The Four Quadrants of Conformism”. It’s well worth finding on the web. I can’t do it justice here, but it explains a lot about why we’re in the present Covid mess, and from a positive point of view, why we as advisers are attracted to the right kind of fund managers who think differently and seek out companies to invest in likely to be winners rather than average or losers.

Finally I’d recommend that you take the advice of Rolf Dobelli who in 2010 wrote a long essay on the dangers to your physical and mental health by constantly watching and reading the News. It’s toxic. For the last 5 months I’ve taken his advice. So I read books instead. Looked out my old “LIFE IS GOOD” Tshirt.  And wallowed in the sound of silence. Chill.