Not a time for cold feet

“The greatest thing in this world is not so much where we are, but in what direction we are moving”
- O W Holmes (1841-1935)

“We may not be able to direct the wind but we can adjust the sails”
- Anon            

“News constantly triggers the limbic system. Panicky stories spur the release of cascades of cortisol. This deregulates your immune system and inhibits the release of growth hormones.  In other words, your body is in a state of constant stress”
- Rolf Dobelli  (2010)

“In every life we have some trouble, but when you worry you make it double”
- Bobby McFerrin  (1988)

“There are decades where nothing happens and there are weeks where decades happen”
- Vladimir Ilyrich Lenin

If you recognise that last quote it’s probably because I’ve used it a few times recently thanks to it being so appropriate to what’s happened this last 12 months. Vladimir allegedly said it as he fled Russia in 1917. You may not know this, but the Russian Revolution started in the February and by the time it ended in October the St Petersburg Stockmarket Index had fallen to zero. That fairly puts what happened from last February into perspective eh? Phew.

Februaries are important to me. No wonder. I was born in one 74 years ago. The recent snow fall reminds me how cold Scottish winters can be. The worst one as measured in snowfall (6 weeks non-stop) was that one in 1947. Legend has it that my mother and I were ferried home from the maternity hospital snuggled up in a taxi behind a snowplough.  Snow had drifted to over six feet.  My dad, a bricklayer, couldn’t work for weeks thanks to sub-zero conditions. Imagine what it was like without double glazing, central heating and only1 fire per household.  And with coal trains stuck in snowdrifts. Brrrrr. Thank goodness somebody had invented hot water bottles.

Mine was a stoneware Albion Leadless one. No, my memory isn’t that remarkable.  I cheated and googled ‘1947 hot water bottles’ and found it on ‘eBay’. If you’d like to know about vintage hot water bottles I suggest you find ‘YouTube’ on your ‘smartphone’, look for Eric Bogle and his song ‘The Wee China Pig’ in which he compares a stoneware hot water bottle with his wee wife. (It’s a good laugh.)  Did you notice the hi-tech words I used there? Not bad for a 1947 brain.

Anyway, regarding February 1947, while at University studying climatology as part of my Geography degree I discovered the weather conditions at the time were due to a severe double depression which sat for weeks over the UK.  A double depression probably became a treble one in the Steel household because a boy hadn’t been in their plans, especially one who wasn’t keen on leaving a cosy spot and who turned up very late, well after 3 o’clock in the morning and sporting a black eye.  The disappointment was clearly so bad that I remained a lonely child. 

February 1963 wasn’t much fun.  A 36 hour blizzard, 20 foot snowdrifts, gale force winds and the coldest spell in the last 100 years didn’t help. By 1953 we’d emigrated the 3 miles from Bo’ness to Linlithgow, raising the average IQ in both towns simultaneously and for my 16th Birthday treat I was sent forth on a one-man Captain Scott expedition to battle through  blinding blizzards to top up our survival provisions. Times were still harsh, no fridge, no phone, no double glazing, a bedroom which doubled as a cold store, and still only one fire.  But progress had led to a rubber hot water bottle, one which didn’t scare you ‘witless’ through the night when it fell out the bed. 

When I look back on my early teenage years, apart from these horrendously cold Februaries there were plenty of times much worse. Allegedly we were under constant threat from attack by the USSR. When I was 15 I went to bed not knowing if I’d see my parents again at the height of the Cuban Missile Crisis.  History tells us we were minutes away from nuclear war.  November 1963 stands out too as deeply worrying when Kennedy was assassinated.  At Uni in 1967 we worried about the Middle East conflict leading to World War 3.  Yet another Middle East war in 1973 led to a trebling overnight of the Oil price (from about $3 to $9) triggering years of UK double digit inflation. 26% it reached in ‘75/76.  What good old days?  And experts are worried now if inflation goes over 2%?  Get a life. 

The news nowadays is always pessimistic. It’s probably always been so but you don’t notice it when you’re young and enjoying yourself.  When I was a young teenager we were the first in the street to have a telly- fortunately only 1 channel with a mere smidgeon of bad news at 6 o’clock. To be honest I had no idea about Money until on leaving University somebody convinced me to become an actuary because ‘it paid well’. They never mentioned that you needed to have a double first in ‘Personality By-Pass and Deep Pessimism’. So I didn’t last long.  But fortunately I was curious.

And curious enough to study stockmarket returns from when I was born. Believe me it’s eye-opening.  Especially when you consider all the dreadful problems mentioned day after day. Problems that became worse and worse as the years went by.  Consider this- since February 1947 there have been 33 times when the broad-based US market index, the S&P 500 fell between 10% and 20%, and 11 times when it fell by over 20%, 6 of which averaged 43%. And that’s not counting all the times when it fell by between 5% and 10%. I bet when you read that you’re thinking - “I wish I’d kept my savings under the bed then”. And you’d be wrong because even ignoring reinvested dividends the index has gone up a remarkable 260 times! And please don’t underestimate the impact of these dividends. In only the last 25 years the impact of reinvested dividends on the index return is to increase gains by 75%. 

However do remember when you hear experts comparing index returns, be aware they aren’t comparing like with like. Comparing the S&P 500 today with its namesake prior to 1976 doesn’t make sense when you consider that twice since then about 60 companies were tossed out and replaced by entirely different businesses. Indeed every year on average over 20 companies are swapped.  It reminds me of the old joiner retiring after 50 years saying -“They don’t make hammers like they used to in the old days”. Then adding- “Mind you, mine has had three heads and four shafts in that time”.

So as I keep repeating – if you listen to the news , and sadly so many of us are addicted today to smartphones (I threw mine away years ago) as Rolf Dobelli reminds us, your stress levels will increase especially if you are older investors. I read recently (Book recommendations to follow) that an average person touches their smartphone (surely a contradiction in terms) around 2600 times a day, and the heavily addicted up to twice that. Research also finds that three-quarters of American adults sleep with their smartphone as do 90% of 18 to 25 year olds. May I suggest a hot-water bottle instead?

I have mentioned the ‘Fear/Greed Indicator’ before. Rather than listen to pessimists wheeled out by talking heads on the telly, miseries lauded for predicting crises but whose wrong calls are conveniently ignored, why not just pay attention to a simple ‘barometer’ like the one in our homes that tell us if it’s likely to rain or not? The indicator I’m referring to is an  accurate contrarian signal. It measures investor sentiment. And it goes from Extreme Fear at Zero to Extreme Greed at 100. It moves remarkably quickly which just shows how fickle emotions are when it comes to stockmarket sentiment.

A year ago it was 59, sitting in Greed. By the 26 th of March it had fallen to an all-time low at Zero. A day ago it was back to 59. Now it’s 49. Guess when the best time was to buy or hold onto shares?  Remember how it felt back in March? I do. And it was damned painful.  And as I’ve learned over all these years the worse the pain the more the gain.  

However there’s no doubt the world has changed enormously from my birth year, and not only since the mid-1970s. Terry Smith of Fundsmith last March reckoned the recovery would be a K shape, meaning that there would be a huge difference between Winners and Losers. Spot on.  In November 2019, one of our other favourite global fund managers told us about a new addition to his fund that he was hugely excited about. We hadn’t heard of the company. It was called Zoom. 

I am persuaded by those whose research I’ve gathered over the years, and whose wisdom I listen to that we are probably on the cusp of a change the likes of which we’ve never encountered before. A change so powerful and fast moving it will create astonishing opportunities for the fleet-footed and at the same time finish off businesses that can’t adapt or cope with developments in artificial intelligence and The Internet of Things. To help you get a feel for this massive change I recommend the following 4 books………

I am grateful to an old client/friend, Ron Collie for his recommendation of ‘The Autonomous Revolution’ by William Davidow and Michael Malone.  It is truly eye-opening and exhilarating and frightening at the same time. I have had a copy less than a fortnight and already on my third read. If you only read one of these suggestions don’t miss this one out.

A great friend whom I met originally way back in 1982 when we were both poor is Jim Mellon, now a billionaire and a serially successful entrepreneur. Jim believes that the best way to make most returns over a long haul is to source Money Fountains. He believes that the dual impact of the Covid pandemic and concerns over climate change is leading to a revolution in non-meat agriculture which he reckons will become a multi $ trillion  market. He calls it Agronomics.  You can read what he thinks in his book ‘Moo’s Law’. I was astonished to learn for example that only 29% of the planet is land, that of that only 71% is habitable, of which 50% is zoned for agriculture, 77% of which is required for livestock and yet only 18% of the Global Calorie Supply comes from that source.  Jim and I meet up in Ibiza where we endeavour to keep the Spanish wine lake from getting too deep.

And if you too have difficulty working out who to believe regarding inflation and financial bubbles, I suggest you read a book by an economist/investor I have followed since 1985 when I first came across his work, to discover over 20 years later he is a buddy of our man in the US, Mike Williams who I describe as a lighthouse in the fog and who regularly writes a Letter from America for our website. I refer to Dr Ed Yardeni and his professional autobiography ‘Predicting The Markets’.   Ed believes that 4 ‘D forces’ will dictate your investment success from now on - Détente, Disruption, Demographics and Debt.

Finally for this month I highly recommend a non-money book I stumbled across about 10 years ago in the days when we were able to fly to and from London City Airport which had a very decent bookshop.  The book is ‘The Art of Thinking Clearly’ written by Swiss Philosopher Rolf Dobelli , and translated from German. It contains  99 easy-to-read short chapters with intriguing headings on  thinking errors that can lead us astray in decision making. It’s great for popping in and out of.  And perfect for these Covid nights on your Kindle tucked up in bed with your hot water bottle. Sweet dreams.