THE HUNT FOR DEAD OCTOBER

Let’s start with some quotes from my March Letter from Linlithgow which is still on our website. I encourage you to read it again to check what I wrote eight months ago….

“We don’t have to be smarter than the rest. We have to be more disciplined than the rest”
- Warren Buffett

“The greatest edges an investor can have are a long term orientation and to resist crowd psychology”
- Seth Klarman

“If everybody else jumps into Bo’ness Docks it doesn’t mean you have to”
- Grannie Mckay

And here’s another one that’s so appropriate right now.

“If you mix politics with your investment decisions you’re making a big mistake”
- Warren Buffett

Sorry for the lateness of this October Letter. Faced with continuing dismal lockdowns and as winter loomed, Fran and I decided to escape for 3 weeks from the dreich Scottish weather and negative media, never mind the daily grunge from our miserable leader, to see if there was any truth in the allegedly dire Covid situation in Spain. We were missing our annual chill-out pilgrimage to deepest Ibiza anyway, given our failed attempts to fly there since May had been thwarted by ever-increasing panic-led decisions from the Stasi Party.

We knew we faced a 14 day detention in quasi-solitary confinement on our return but figured that 3 weeks in the  Ibiza campo surrounded by orange, lemon and tangerine trees, with regular daily doses of blue skies, sunshine, quiet beaches and muchas vitaminas (usually in the shape of Ribera del Duero tintos) was worth the pain on our return. Though I’d like somebody in officiousdom to explain why you can’t be Covid tested on your arrival back in Edinburgh Airport. If Jersey can test you in minutes when you land there, why not here?

And don’t tell me it’s because staff are over-stretched. Have you been to an airport recently? Empty. A simple test reported within 24 hours as they do in Jersey would allow us to get on with our heavily restricted lives instead of being stuck at home annoying each other for a further fortnight. Talking about being over-stretched, I see that the pessimists at SAGE are now worried about an estimated 25,000 new Covid patients they calculate will need hospitalisation this winter, based on their abacus models. Apparently the NHS won’t have enough beds. Whose fault is that? In the last 20 years almost 75,000 NHS beds have been lost thanks to Government cuts, presumably based on previous mathematical model predictions. We could sure use these beds now eh?

So how was Ibiza? October has always my favourite month there. It’s quiet at the best of times in restaurants and beaches. And where we prefer to be, in the North East it was muy muy tranquillo. Covid restrictions mean that you must wear masks and be sensible in the streets and shops, but the draconian measures in bars and restaurants were as follows…. No more than ten to a table. No masks to be worn once sitting down. Alcoholic drinksh can be sherved without food until 10pm, after that you can continue until 1am if you can still focush shufficiently to order food from the menu. Ta Daaaa!

But in the main tourist areas like San Antonio it’s dead. A dead October you could say. Hotels remain closed, most bars and restaurants are boarded up and poverty beckons for 1000s of families who depend on the tourist season. On our last day it was confirmed there were as many as 2 Covid patients in ICU in the hospital there. A total of 6 Covid deaths have been registered since February, all aged over 80 with serious pre-existing illnesses. Half were described as ‘immigrants’ whatever that means. The vast bulk of cases and fatalities in Spain are in Madrid and Barcelona. Yet Ibiza suffers a ‘death by 1,000 cuts.’ Madness. 

However, three weeks in paradise when not enjoying Vitamin D and other Vitaminas, it gave me the chance to catch up with my research and reading. An iPad does come in handy sometimes. I didn’t watch any TV, gave the predominantly negative social media a wide berth, though I did have the odd squint at ‘Bad News’ on the BBC website simply to remind me how one-sided they still are and how lucky we were. And given you will all have had your fill of fear-driven pessimistic drivel while we’ve been in paradise, I thought I should share ‘stuff’ you are unlikely to have seen (because it’s good news), and hopefully cheer you up un poco.

We are constantly being told these days that Technology stocks are in a bubble. Question is- what’s a technology stock? Or what’s a bubble? I came across a fascinating piece that discussed this very issue. In 2004 Google went public at the same time as Domino’s Pizza. Google as you may be aware is part of the FAANG mob (Facebook, Amazon, Apple, Netflix and Google) who appear to be taking over the world alongside scientific pessimists. An odd combination, eh? Anyway, you’d imagine that by last week, Google with a return since launch of over 2,700%, would have way outperformed Domino’s Pizza.  And you’d be wrong. Domino’s is up over 2800%. That’s more than by a pizza slice in my book. But surely Domino’s owes part of its success to its use of technology? As have many other successful businesses I’d imagine.

These long term winners like Google or Domino’s can be categorized as‘100 Baggers’ (Companies whose share prices go up by at least 100X). Previous ‘100 Baggers’ include a wide mix such as Campbells Soup, Boeing, Chrysler, and Deere and Co who make tractors and the like. As Buffett has said “Find great companies at a great price, never mind the sector, and hold on for the ride”.  So rather than invest in an index filled with loads of losers and a few winners why not study what drives long term successful businesses (check my September LfL)  then find the fund managers who go the extra mile to find them? It’s hardly rocket science.

As you’d imagine all great businesses start small. Of course not every small business makes it. In February, we sat down with a fund manager we’ve known for years who is rather good at spotting winners early. He had added Zoom to his portfolio and explained why (who had even heard of Zoom then?) At the time Zoom (a conference meeting app) had only 1 million subscribers. By April (from memory) they jumped to  300 million thanks to Covid fears and remote working. The share price? Up fifteen fold. Wow.

A Zoom call we had this week was with our friend Mike Williams (he writes our Letters from America. Do check out his short video on our website) who mentioned that while media concentrate on bad news like failed businesses and job losses, in the US so far this year 1.6million new businesses have been launched. And he added that $18 trillion lies earning nada in money funds over there thanks to fear. He reminded us that the biggest generation in US history, Gen Y, is poised to enter its maximum consumer spending years. Fear AND positive demographics added together. What a potent mix. This could be 1982 all over again but better.

Back then the Dow Jones index was 970 and pessimists predicted that the US had no future. US GDP was $2 trillion then. It’s now 9 times bigger. The Dow Jones is 27 times higher. Over that period there were 6 different US Presidents, Democrats and Republicans. Goodness knows how many crises No matter who wins this election, great businesses will keep winning. So yes, I’m optimistic again. What’s more, so are top investment research organisations rarely mentioned.  Ned Davis Research for one. Pring Turner for another.

Now a few words on Brexit.  Now I don’t know what will happen but consider this- In February the highly respected German Halle Institute found that a No Deal Brexit would put 422,000 EU jobs at risk, 100,000 at risk in Germany, 50,000 in France, and 20,000 in Ireland. These compare to the 12,000 at risk in the UK. I haven’t seen that mentioned in Bad News. Have you? So what do you think is likely to happen? And when/if it does, what do you think could  happen in the UK and European stockmarkets considering the biggest 7 European stockmarkets in total (inc the UK) are worth less than 6 US Tech stocks. Yes really. Value somewhere, eh?

And now an Obituary. Before disappearing to Ibiza I wrote an obituary for ‘Long Term Thinking” who had just passed away. It’s on our website. It was published on Daily Business online on the 2nd of October. Now, sadly I find that his step-brother Common-Sense has also died. So here’s a short obituary for him.

“We mourn the passing of a beloved old friend Common-Sense who has survived much tragedy for many years. No one knows exactly how old he was since his birth certificate was lost long ago in bureaucratic red tape. He was a mentor to my Grannie McKay with his wisdom such as ‘There’s always two sides to every story’ and ‘there’s 2 types of people in the world- drains and radiators. Keep close to the radiators’ He will be remembered as having cultivated such valuable lessons like knowing when to come in out of the rain; why the early bird gets the worm; that life isn’t always fair;, and maybe it was my own fault.”

“Common-Sense lived by simple rules including ‘don’t spend more than you earn’. His health however began to

deteriorate rapidly when overbearing regulations were introduced by control freak boffins. Like 6 year old boys charged with sexual harassment and social-distancing violations for kissing a classmate, teachers sacked for reprimanding unruly children, and university students locked up in University halls of residence without food and fined £10,000 for having a party. His last words were ‘if I can’t see my children, cuddle my grandchildren or go to the pub to share drinks and stories with my old pals, life isn’t worth living.’”

“No one attended his funeral. Despite being well over 100 and untested, he was just another Covid statistic. A tape of his favourite music was played though. Which led to an unsavoury scene when local police barged in to intervene. One said ‘I thought I heard singing and that’s illegal”

Alan Steel
This letter is the personal view of Alan Steel.  Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.