"If cheaper currency is the source of wealth, where has Bangladesh gone wrong ?"
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
One of the sadder stories in the history of investment management is that of Mr.Tony Dye. The following extract is taken from his obituary in The Independent:
“Tony Dye was one of Britain’s best known fund managers, becoming a household name in the late 1990s due to his controversial opinions about the outlook for global stock markets. At a time when markets were soaring, Dye insisted they were overvalued and on the verge of a crash – a view which put him at odds with most other investors at the time and earned him the nickname ‘Dr Doom’.
“As early as 1995, as the FTSE 100 was approaching 4,000 points, Dye began to make the case that markets were too expensive. At the time, he was the chief investment officer for Phillips & Drew one of Britain’s biggest asset management firms, and by 1996 he had begun to move large sums of clients’ money out of equities and into cash.
“In the years that followed, however, stock markets continued to soar, driven by the technology boom. But Dye stuck to his guns, avoiding the high-growth, high-risk internet stocks, maintaining large positions in cash, and consequently ensuring that Phillips & Drew’s funds significantly underperformed their rivals. By 1999, the firm was ranked 66th out of 67 for performance amongst Britain’s institutional fund managers, and was haemorrhaging clients – and in February the following year, just weeks after the FTSE had broken through 7,000 points for the first time, Dye was sacked.
“Days later, his prophesy finally came true. Markets collapsed, and settled into a three year slump, which saw more than 50 per cent wiped off the value of global stock markets.”
In matters of investment – especially when acting as an economic agent – being fundamentally correct – but overly early – invariably looks identical to being wrong. Big market timing calls aside, there is also a grotesque mismatch between the set-up of institutional asset managers and what is in the best interests of their end clients, the individual members of the public who pay their fees. The investment fund marketplace is grotesquely oversupplied. There is far too much, to use the dismal phrase, ‘product’.
The problem is exacerbated by inevitable weaknesses in psychology – both on the part of the manager, and on the part of the investor. Stress points abound throughout the chain. The investment fund world is hopelessly balkanised, and brimming over with a degree of product specialisation utterly unwarranted by investors’ real needs.
The fund management industry is a perpetual production line of novelty, or rather an endless rehash of the same old ideas. The point of absurdity was reached and surpassed (in the 1990s was it ?) when there were more mutual funds listed on the New York Stock Exchange than there were common stocks with which to populate them. The industry is a monstrous hydra, busily consuming its own, and its investors’, capital.
New funds are launched daily. Failing older funds are quietly tidied away, merged, or destroyed. They are ‘uninvented’. The FT‘s John Kay, who knows the UK equity (and fund product) markets well, once said:
“The short-term horizon is basically introduced by the intermediary sector. Pension trustees [for example] are told they should keep reviewing managers, while retail investors get constant invitations to trade from independent financial advisers [for example] and the platforms set up to enable them to do so.”
“But imagine the hurdles in the way of a manager who would like to purse long-term strategies but is just starting out.” In the words of Professor Kay:”How easy would Warren Buffett find it to set up now?”
We have not been immune to the aspirations of clients frustrated at the performance of diversified portfolios lagging the best-performing equity markets or sectors, i.e. the so-called FAANGs (although this explicit benchmarking against stocks was never a mandate to which we subscribed).
We struggle, in some cases, to make sufficiently clear our concerns about broader market valuation, or just as importantly the gravity of the global financial situation (including a potential end-of-cycle-driven currency crisis), which makes a wholehearted commitment to the stock market in mid-2023 to the exclusion of all else seem to us a particularly risky strategy. The same holds true even more urgently in the context of government debt – a gigantic fly in search of a fast-moving windshield.
So where, if anywhere, does the fault lie? Sometimes it is not just asset managers who should be accused of being short-termist, or of missing the big picture.
Our thesis has been consistent for many years now. We believe we are at the tail end of a 50-years’ and counting experiment in money and the constant expansion of credit. This experiment is not ending well. Because government money, unbacked and unchecked as it now is by anything of tangible value, can be created at will, it has been. What is extraordinary is that despite trillions of Dollars (and Pounds and Euros and Yen) of stimulus, there have until comparatively recently been few visible signs of what we would call inflation, in anything other than the prices of financial assets themselves.
We are living through a historic period of global currency debasement. The neo-Keynesian money-printers who dominate the world’s central banks have ‘won’ the debate, but are now scratching their heads, looking in vain for the economic recovery that they were expecting all those trillions to have bought.
They will continue to look in vain, because money creation and true wealth creation are polar opposites. As portfolio manager Tony Deden has asked,
“If cheaper currency is the source of wealth, where has Bangladesh gone wrong ? If cheaper money means economic prosperity, why not just print as much as we can and give it out to everyone ?
“We have become fools. The customers know nothing and the advisers know even less. And then we have the idiot economists – the neo-classical Keynesian variety with solutions to problems they did not even anticipate; solutions that have, in fact, been long discredited. And so we lurch from crisis to crisis, eating our meagre capital in the hopes of becoming rich in money. It is a pity.”
Those words were written fourteen years ago. The printing presses have been run to exhaustion ever since. So far they have bought us an inflationary rally in certain financial assets – and a generalised collapse in the purchasing power of everyone’s money. It has been a challenging time for anyone focused on the disciplined and genuinely diversified pursuit of capital preservation in real terms (not least by focusing on the honest money that is gold).
We have not, to any significant extent, participated in the latest ‘phony rally’. But then we are playing a longer game than most of our peers. Round and round and round she goes; where (and when) she stops, nobody knows. But it certainly feels like a fin de siècle moment – a true changing of the old guard. At times like this we have to stand for something – or else we run the risk of falling for anything. In the words of the celebrated fund manager, Jean-Marie Eveillard:
“I would rather lose half of my shareholders than half of my shareholders’ money.”
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you, too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio -with no obligation at all:
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: email@example.com
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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