“Follow the money.” - Deep Throat (Hal Holbrook), All The President’s Men, 1976.
“You think it’s all a couple of looney scientists, it’s not ! It’s bigger. There are people out there, *forces* out there, who have a lot to lose. They’re grown ups. It’s gotten too big, it’s in the hands of grown ups !”
“December 9: Met with Blake this evening for the first time. He stood in the shadows to prevent me from getting a clear look at his face. What a vile disease this is. He is a rich man with a cursed condition, but this does not prevent him from trying to better his situation and that of his comrades at the colony. December 11: Blake’s proposition is simple, He wants to move off Tanzier Island and re-locate the entire colony just north of here. He has purchased a clipper ship called the Elizabeth Dane with part of his fortune and asks only for permission to settle here. I must balance my feelings of mercy and compassion for this poor man, with my revulsion at the thought of a leper colony only a mile distant. April 20: The six of us met tonight. From midnight until one o’clock, we planned the death of Blake and his comrades. I tell myself that Blake’s gold will allow the church to be built, and our small settlement to become a township, but it does not soothe the horror that I feel being an accomplice to murder. April 21: The deed is done. Blake followed our false fire on shore and the ship broke apart on the rocks off Spivey Point. We were aided by an unearthly fog that rolled in, as if Heaven sent, although God had no part in our actions tonight. Blake’s gold will be recovered tomorrow, but may the Lord forgive us for what we’ve done.” I couldn’t read any further.. The celebration tonight is a travesty. We’re honouring murderers.”
In memoriam Hal Holbrook, actor, 1925 – 2021
After 30 years in the capital markets, you think you’ve seen everything – and then something like Wallstreetbets and the great short squeeze of 2021 come along.
(The latest commentary by fund manager John Hussman is well worth a look, not least for being chock-full of historical analogues with our current wildly dysfunctional markets.)
The reality, as we see it, is that the so-called ‘revolution’ around retail trading / online flash mob activation is the 21st Century equivalent of the perhaps apocryphal late 1920s “shoeshine boy”; when the business of equity investing is distorted by seemingly effortless profit generation and fuelled by forcedly idle hands and government furlough money, discretion might yet be the better part of valour. The comedian JP Sears offers a useful summary of what the GameStop mania is all about here, but one wonders whether the investment pool, such as it is, is already being churned into irrelevance by the participation of innumerable Wall Street insider ‘false flag’ participants. Perhaps the pro-Trump raid on the Capitol was not quite what it seemed, either..
Hussman then goes on to cite from the godfathers of value investing, Benjamin Graham and David Dodd, and from the value Bible that is Security Analysis (1934):
In the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude to the investment merits of common stocks. Why did the investing public turn its attention from dividends, from asset values, and from average earnings, to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the record of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.
Along with this idea as to what constituted the basis for common-stock selection emerged a companion theory that common stocks represented the most profitable and therefore the most desirable media for long-term investment. This gospel was based on a certain amount of research, showing that diversified lists of common stocks had regularly increased in value over stated intervals of time for many years past.
These statements sound innocent and plausible. Yet they concealed two theoretical weaknesses that could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether or not it was a desirable purchase.
The notion that the desirability of a common stock was entirely independent of its prices seems incredibly absurd. Yet the new-era theory led directly to this thesis. An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.
We have long been wary of Big Tech, primarily on the grounds of stretched valuations. This video, by Dominic Frisby, gives rise to concerns on altogether different fronts..
Not that we don’t buy technology-related stocks, but we’re only willing to do so on our terms, namely when they are hugely cash-generative, can be bought on unchallenging earnings multiples, and labour under little or no burden of debt.
One standout market offering legions of such investments, along with superior (not least demographic) growth potential to much of the Anglosphere, is Asia. The fund in question is now closed to new investors, but the Samarang Asian Prosperity Fund, for example, has the following attributes: an average p/e ratio of just 10x; an average yield (remember those ?) of 4%; and a price / book ratio of 0.9x. Take that, Amazon !
Because we don’t want all our investment eggs in the equity basket, we then choose to diversify the risk load via the ownership of systematic trend-following funds (correlation to stock markets: approximately zero); and further via the ownership of real assets, including both precious metals participations and also agricultural and commodity-themed investments bought, again, on attractive valuation grounds. We remain concerned about the outlook for inflation and / or stagflation, as articulated nicely by Dave Collum in this podcast.
In the latest Grant’s Interest Rate Observer, the legendary market analyst James Grant offers the following by way of conclusion:
The new digital reign of terror on Wall Street is the subject of the essay now in progress. In it, we trace the rise of the once lowly individual investor to his present cyber eminence. We compare the antics in GameStop, silver, AMC, etc. today to the pool operations of the 1920s, finding not much to choose from between the two on moral grounds. We judge that the ascent of the little guy is not so important a source of the change in the tenor of investment markets as the switching out of the Bretton Woods dollar for the pure paper model 50 years ago. Some things take time.
The bite of real interest rates, the threat of a capital call and the risk of professional shame used to temper, however imperfectly, the conduct of professional Wall Street. Nowadays, in the absence of real rates, assessable bank shares (the kind that held the stockholder liable if the financial institution in which he owned a fractional interest failed) and a self-governing Stock Exchange, that responsibility falls mainly on an indolent Securities and Exchange Commission and a model-blinded Federal Reserve. The investment conclusion we reach is that short-selling is oversold and due for a comeback. We’re bullish on bears and strong for security analysis.
Mind your back, and look out below.
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: firstname.lastname@example.org.
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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