Did you see oil’s recent pop?
Did you manage to profit from it?
I’m guessing some of you did. But the vast majority probably didn’t.
And there’s a good reason why.
Oil is up 18% this year. Worries about global oversupply are fading. Prices were also higher on news of China’s trillion-dollar spending spree.
So why did most of you fail to capitalise on oil’s rise this year?
Because you’re not fortune tellers. You don’t know what’s going to happen next week or next month.
China could come back and say they’ll hold off on their purchase. Worries about an oil oversupply might preserve because of one remark by someone who’s got something to do with oil.
Guessing when these things will happen is almost impossible.
Yet it doesn’t stop the fundies from trying…
Why fundies failed to deliver this year
From the Australian Financial Review (AFR):
‘The year was another humbling one for the active funds management community, which has struggled to convince investors from trillion dollar sovereign funds to individuals with small balances, that they can add value over and above the fees they charge.
‘Their argument in the years leading up to 2018 was that cheap and easy money made it harder to pick stocks and fuelled an exodus into passive funds. Their sentiment was that mindless investing would be punished when volatility returned to the market.’
Yet what happened when volatility picked back up?
The fundies failed to deliver.
A large majority of them lost money. Then again, a year’s worth of returns means almost nothing. Those bets that were down 20% in 2018 might jump 100% in the next two years.
The AFR continues:
‘But what is most disappointing is that certain funds that marketed themselves and their strategies as being built to endure a stockmarket correction lost money. In some instances they lost more than the risky benchmarks they derided.
‘That includes so-called “value investors”, which avoid racy high risk growth stocks, hedge funds that can short stocks and profit from falling markets, quant funds that systematically follow trends, or macro hedge funds that apply their apparent expertise in interest rates and currencies to make money from major shifts.
‘While there were notable exceptions, many alternative asset managers failed to beat their modest cash benchmarks, and some produced losses that were five times greater than the stock market draw down.’
So why are so many fundies performing so terribly, even when volatility enters the market?
There’s a few reasons really. One of them I mention above.
Fundies are too eager to make bets on what will happen in the next quarter. And it’s because that’s what they’re incentivised to do.
Clients look solely at returns. So, if a fund isn’t beating the market or their peers, clients redeem their cash and go somewhere else.
Fund managers then have the enormous pressure of always trying to be where the returns are. They trim and clip. They optimise and allocate their portfolio to always be in the black.
But often it’s such a herculean task, many can’t pull it off. And only the lucky do.
So, what should fundies (and you) focus on to pick winners?
What fundies should be focusing
First, I should say it’s almost impossible to always be ahead.
Sometimes you’ll buy a stock, and it might be a wonderful stock, but it just goes down. It might have nothing to do with the business.
Investors just don’t like it or they’re just ignoring it. And that’s fine. We have plenty of time. We can wait.
So, with that out of the way, what kinds of things should the fundies (and you) be looking at…
Well if you’re macro (wider economy) included, you might want to look at the structural problems affecting many countries in the long run.
Forget about what oil is doing or if lithium prices are going higher. You don’t have a good grasp on these variables, turning investors into speculators.
What I would want to focus on is if countries like Japan, Germany and China can break free of their manufacturing-led economies.
I’ve talked about this before. Manufacturing is a dying industry and it’s nobody’s fault.
Like agriculture before it, manufacturing is becoming more efficient year-after-year. Output continues to climb, far above the growth of demand.
Sooner or later we’ll reach a turning point, a point where these manufacturing economies will stop growing output and drudge along. They’ll all be like Japan today if they don’t wise up and push more people into services.
After all, that’s where we’re all heading, isn’t it?
Automation and machines will take over the factories. And the services will be left to us humans.
What does this large trend mean for investors?
Well things could get a whole lot more local. With low costs of manufacturing all over the world, producers will be stationed in local economies.
They’ll try to build up local dominance and cater to local buyers.
The push to services is also a push to a local world. Most service businesses are local by definition. You’re not going to send your dry cleaning to China or fly to Switzerland to get financial advice.
You’re likely going to get both very close to where you live. Again, it will be the local dominant businesses that survive and thrive.
That means if you’ve got to start shoring up a portfolio, it better include locally dominant businesses.
These businesses won’t just be insulated from macro events. They’ve have a strong foothold to continue expanding at the fringes of their local economy.
Maybe some of the picks you find won’t rise in 2019 or 2020.
But I believe that because our global economy is moving local, sooner or later you’ll be handsomely rewarded…far more than trying to bet oil anyway.
Bet on localisation,
Editor, Money Morning
PS: Three reasons you should watch gold carefully. Read the free report now.