20 years ago there was a popular saying in the investment business.
‘No one ever got fired for buying IBM.’
At the time, IBM was the technology stock to own.
Hundreds of fund managers had it in their portfolio.
It was given the institutional tick of approval, if you like.
And because the majority had gone all in on IBM, it was OK for everyone else to do the same.
Buy IBM and watch it fall 20%…
How do you explain this to investors?
‘Everyone else was doing it at the time. I thought it was a good idea too.’
The phrase has turned into exactly that: an excuse for a herd mentality.
The latest followers are the UK government. They’ve seen Trump’s tariffs. Some are upset about it, but no one is talking about impeachment.
So they’re piling on, likely using Trump as an excuse if any questions arise…
UK government is following Trump’s lead
The UK plans to slap tariffs on Aussie farm imports if a no-deal Brexit scenario arises.
The British government said they would scrap all tariffs in an attempt to lower prices for consumers.
Yet Environment, Food and Rural Affairs Secretary Michael Gove quickly reassured UK farm equipment firms. Reported by the Australian Financial Review (AFR):
‘Gove told a National Farmers Union (NFU) conference on Tuesday that the government would imminently unveil its tariff plans for a no-deal Brexit scenario, but reassured farmers they would be protected even if many other tariffs were slashed to zero.’
And why not secure the farming vote? It’s working for Trump over in the US.
No one ever got impeached for protecting domestic industry, right?
What this does now is it encourages others to follow suit. Tariffs generate revenues for the government. They also keep a pocket of voters happy. And if anyone asks you can simply regurgitate what Trump says: ‘I’m protecting domestic industry and domestic jobs.’
But that’s not what happens when you impose tariffs. What actually happens is a continuation of an inefficient sector of the economy.
Workers keep their jobs.
But their work can be performed by someone else more efficiently. It might keep everyone (expect consumers who are paying higher prices) happy in the short-term. But over time it holds back the economy, the country and society.
I guess this is why Ron Temple, over at Lazard Asset Management, told investors to brace for the worst.
‘It’s been a bumpy ride for the last 14 months and, unfortunately, I don’t think the ride is over,’ Temple said.
‘When we got to the fourth quarter the market woke up to the protectionism fears and volatility. It was pretty ugly. It was painful for many people [and] we are going to see more of those periods in the next one to two years.
‘…When you think about what that means for asset allocation, I believe investors should still be overweight global equities but I think that investors should be very focused on upgrading the quality of what you own.’
That’s some pretty good advice Ron.
Investors should be buying quality. But it goes without saying.
Who are these investors that say, ‘Oh boy. I think it’s time to invest in crap!’
The only time to buy crap is when it’s heavily discounted from its true value. And even then, it’s not always a good idea.
Surely, we should be trying to buy good businesses all the time?
(By good businesses I mean those which can earn extraordinary returns using the assets they have today.)
But there’s a problem. Many of these ‘good businesses’ or ‘quality stocks’ are not cheap. They’re not even fairly priced.
Want to jump into the best property classified and logistics software businesses in Australia?
Look no further than REA Group Ltd [ASX:REA] and WiseTech Global Ltd [ASX:WTC].
But buying either will put you at an immense disadvantage.
I say that because the price to buy into either stock is astronomically high.
Today you’ll be laying out $83 for REA and $168 for WiseTech just to receive $1 of earnings.
Hopefully your plan is not to wait 83 and 168 years to make back your investment.
Yet even with growth of 25% a year, which is massive and unstainable for long periods, paying $83 and $168 for a growing $1 is still a terrible bet to make.
Source: Money Morning
[Click to open new window]
Even with the unsustainable assumption of 25% growth, payback for REA occurs in 21 years, for WiseTech it’s 24 years.
Yet ‘the experts’ (fundies) buy these stocks now because no one ever got fired for buying quality. They just pay ridiculous prices for it.
Small quality stocks go exponential
The advice is sound, though.
Given a choice you should always buy quality business. You just need to be mindful of the price.
Hopefully the pending volatility which Temple predicts will take care of that. After all, which stocks do you think get sold first when investors become more risk adverse?
The expensive ones, or the cheap ones?
But rather than just looking for quality, it also helps to steer clear of the experts and fish in the less crowed waters, so to speak.
I’m talking about the smaller end of the market, where volumes are too small for million- and billion-dollar funds, but they’re perfect for retail investors like you.
One hedge fund recently said they want no more money from investors.
Because having a smaller fund allows them to fish in less crowded water, potentially increasing the chance of catching multi-bagger gains.
Editor, Money Morning
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