Market Commentary 4th December 2023

A new mindset

Charlie Munger, who died last week at the age of 99 is a sad loss. That the eulogising column inches already published could probably stretch from Berkshire Hathaway’s HQ in Omaha, Nebraska to the Pacific coast of Santa Barbara, where he drew his last breath, tells us of his impact.

His long-term partner in crime, Warren Buffett, is far more associated with the soundbite, but Buffett credits one of Munger’s quotes with breathing new life into his investment approach. “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” Like all great ideas, this is beautifully simple, yet transformational.

This appreciation of quality steered Buffett away from what he termed ‘cigarette butt’ investing – picking up businesses that others had discarded, but actually had ‘one last puff’ in them – to the fantastic formula that led to sustained success over many decades.

That success transformed them both, but particularly, Buffett, into superstars. Take Berkshire’s annual general meetings. Tens of thousands of excited pilgrims would flock to Nebraska to be there first hand when the headline act of Munger and Buffett distributed their pearls of wisdom. In true American style, the speakers were cranked up to the max, the merchandise was stacked high outside and the atmosphere resembled that of a music festival. ‘Stockstock’, if you will.

Sure, there’s a touch of the absurd about that, certainly when set against our more measured affairs. But what Berkshire Hathaway’s AGMs really show is how attitudes to financial markets are just different in America. The public clamour to hear from the biggest and best investors. That the company’s latest retained earnings (cumulative net profit) was a staggering $511bn is a cause for celebration. Here, it’s more likely a cause for taxation.

This all translates to greater participation. 61% of the adult population in the US have an investment account, roughly twice the UK’s percentage. That extra engagement has created enormous amounts of wealth.

Last year, Barclays published a report that showed how, since 1899, UK equities outperformed cash in 91% of rolling ten year periods. Extrapolating that forward is not completely appropriate – equity markets come with risks attached, there will be volatility in those ten year periods, and past performance is not a guarantee of future returns.

But we shouldn’t ignore how the data demonstrates that if stock ownership had been higher, we’d have been better off. Ipso facto, Americans have benefited from their engagement with, and attitude towards, financial markets. Is it possible markets fall in any one year? Yes. Obviously. Would I back markets to rise far more often than not over a ten year view? Yes. Obviously.

With more engagement comes a greater propensity to back new companies and ideas. We have a superb platform for growth here. Oxford and Cambridge are ranked 1 and 3 in The Times’ global university rankings. Imperial College London is number 10. Their cumulative distance from Europe’s preeminent financial centre is around 100 miles, and the continent’s busiest airport is right next door. What more could you want for a runway to growth?

But still, very little new and exciting has come through. And what does won’t always hang about. A genuine UK success story, Cambridge-based ARM, recently relisted on the other side of the Atlantic.

I’m not saying we cast our fish & chips into the trash can and rush to board the Mayflower, but the quicker we adopt a new mindset and understand the power of financial markets, the better. The main frustration is we’re only a couple of policy changes away from liftoff.

To be fair to this and previous governments, there have been some good ideas. The Edinburgh Reforms certainly mean well, and I am convinced auto-enrolment will, in time, be regarded as one of the best long-term policies in generations. But pensions remain a black box to most. Quite how that’s acceptable is beyond me. Would it be too much to ask for better financial education in schools?

On a slightly more ambitious note, why not move to create a savings pot in the same way the Norwegians have. With the help of admittedly large net flows, sensible investments and two and a half decades of growth, their sovereign wealth fund is now worth $1.5 trillion (equivalent to c$275,000 per capita). Its long-term track record is for 3.7% growth ahead of inflation. Could cross-party agreement that any surplus over budget goes into creating something similar be the beautifully simple, yet transformational change we’re after? I don’t see why not. Realistically, though, that remains a long shot. The onus will, almost certainly, remain on the individual.

At Hawksmoor, we believe long-term thinking is the best way to help our clients grow their wealth over time. As a society, we should do more of it when conditions allow, both on a national and individual level.

Since this is my last missive before the holidays, I send you all my early Seasons Greetings.

George Salmon – Senior Investment Analyst

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