It was Franklin Rosevelt who said we’ve got nothing to fear apart from fear itself. Warren Buffett later said we’ve to fear greed.
We can satisfy both of these great Americans from the depressingly named Lost and Silent generations by introducing the Millennial concept of FOMO and being scared of it. That’s right, we can stand in the Buffett-Roosevelt Venn diagram by adopting a fear of the fear of missing out. Let me explain.
Those investing motivated by a fear of missing out are exhibiting greed. It feels like there is a fair amount of dumb money pouring into certain sectors of the market just now, and the donors of said flows are those who have seen others profit, and now want a piece of the action.
If valuation moves, or if fundamentals look different is of no concern to these folk. It feels like these positive flows into the market are irrationally concentrated in certain flashy sectors. Loss-making AI startups appear at the centre of it all. The fact that loss-making businesses have attracted investment to the extent they have outperformed profitable ones since the spring of last year is evidence of that. That can’t be sustainable.
I am not saying for certain that there is a bubble around these loss-making businesses, but this is one of the signs that often gets pulled up with hindsight. The problem is that flocking to successful trades is difficult to resist for the average individual. We are trained to herd to strategies that have yielded results by our very survival instinct. If you see someone land a great catch in one part of the river, where are you going to set up?
The problem is that while copying a successful fisherman may land you a tasty supper, financial markets have a habit of hurting those who irrationally gravitate to crowded trades.
Notice the choice of language here. While we are not interested in the more speculative AI-driven stocks, we do think AI is a valuable theme. One look at the profits the biggest chip designers and manufacturers have hauled in recently tells us that, and we believe these leaders remain interesting businesses.
We also do not see the wider market as prohibitively expensive. The UK market trades on 12.7 times expected earnings. That’s almost exactly in line with its 10 year average. The difference is that the profit margin being earned today is notably higher. It may not sound much, but moving from an average of 11.6% (admittedly dragged down by 2020’s lows) to close to 14% is a big change. In percentage terms, that means UK plc is generating 25% more profit from its revenue today than it has done over the last decade. It is much the same story over in America. Looking ahead, if technological advancements generate the improvements many anticipate, it is easy to see profitability improving further. Time will tell.
In the more immediate term, we are on the cusp of half year results season. We thought first quarter numbers were generally very strong, with many businesses proving resilient to external factors like the Iran war and the political uncertainty that has now resulted in a new Prime Minister taking office. Much of this uncertainty remains, but further good growth is expected over the remainder of the year. Forecasts have US earnings per share increasing in the region of 25% this year, with UK earnings expected to grow 19%.
With strong growth expected and valuation relatively undemanding, the prospects for the market in general are encouraging, in our view. As we mentioned before, there are some patches of irrationality, but the way SpaceX has come crashing back down to earth since its stratospheric highs post IPO show us there are others in the market that retain some valuation discipline too. Things could change in the future, but we feel it is hard to confidently value SpaceX at the multi-trillion dollar highs it has reached while it continues to lose money.
The reality is of course that nobody can say for sure whether the price of any asset or sector is entirely right at any given time. But we should not have a fear of this unknown. Over time, we are very comfortable that a disciplined focus on quality and valuation will bring better results than anything that can be achieved by blindly following the crowd.
And even if the timing of an investment ends up being a little off, time itself is often a great healer. Using monthly data over the last 20 years, I found that investing £100 into the MSCI World index at the worst time each year (the month when the market was highest) would have still compounded to an investment worth just shy of £8,000. That’s nearly four times the original investment. Patience really can be an investor’s best friend.
George Salmon – Senior Investment Analyst
FPC26736
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon, Senior Investment Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.
