Is This Time Different?

Hailed by Barrons as the dean of global investing and one of the most successful investors in history, the late Sir John Templeton stated that ‘This time is different’ are ‘among the four most costly words in the annals of investing’.

Before emerging markets became mainstream, Templeton was investing in emerging growth companies for parents of his friends, whilst he was at university. He said ‘Never adopt permanently any type of asset or any selection method. Try and stay flexible and sceptical. Long term results are achieved by changing from popular to unpopular the types of securities you favour and your methods of selection’. 

So what advice would Templeton have given today? 

Another revered investor is Benjamin Graham, who wrote the Bible for stock selection: Security Analysis and The Intelligent Investor. In his last recorded interview with Warren Buffet, Graham recognised that the stock market had changed to such a degree that his thesis of analysis for selecting a stock was no longer relevant. In other words, he would be an indexer today. He recognised the inevitable challenge of trying to pick an individual stock, and would have bought the index, letting everyone else in the market determine the price. 

Today this is relevant. When the Hertz Corporation can file for bankruptcy and issue stock, something is seriously wrong. Since the ‘Powell put’ (when the chairman of the US Central Bank violated the Federal Reserve Act of 1913, buying bonds with a high risk of default), price discovery in the credit market has disappeared. Eleven years of financial engineering by large corporations buying back shares with leveraged credit whilst reducing their cash reserves has lifted asset prices and distorted value. This has made price discovery virtually impossible in the equity markets. 

It is estimated that as a result of the pandemic lock-down in the US alone between 50 and 70 million people are micro-trading the market daily. Add to this traders using algorithms attacking stop losses and the pricing of option trades, traditional fundamentals of analysis becomes irrelevant to stock selection. Any market reflects human behaviour and endeavour. For many speculators, trees grow to the sky – until they don’t! For those wishing to make a quick speculative profit, the only thing that matters is the price. Whether you trade coffee, GM Motors, pork bellies or Amazon, the intrinsic value of the underlying asset is irrelevant. 

So is it really different this time? Markets are cyclical, and we have too much uncertainty ahead of us to be sure. What we do know is that against the politicisation of central banks and a zero nominal risk free interest rate, negative real, we need to change our thinking. Cash is no longer risk free. If we want to achieve a successful investment outcome over the next decade, we need to think about several things in a different way: What is a store of value? How do we balance risk? Do we need to redefine market risk? As Maynard Keynes said, ‘When the facts change I change my mind. What do you do, sir?’

Jeremy Blatch TEP
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