All serious investor You should suspend admitting your mistakes at least once a year. Usually, we learn more from failure than from success. Therefore, although painful, this reflection should help us improve our methods and determine whether we need to change it.
This year I am trying to figure out what happened, just because it was so strange. So far, global stock markets have risen 21% in pounds sterling. This is after an increase of 13% last year (with large fluctuations in the spring). This adds up to an increase of 84% in five years and an increase of 238% since the low in February 2009. Anyone would think that we have enjoyed economic prosperity!
In college, I read the classic works of American economist Paul Samuelson, Fundamentals of Economic AnalysisHe taught that rising inflation will cause bond yields to follow. In the United States, CPI Rising inflation From 1.2% in October last year to 6.2% in October this year. The US 10-year conventional bond yield was 0.8% a year ago. They are now 1.4%. According to Samuelson, they should increase by 5 percentage points, not 0.6 percentage points. This is abnormal, and I hesitate to call it the new normal.
The performance of the stock market is also strange. My biggest failure this year is not buying strange stocks. Some have risen a lot.take Tesla, Which is up 44% this year. It is expected to generate slightly less than US$10 billion in revenue in 2022, but its valuation is more than 100 times its US$1.09 trillion. This is a strange valuation.
We applaud the development of Tesla, but suspect that its competition is about to become more intense. Not everyone can afford the entry price of £43,000. Competitors with a long history are rapidly expanding their range of electric vehicles, and competition from different directions is imminent.For example, Chinese Great Wall Motor It will start selling its Ora Cat five-door hatchback next year, priced at approximately £25,000.
In our opinion, Tesla is a very worthwhile company to invest in-but it does not meet this valuation.However, it cannot compete with Rivian Auto, Its IPO has recently received support from Amazon and Ford. Its current value is close to 100 billion U.S. dollars-more than Ford or General Motors. It only started delivering the first trucks in October. Its income is zero.
In the past, these companies were privately held and only entered the stock market when they were able to succeed.
American journalist and author Hunter S Thompson once said: “When things get weird, weird people become professional players.” Some investors who support this weird stock have decided to offer their services as long-term savings managers because they “Got it” and the others didn’t. What could go wrong?
Is it time to change tactics?
My fund has outperformed the MSCI Global Index in most years, but got stuck in 2021, falling behind by about 1%. So am I too old to play this game? Are the young people who claim to have it followers?
Maybe, but it would be a wrong experience to start buying weird stocks now. It is best to continue to try to reduce the number of old-fashioned investments that we make mistakes. This year’s disappointment in this area includes some surprises.
Our worst investments are automated stocks, which dominate the Japanese portion of our portfolio. They will perform well in 2020, and orders will generally be strong in 2021.
Unfortunately, supply chain issues and China’s economic slowdown have prevented these orders from turning into sales and profits. However, if more progress is made on normal trading conditions in 2022, we expect greater demand for automation.We took this opportunity to increase some investments, such as American sensor expert Cognex, and our core Keyence Keep.
ØrstedThe Danish Energy Group, perhaps the most ironic disappointment.When world leaders gathered in Glasgow COP26 summit, We found ourselves selling our last shares in wind farm experts. As often happens, when governments prioritize areas such as renewable energy, they provide cheap loans that allow all comers to compete. Some people do not need motivation. Seeing the influx of large oil companies into the offshore wind power industry and repositioning myself as an angel of climate change made me laugh and cry.
Renewable energy production capacity will increase, which is good, but all these new players will depress shareholder returns. Samuelson spent several pages introducing this phenomenon known as “squeeze out”.
Interest rate hikes in 2022 will challenge stock valuations
In the past 10 years, investors have done well simply by buying products that sell well. The inflation rate is very low, so cost issues rarely arise to challenge profitability. Valuation discipline often prevents a good story.
This may not continue. Shortages in many areas of the supply chain and labor market have caused prices to rise. Many companies will see their profits squeezed-something they and market analysts cannot predict.
Higher environmental standards will also lead to inflation-for many years to come. In many parts of the world, wind power is still more expensive than coal, especially where fossil fuel infrastructure is already in place, and you must consider the green energy costs of new plants.
China’s huge share of global coal combustion indicates that its exports are effectively subsidized by pollution. This is unacceptable, and it is inevitable to impose higher tariffs on steel, etc. Although for different reasons, US President Joe Biden may eventually adopt a China policy similar to Trump. This will affect the price of the traded commodity. At the same time, Chinese ports have raised tariffs by 10% or more. It is difficult to see when and where inflation will peak.
Interest rates have remained low, possibly based on the assumption that the current inflation trend is temporary. But the central bank is in a difficult situation.German retirees, they mainly save bonds-today the yield is quite high there is nothing — Will not tolerate 6% inflation for a long time.
Therefore, the possibility of raising interest rates in 2022 will be much greater than recently expected-and this will be in the context of weak economic recovery New Covid variantI think this is probably enough to put Europe in recession in 2022, but it may not be in the US.
A more positive situation is that the central bank allows the rate of return to gradually rise to the level of inflation. If this happens, growth companies should be able to overcome the downward pressure on stock valuations, as long as they do not start trading at problematic valuations.
So what lessons have we learned? Putting aside the biggest losers and winners in my portfolio, I can’t help but notice how much revenue comes from a long list of reliable, lucrative companies that seem to be advancing steadily year after year: Microsoft, Google, Thermo Fisher, Louis Vuitton and MasterCard. Excellent companies will get rich returns and invest in the future. No matter how good you think they are, they are often better than you expected.
Simon Edelsten is the co-manager of Artemis Global Select Fund and Mid Wynd International Investment Trust