One Golden Rule To Heed Before Investing In A High Risk Venture

Before you decide to invest in a company, start-up or venture that is highly risky, there is one very important rule that all investors should heed. We are all aware of the obvious rules such as doing sufficient due diligence and only investing what we can truly afford to lose. However, a less obvious rule, and the one which I am talking about in this article, is focused on having Skin In The Game.

The origin of this phrase is debatable although a quick Wikipedia search tells me that it originates from derby races whereby the owners of the horses taking part in these races have ‘skin’ in ‘the game’. More recently, it has been written about extensively in the works of Nassim Nicholas Taleb. Put simply, it refers to how much ‘skin’ a person has in something or how much personal risk they are willing to take on. For example, in the case of entrepreneurs or founders of businesses, an entrepreneur who has the vast majority of their net wealth tied up in their business has considerable Skin In The Game. Even though they will be handsomely rewarded if the company is successful, they will also go down with the ship and face financial ruin if the company goes belly up. This latter point is crucial.

When I analyse high risk ventures, one thing that is a huge red flag for me is a genuine absence of Skin In The Game. A founder or director of such a company needs to have the majority of their own capital invested. ‘Share options’ do not count. However, ‘director buys’ do.

Another red flag is when founders and directors draw huge salaries, especially if the company is not currently generating any revenues. If a company is not yet making money, a company will be raising money via debt or equity placings (issuing more shares) to keep it a going concern. This is precious cash and should not be eaten up in the form of generous remuneration packages. Alarm bells should be ringing if this is the case.

Founders and directors who have a considerable amount of Skin In The Game in a venture is an indication not only that they truly believe in what they are working on and executing, but also that they are motivated and kept under a considerable amount of pressure to ensure that the company succeeds. They believe in the company so much that they are more than willing to match their considerable belief via taking on a considerable amount of personal monetary risk. If the company doesn’t succeed they will be financially ruined. There will be no government or organisation ready to bail them out if they fail.

I have seen so many high risk ventures collapse where the founders and directors have come out of the wreckage mostly unharmed. They always drew big salaries and their equity stakes were mostly in the form of options rather than purchased with their own money. Founders and directors with little to no Skin In The Game are not under any acute pressure to contribute in the best ways they can. They don’t believe in the company they are working for nor is their heart really in it. It is merely a gravy train.

Thus, before deciding to invest in a company, start-up, venture or anything that is highly risky, one should always ask, ‘How much Skin In The Game do the founders and directors have?’

 

By Nicholas Peart

(c)All Rights Reserved

 

Image: valueresearchonline.com

THE FOLLY OF MARKET TIMING: Focusing On Percentages Not Prices

It is natural to get in the habit of trying to buy or sell shares at a particular price. Sometimes we may get lucky and reach our desired entry or exit point. Other times, we may not always get what we want in this respect. I fall into this trap myself a lot of the time, yet, perhaps unwittingly, am I playing a mugs game?

The future is uncertain. Nobody can predict the future and don’t believe anyone who tells you otherwise. I have written articles where I have talked about where I think certain things may be going, but the truth is anything can happen. I know nothing. Even if we have deep and unmatched levels of foresight we can so very easily, in the words of Nassim Nicholas Taleb, be fooled by randomness. We can be knocked off our perch by completely random and unforeseen events way out of our control. This is one reason why it is important to have a diversified and balanced investment portfolio. If one sector or stock is particularly badly hit by some unexpected event, at least your other investments in other stocks and sectors are not affected. That old chestnut of ‘not keeping all your eggs in one basket’, whilst it may sound hackneyed, still rings true.

Whilst we may or may not be able to get our desired buy or sell price for a particular stock, one thing we do have complete control over is how we weigh and structure our investment portfolios. There may be a company you highly rate and want to invest in, but you want to invest in it at the right price. Right now, you consider the current price too high and have lower price in mind that you hope will arrive. But what happens if that price never comes and instead the share price of the company just continues to climb in value? Instead of hoping to get the right price, or worse, the lowest price, why not say to yourself, ‘What percentage of my total investment portfolio do I want this company or security to represent?’. I think dealing in percentages rather than prices can not only help you to be a better investor, as it can take away a lot of the unnecessary stress and anxiety associated with trying to buy or sell a security at ‘the right price’. It can also help you overcome deeply ingrained cognitive biases.

When you focus more on what percentage of your investment portfolio you want a security to represent, rather than chasing a price, that can give you more control and balance. If the investment goes down in value, the percentage weighting it represents in your portfolio also goes down. If the investment goes up in value, it’s percentage weighting also goes up. By this you can then decide whether you want to be more overweight or underweight in the percentage weight of this particular security. If you want to be more overweight, you buy more. If you want to be more underweight, you sell a portion.

The percentage of what a security represents of your total portfolio is in many ways more important than the price you pay for it. Even if you end up overpaying for a stock or security, if it represents a percentage of your portfolio that is not too detrimental to the overall performance than it is not so bad.

 

By Nicholas Peart

(c)All Rights Reserved 

 

Image: datanami.com

 

The Anti-Tourist

According to the writer Daniel Kalder;

‘As the world has become smaller so its wonders have diminished. There is nothing amazing about the Great Wall of China, the Taj Mahal, or the Pyramids of Egypt. They are as banal and familiar as the face of a Cornflakes Packet.’

He further embellished on this via the following decrees originally established at the Shymkent Hotel in Shymkent, Kazakhstan on October 1999 as part of the so-called ‘first international congress of Anti- Tourists’;

The duty of the traveller therefore is to open up new zones of experience. In our over
explored world these must of necessity be wastelands, black holes, and grim urban
blackspots: all the places which, ordinarily, people choose to avoid.

The only true voyagers, therefore, are anti- tourists. Following this logic we declare that:

The anti-tourist does not visit places that are in any way desirable.

The anti-tourist eschews comfort.

The anti-tourist embraces hunger and hallucinations and shit hotels.

The anti-tourist seeks locked doors and demolished buildings.

The anti-tourist scorns the bluster and bravado of the daredevil, who attempts to penetrate danger zones such as Afghanistan. The only thing that lies behind this is vanity and a desire to brag.

The anti-tourist travels at the wrong time of year.

The anti-tourist prefers dead things to living ones.

The anti-tourist is humble and seeks invisibility.

The anti-tourist is interested only in hidden histories, in delightful obscurities, in bad art.

The anti-tourist believes beauty is in the street.

The anti-tourist holds that whatever travel does, it rarely broadens the mind.

The anti-tourist values disorientation over enlightenment.

The anti-tourist loves truth, but he is also partial to lies. Especially his own.

Considering these resolutions were written a little more than 20 years ago, I wonder what Kalder would make of travelling today? In 1999, the internet was barely a few years old. Back then, households that had an internet connection had a slow dail-up connection. There was no broadband and neither were there smartphones. 1999 seems rather ancient compared to the world today in the context of the exponential growth of global digital connectivity.

The world today is much more globalised than the world of 1999. A consequence of this has been even more demand to visit the worlds ‘wonders’ be it the Taj Mahal or the Great Wall of China or cities such as Venice and Florence. The ‘very desirable’ places that the so called anti-tourist snubs.

Then again, on the other hand, such wonders are an important part of the history of a country regardless of whether they are popular or not. Most visitors to India visit the Taj Mahal yet the Taj Mahal is an important part of the history of the Mughal Empire. Indian history is fascinating and one of the best documenters and narrators of this history is the writer and historian William Dalrymple. Dalrymple is a black belt regarding the history of the Indian subcontinent and has a deep passion and interest for that part of the world. So much so that he has lived in India for over 35 years. What this means is that this goes beyond any labels or identity. Dalrymple is neither a tourist nor an anti-tourist. Traveller or dilettante. He is simply someone who loves the subcontinent and dedicates a substantial chunk of their time to writing, educating, reading and learning about it.

When I think of my very first trip to India, I did a lot of the typical tourist things. I visited the Taj Mahal in Agra, I visited all the well trodden places in Goa and went on popular tours. Yet I also, unwittingly, did a lot of anti-tourist activities. I stayed in some of the cheapest and most unsavoury guesthouses I could find. I ate street food at rock bottom prices. I developed a habit of roaming the streets of the more down and out parts of the cities I visited. I didn’t document any of this neither did I really brag about them. I had no digital social media accounts at the time and I never kept a physical journal. Friends and family would ask me if I was writing about my trip, but I had no desire to. It wasn’t indolence. I suppose I was adrift in multiple intangible fleeting experiences and frequent moments of disorientation and I had no inclination to hole myself in my threadbare guesthouse room to put it all down to paper. People often talk about ‘finding one-self’ or ‘becoming enlightened’, but I wanted to get away from myself. In at least a semi-masochistic way, I revelled in my anonymity and frequent discomfort.

Every time I spoke to a tourist who expressed an interest to visit Brazil they would invariably say that they wanted to visit Brazil during Carnaval and specifically visit the city of Rio De Janeiro. In my mind I would say to myself, ‘I would like to visit Brazil anytime except during Carnaval.’  During this period, especially in Rio, accommodation prices go through the roof, many parts of the cities become unbearably overcrowded and the levels of crime spiral out of control. Rio is already a dangerous enough city at night, do I really want to visit it when it becomes even more dangerous? Nao obrigado!

Staying on the subject of Brazil, one popular activity many backpackers undertake when they visit Rio is a ‘favela tour’. Favelas are slums located on the the outskirts of cities in Brazil. Rio has a much higher proportion of them compared with other cities in Brazil owing both to the layout of the city and the extreme inequalities of wealth. Even the richest neighbourhoods in Rio seem to be just a stone’s throw away from one. I think the popularity of such tours is down to the belief that backpackers think they are doing something ‘edgy’ and ‘non-touristy’. Yet the irony is, considering the relatively recent popularity of such tours, they are anything but. It may be considered ‘anti-tourism’ on the surface and such activities do conform to Kalder’s resolution; ‘The anti-tourist does not visit places that are in any way desirable’. There is nothing desirable about these favelas. Yet neither is it clever or cool to visit such places which are downright dangerous. Also most of the people that go on such tours do so to brag and get a so-called one-upmanship over other travellers. The anti-tourist would never brag or boast about such things. Furthermore, there’s no danger during these tours since you are always accompanied with protection just in case anything does flare up. My Brazilian friend Carlos finds it comical that such tours exist; ‘Why would any tourist want to pay to visit a favela? Anyone who lives in a favela wants to pay to get out!’

There are other tours with anti-tourist themes. They could be ‘street tours’, tours to visit abandoned buildings or tours to visit derelict and defunct places destroyed by war. When I visited Bosnia a few years ago I went on a tour in the capital, Sarajevo. The city was under siege for three years from 1992-95. It was a fascinating tour and I dont regret doing it. Our guide lived through this terrible period and almost died at one point during the conflict. It would be pathetic and poor form of me to categorise it as a tourist or anti-tourist experience. I don’t wish to plunge to such low depths.

I guess the bottom line is that the anti-tourist does not purposefully try to be an anti-tourist. The anti-tourist is not aware that they are an anti-tourist. It is almost like a hardwired way of life with no underlying agenda or anything to prove. We seldom ever hear about such people, because they have no desire for notoriety. They prefer to remain invisible and anonymous.

Calling oneself an ‘anti-tourist’ is missing the point completely.

 

By Nicholas Peart

(c)All Rights Reserved  

 

Image: something-interesting.com

REFERENCES:

http://www.danielkalder.com/antitourism.html

Money Cannot Buy Happiness, But…

Money can buy you freedom. That’s it. Not as a means for conspicuous consumption, gaining status or power, or indulging in an eternal cornucopia of mindless, decadent pleasure and self-indulgence.

The Twitter account Orange Book (@orangebook_) recently posted the following tweet…

Things money can buy:

-freedom to think
-freedom to travel
-freedom from jerks
-freedom to learn slowly
-freedom from an alarm clock
-freedom from work you dislike
-freedom from financial anxiety
-freedom from low-cost nutrition
-freedom to pursue a creative purpose

I could add more things to this list…

-freedom to create and invest in ventures that make the world a better place
-freedom to be time rich
-freedom to afford better healthcare
-freedom to help others

All of this is very positive, however there are downsides too. For example, I would include the following…

-freedom to run away from problems
-freedom to avoid the unsavoury aspects of life
-freedom to not live in the real world
-freedom not to grow

As much as having money shields us from the unpleasant aspects of life; from jerks, from jobs we hate etc ; if we never have to deal with these unsavoury aspects of life, this can put us in a very vulnerable and fragile situation if, by some random stroke of misfortune, we ended up in a no money situation. The freedom that money provided in the past is gone at the drop of a stone. When previously, money offered a means to be cocooned from the real world, not having any money now throws us back into it.

It is much better to have money, but at the same time, know how to deal with the real world, how to deal with challenging situations, how to deal with difficult people. This is because, if we ever find ourselves back to a situation without money, then life is not a constant struggle.

 

By Nicholas Peart

(c)All Rights Reserved 

 

Image: Patheos

The Dangers Of Story Stock Investing

Investing successfully requires a lot of boring fundamental analysis and often the best stocks to invest in are in boring overlooked, but undervalued companies with strong fundamentals and a decent margin of safety. These companies are not prone to hype.

On the other hand you have story stocks. Investing in a story stock does not mean that your investment will go down in value. On the contrary, a stock with a powerful story could make you very rich. Look at Amazon. Then again look at the multitude of other stocks, which had a powerful story behind them, but that was it. Fundamentally they were houses made of cards, which soon collapsed. The Dot.com crash from twenty years ago is littered with such casualties. More recently, the whole WeWork disaster is a prime example of company with an enticing and exciting story (as well as a charismatic and convincing leader), yet with very shaky and fragile financial fundamentals.

The problem with story stocks is that the stock valuation gets to a point where it is propped up much more by the goodwill of the story alone than by the company’s fundamentals. This is very treacherous territory as even a mild downtown or modest bit of bad news can send the share price crashing back down to Earth.

A stock with a unique story behind it is psychologically very alluring. Doing some solid due diligence such as analysing company reports and financial statements requires effort and if you dont have much experience on that front it can seem very daunting. However, with practice and learning you can become better at analysing and understanding all this nitty-gritty stuff, which also enables you to make better investment decisions with a cool head. Knowing exactly what you are investing in and having even just a modest understanding of the full financial health of a company is a very reassuring thing.

I suppose we prefer stories to analysis, because stories have much more of an instant cognitive resonance. Our minds can be lazy and it’s so much easier and more soothing to be swayed by a good story or glowing article in the media on a stock. More succinctly, sometimes a powerful mantra alone is enough to sway us. Software is eating the world or It’s the wave of the future or You are investing in a slice of history or Nobody else is doing what this company is doing are a handful of mantras that can make us overly bullish on a particular stock without questioning it further or taking it apart via some deep research.

The problem with such stories and mantras is that they activate and play to our emotions and making investment decisions based on emotions is never smart. We always have to have a healthy, balanced, critical and analytical mindset to investing without allowing our emotions to hijack and influence our decision making. A cool head always wins.

 

By Nicholas Peart

(c)All Rights Reserved

 

Image: 4.bp.blogspot.com

VALUE OR GROWTH? A Tale Of Two Scottish Funds

There are two Scottish funds listed on the London Stock Exchange, which I would like to focus on in this article. They both have similar names, yet their investment strategies differ considerably. The first of these two funds, The Scottish Investment Trust, is a contrarian value fund. Whilst the second fund, the Scottish Mortgage Investment Trust, is a growth fund.

The Scottish Investment Trust (SCIN) is over 130 years old and was first established in Edinburgh in 1887. Since 2015, the fund has been managed by Alasdair McKinnon with a focus on blue chip dividend paying companies that are out of favour. McKinnon takes a contrarian view to investing avoiding sectors that are hot and investing in companies that are undervalued and where sentiment is poor. The rationale being that when sentiment turns, the value of the companies increase as investors begin to pile in. To be clear, contrarian and value investing don’t mean simply investing in any old company that is down and out and going through a turbulant period. It is important that the company has a margin of safety to ride out any difficult period thus protecting it from having to raise emergency cash and/or ceasing to remain a going concern. It is also equally important that the company has healthy cash flows and a decent track record of this. The amount of cash that a company generates from its operations is a crucial metric and sometimes overlooked. A low P/E (Price To Earnings) ratio is one thing and a significant metric in indicating whether or not a company is overvalued, yet it doesn’t tell the whole story. The level of cashflow generation indicates how much cash a company is generating and the more cash it generates, the more of a financial buffer it has, especially if it’s total operating margins are not very high. It is also important to monitor a company’s total liabilities and how manageable and sustainable they are.

As of 30th April 2020, the largest holdings in SCIN’s portfolio included large gold mining companies such as Barrick Gold and Newmont Mining, large pharmaceutical companies such as Roche, Pfizer and Gilead Sciences and other assorted value blue chips such as United Utilities, Japan Tobacco, BT and Chevron. The gold mining companies have been in the portfolio for sometime. Recently gold has performed very strongly and it’s likely to continue. McKinnon, like myself, is of the view that major fiat currencies run the risk of being debased. Since the last financial crisis in 2008, we have been living through a period of very low interest rates and easy money. The present COVID-19 crisis has only exacerbated this as central banks have reduced interest rates even more and printed unprecedented amounts of money to prop up national economies in the wake of this crisis. Add to this the staggering levels of global government, corporate and household debt and you have a rather fragile situation. McKinnon’s thesis for having exposure to gold is as a form of insurance against this extraordinary macro environment and the real future risks and consequences it carries. He is also no fool by investing only in the biggest and most geographically spread global mining companies with low production costs. Whilst it is true that gold may not currently be unloved, I would still consider it a contrarian investment as it represents, to a degree, a lack of faith and trust in central banks and governments. It is also considered unfashionable. I would argue that newer supply-capped digital cryptocurrencies such a Bitcoin are more fashionable and hotter than gold. Especially amongst younger investors who generally overlook gold and other precious metals as a store of value.

McKinnon deliberately stays away from sectors that are hot and fashionable such as the technology sector. SCIN has absolutely no exposure to FANG (Facebook, Amazon, Netflix, Google) stocks or any other hot tech/startup stocks. The closest thing to tech in the portfolio are it’s holdings in boring and undervalued blue chip communication service companies such as BT, China Mobile, Verizon and Deutsche Telekom. McKinnon believes that the tide will turn regarding the high valuation of many technology companies, as unlikely as this may currently seem, and that value stocks, for a long time overlooked and underperforming compared with their growth counterparts, will prevail in due course.

The Scottish Mortgage Investment Trust (SMT) is currently the most valuable investment trust by market capitalization listed on the London Stock Exchange. As of today, it has a total market cap in excess of £10bn and over the last decade has performed extremely well. The primary reason for its impressive performance has been it’s exposure to all the FANG companies plus a number of other tech investments that have recently done exceptionally well. For example, the fund has a substantial holding in Tesla, whose share price has more than doubled since the beginning of this year. Generally speaking, tech shares have done very well since the COVID-19 induced lockdown measures were put in place over the last few months and the share price of SMT is trading at all time highs.

SMT, like SCIN, is also a very old investment trust with a hundred year plus history having first been established in 1909. It is currently jointly managed by James Anderson and Tom Slater. Anderson has been managing the trust for 20 years with Slater joining him in 2010. Their focus is purely on growth and investing in companies of the future. SMT is everything that SCIN is not. SCIN adopts a Benjamin Graham style value investing strategy. SMT does not embrace this type of strategy and even questions it. This is highlighted in a series of interesting essays written by Anderson and published on the fund’s parent Ballie Gifford website entitled Graham Or Growth?. I highly recommend giving them a read as it provides one with unique insights into Anderson’s way of thinking and by extension the investment philosophy and strategies of SMT.

It is true that growth investing has greatly outperformed value investing since the last financial crisis more than a decade ago. At the very start of 2009 the Russell 1000 Growth Index (RLG) was around 360 points. Today it is almost 1820 points. In this time the RLG index has grown more than 500%. That is highly impressive. By comparison the Russell 1000 Value Index (RLV) was around 446 points on 1st January 2009. Back then the RLV index was higher than the RLG index. The same cannot be said today with the RLV index almost 1,105 points. The RLV index has grown less than 250% during this period. Whilst this is certainly not a poor return, it doesn’t hold a candle to the RLG index’s 500% plus return.

Regardless of which side of the fence I am on regarding value or growth investing, it cannot be denied that both Anderson and Slater are highly skilled and visionary managers with a highly impressive track record for picking winners. It is much harder to quantify growth stocks than value stocks via traditional metrics and methods of fundamental analysis. If one were to just use just those methods when investing, one would have passed on investing in Amazon, Alphabet or Tesla in the early stages of their listings in the public markets. It takes more than just the tried and tested strategies of the past to value these companies and Anderson’s essays make this very clear.

However, it is just simply not the case that all new and exciting tech companies are ‘crushing it’. There have already been some casualties. The one that springs most to my mind has been the downfall of workspace company WeWork. Before the issues of the company came to the fore, it had a valuation of $47bn even though it had vast amounts of debt. Today, it’s worth far less at around $3-4bn. One of the largest investors in the company is SoftBank whose Vision Fund took a massive hit. Fortunately, SMT and its parent company Baillie Gifford, never built up a stake in WeWork over the years, but it could have easily happened here.

The recent WeWork debacle is one of a number reasons that make me nervous about having too much exposure to SMT right now irrespective of its stellar performance. As much as I respect the vision and foresight of Anderson and Slater, I worry that their fund could come a cropper some time down the line if a number of the holdings in the SMT portfolio underwent similar write-offs in value like WeWork. One of the fund’s holdings, Tesla, is probably the most polarised and hyped publicly traded stock in the world today. I have a great respect for its founder Elon Musk, who is a highly driven and exponentially thinking visionary. There is no doubt in my mind that he is special. However, the company could very easily experience a similar WeWork style crisis. No matter how highly I rate Elon, the financial fundamentals of Tesla are fragile and the share price could dive spectacularly in the event of a major existential crisis. This would create a huge dent in the value of SMT, as its Tesla holding currently represents a chunky 10% of the entire portfolio. Together with Amazon (which also represents 10% of the total holdings), it is one of the largest holdings in the SMT portfolio.

McKinnon is very wary of the present high valuations of tech companies and has citied the WeWork situation as a clear and present danger. In a post from December 2019 entitled Peak Unicorn?, he refers to the overvaluation of these exciting multi-billion dollar valued unicorn story stocks as a ‘disruption’ bubble, which has been propped up by an environment of cheap money and will not end well.

The last ten years have been very good for growth and technology stocks, yet it remains to be seen whether the next ten years will be equally magnanimous.

By Nicholas Peart 

Published on 27th May 2020

(c)All Rights Reserved

CITED ARTICLES:

https://resoluteoptimism.bailliegifford.com/will-the-mean-revert/

Peak Unicorn?

Image: tripsavvy.com

The Future Of Tech, Work, Education and Living Post COVID-19

This year’s COVID-19 pandemic has been highly disruptive in many areas of our lives. As I type this article, there have been statistically nearly 5.5 million cases and almost 350,000 deaths from this pandemic around the world. In addition to the toll this virus has taken on peoples’ lives, there have been grave economic ramifications. Many businesses and industries have been hit hard and as a consequence millions of people have either lost their jobs or have had to take a pay cut.

The unstoppable growth of the internet over the last 20 years has had a profound effect on our lives. It could already be said that we live in both the physical world and the virtual world. Yet during the lockdown period of the last several weeks, we have been spending considerably more time in the latter world. The growth of the internet has already had a noticeable effect on the physical high street as more people do their shopping online. Yet, the lockdown restrictions, at times, have given people no choice, but to buy almost all their groceries online thus increasing greatly the rate of e-commerce transactions. We have also been interacting much more with other people virtually, both for work and pleasure. And as educational institutions remain shut, or at least severely restricted, we have been doing a lot more learning online.

In an article I wrote back in 2017, I discussed new and emerging technologies such as Virtual Reality (VR) and Augmented Reality (AR) and how they could change people lives, especially in the areas of education. As students are still currently unable to physically go to university and attend lectures, much of their courses and lectures are now online. In my 2017 article, I discussed how via VR technology one could be completely immersed in a setting and interact with it from anywhere with an internet connection. The education industry has long needed such a change. One of the biggest current problems facing young people is the unbelievably high costs of going to university. By the time they have graduated, they are saddled with staggering sums of debt. Yet I have long felt that it doesn’t always have to be that way and that given time, technology would soon provide a much needed solution to this issue. Even though I went to university and got my degree many years ago, I find that a lot of all the most recent knowledge I have gained has been via content online. I, of course, also supplement this knowledge with books in both physical and digital form. There is so much free and good quality educational content out there on the web. And I am also happy to pay for exceptional online resources too. Yet the total amount of money I pay is still far less than what I would pay going to universities, where tuition fees in the UK are currently still over £9k per year.

In an earlier article from 2016, I discuss how VR could potentially change all aspects of our lives, not just within the realms of education. During the lockdown period, the video communications app Zoom has taken off in a big way. Zoom has been the default option for not just video calls between family and friends, but also for remote working and playing. By the latter, I mean having a kind of ‘virtual night out’. Rather than physically going out to a bar or club with friends, Zoom has been used as a virtual platform for replicating a physical night out. VR and AR are both powerful emerging technologies and now is the perfect time for them to be harnessed to a greater level. Interacting via Zoom is still a 2D experience, yet VR and AR have the potential to make this a more immersive 3D experience. This would reduce the chasm greatly between the physical and virtual worlds.

There is no question that remote work will continue to grow and these new and emerging technologies will accelerate this growth. Yet will traditional office spaces be made completely redundant? It is tempting to go down this route and its currently all the rage to have the belief that this virus will make the traditional office space obsolete as an increasing number of workers find the option of remote work to be more appealing and perfectly feasible. To be clear, as I already stated, there is no doubt in my mind that remote/virtual work will grow, yet I think it’s at this stage too premature to say that the traditional physical office environment is dead. Even if technology develops exponentially, we are still, fundamentally, organic human beings and creatures of emotion more than logic. As long as we remain 100% organic human beings, we will still long for that human touch and physical interaction. I think to completely 100% forsake the physical world for the virtual world, we will need to physically merge with technology. I am with the futurist and inventor Ray Kurzweil on his prediction for the coming Singularity in 2045 when Artificial Intelligence (AI) will be at the same level as human intelligence. This will be, arguably, the most significant event in human history and I will never bet against the infinite potential of AI. If software is currently eating the world, soon it will be AI. Yet as AI becomes further developed, the options for us to merge with technology will also arrive. AI, rather than posing an existential threat, I believe, will make our lives easier and more comfortable. What’s more, it will also enhance our lives and enable us to reach our fullest potential.

Going back to the topic of post COVID living, could the development of cities/urban spaces be affected? What if there was a growing trend whereby there was an increasing migration from cities to more rural areas? For some time, as technology improved – more specifically; internet speeds and bandwidth improved further – there has been already to a small degree such a trend. You can go and live in the remotest part of the country, but if you have access to a high speed internet connection over there, then you have full sophisticated access to the virtual world no different to that in a big city no matter how remote the physical environment may be. Yet will there ever be a complete deurbanisation type of migration where the physical location of people is much more fragmented? If such a migration were to happen in the near future and we are still 100% organic beings, we will be incredibly reliant on the virtual world and by extension the cell towers connected to our internet providers. Even if SpaceX, via its Starlink project, intends to beam super-fast satellite internet on all corners of the world in the next few years, for now we are still reliant on onshore cell towers as the source of the internet. This is quite a fragile situation, as any disruption to these cell towers disrupts the internet itself and thus a great chunk of our lives. We become instantly irritated with slow internet speeds let alone having no internet. It is amazing how dependent on the internet most of the world is. The cells towers providing the internet are powered by electricity and electricity is powered by energy from both renewable and non-renewable sources. In spite of all the technological advances since the first Industrial Revolution, we have still not found a permanent and workable solution to the long standing energy problem, that is, how do we generate an abundant and unlimited supply of energy for every corner of the world without having to tap into any non-renewable sources?

I sometimes feel that I overestimate the speed of technological development. Earlier in the last decade,  I thought that within the next few years (now), every household would have a 3D printer and the smartphone would be replaced by some form of smart-glasses with fully integrated and advanced VR and AR technologies. This has simply not happened. Even if these technologies may be available in some shape or form, we still use smartphones. The smartphones of today may be more sophisticated than the smartphones of just a few years ago, but they are still smartphones. Our interaction with the virtual world remains a 2-D experience. This is why I feel that in order for us to live completely in the virtual world with little to no living in the physical world, we have to adopt some form of transhumanism where our minds and bodies are fully integrated with technology.

Going back to the economic ramifications of the current COVID-19 pandemic, I wonder whether, at least in the short to medium term, the concept of a Universal Basic Income (UBI) may become more widely adopted? Already technology has been automating many menial and repetitive jobs that has resulted not only in vast swathes of people losing their jobs, but also in these same people being ‘left behind’ as technology marches on. This is a serious concern as such people become naturally angry and turn to political parties and figures who echo and amplify their frustrations rather than turn to transformative solutions. The virus has hit hard industries requiring a constant physical presence. Some of these industries that have been hit hard such as, for example, the physical high street retail industry, has long already been affected by the growth of the internet. This virus has almost been like the final nail in the coffin.

Technology never stands still and the number of people using the internet will only keep growing. If you look at the S&P 500 (the top 500 companies) you will see that the biggest companies today are all technology companies. My concern however is with the demise of all these low skilled repetitive jobs. Although I personally think that a lot of these jobs are time wasting jobs (and time is an increasingly scarce and valuable asset), which offer no spiritual or intellectual nourishment, many people are employed in such jobs and depend on the income for their survival. If such jobs disappeared on an even greater scale and the people employed in these jobs had little or few alternative skills for other jobs, how will they survive? I hear a lot of emphasis on ‘learning to code’. Whilst computer programming is very useful and currently provides a lot of employment opportunities, who’s to say that such jobs also won’t get disrupted? Furthermore, why would anyone want to learn something purely for the ’employment opportunities’ it will bring? Surely one would learn computer programming, because there are interested and fascinated by it? Learning it just purely to make money seems very flawed and short sighted to me. If we want to continue to live in a capitalist economy then a Universal Basic Income may have to become more widely adopted. Otherwise the alternative is a socialist economy. I do in the long run, however, believe that we will enter a brand new kind of post-scarcity and post-work environment of abundance created by exponential technological innovations. This would transcend any economic model of the past. I wrote about this in greater depth in my article from last year entitled ‘THE TRUE SINGULARITY: A Universe Of Unlimited Abundance And Eternal Harmony’. This kind of vision for the future is also outlined very clearly in the excellent 2011 book by Peter Diamandis and Steven Kotler ‘Abundance’. Yet in order for this to become a closer reality, we also cannot take technological development for granted. One of the early internet pioneers and entrepreneurs, Marc Andreessen, wrote a recent article entitled ‘Its Time To Build’ talking about this. We cannot take innovation for granted and rest on the laurels of the technological advancements of the past. When the virus hit the world, we were unprepared. There was no available vaccine to protect us. Thus we had to adopt measures that have been very disruptive to our daily living. Several companies may currently be working on a cure and it could still be several more months before one is in place, but the point is there was no available permanent remedy at the time. Technology may have provided many vital solutions to long standing limitations, yet, as is currently clear, there are so many more limitations that require solutions. And it is only via continuing to innovate and build that we can ensure that these other limitations begging to be solved are solved.

 

By Nicholas Peart 

Published on 24th May 2020

(c)All Rights Reserved

 

Image: qimono

Don’t Fight The Trend…

the trend

But don’t be off your guard either.

A lot of the time, stocks are priced at a value quite debased from their fundamentals. Thus they are either overvalued or undervalued. This is true since markets are, for the most part, driven by sentiment. In the most extreme circumstances, total greed or fear takes over.

I have been rather baffled by the stock market rally over the last few weeks after having witnessed some of the most spectacular series of crashes over the brief one month period from the end of February towards the end of March. This rally far from reflects the economic reality on the ground. Many people have lost their jobs and are struggling financially. Yes, there have been huge stimulus packages to soften the blow, but these are artificial and only increase an already substantial debt load.

Yet markets can behave irrationally for a very long period of time. Far longer than one can stay solvent, to quote the economist John Maynard Keynes. Instead of trying to be right, sometimes it can pay to just go with the trend. That often quoted adage, the trend is your friend, is very true. Rather than fighting it, it can be less painful to simply ride with it in whichever direction it may blow.

But don’t get carried away. Always be on your guard. As the tide can abruptly change without warning.

By Nicholas Peart

(c)All Rights Reserved 

 

Image: Peggy_Marco

CREATOR/DESTROYER: A Journey Through The Roots Of Tragedy

AssinationGianniV

The TV drama The Assassination Of Gianni Versace: American Crime Story, which first aired in 2017, is one of the most notable TV series I have watched in the last five years. Although spanning over nine episodes, there is only one episode in this series, which truly stands out. Episode 8 entitled Creator/Destroyer is probably the most riveting and powerful one hour of television I have ever watched.

I was just 14 at the time, but I remember very clearly the day when the iconic Italian fashion designer was murdered. One would think, judging by the title of the series, that the series would focus on Versace. In fact, it puts the spotlight more on his killer Andrew Cunanan played by the actor Darren Criss. Much of the series follows Cunanan as he prays on his victims and murders them in the most shocking ways. Yet the jam in the donut of this series only arrives at the penultimate episode.

The Creator/Destroyer episode is about the early lives of both Versace and Cunanan and how they took vastly different turns. In the case of Versace, we see him grow up in a poor town in Calabria, yet he is brought up by a loving mother who recognises his talents early on and encourages him to develop them. Yet she is also very wise stressing that in order to achieve success he will have to work hard. At times it won’t be easy, but that’s ok if you are doing something you love and are passionate about.

The early life of Andrew Cunanan could not be more different. The figure who has the most influence on his early development is his Filipino father Modesto who is played by the actor Jon Jon Briones. Unlike Gianni’s mother, Modesto is an extremely deceitful and delusional individual with no moral compass. Throughout his childhood, Modesto never ceases to remind his child that he is special and that by merely believing that he is special he will be able to achieve anything he wants. He is never instilled with any grounded or true wisdom. Witnessing this had a profound effect on me as it signalled to me that any child who is exposed to such falsehoods or delusions of grandeur from an early age is doomed. They will soon find life incredibly frustrating and unfair with potentially tragic consequences.

Furthermore, Andrew is spoiled rotten by his father. In this episode we see him treated like royalty. His siblings refer to him as Prince Andrew. When the Cunanan family move to a larger home when Andrew is around 10 or 11, Andrew is immediately assigned the master bedroom. In this particular clip, we see the rest of the family, Andrew’s mother and siblings, look exhausted as they move sofas and other bits of heavy furniture. Andrew, however, doesn’t lift a finger.

Modesto buys Andrew a sports car even though he is too young to drive it. Andrew’s eldest sibling Chris is old enough, but Modesto denies him this privilege and gives it instead to Andrew even though it will be a few years before he is legally old enough to drive it. When Andrew’s mother challenges Modesto on this, he violently pushes her to the ground. It becomes increasingly clear that Modesto has an unhealthy obsession with his youngest child and favours him over his other children, which creates a rift and a lot of tension.

One of the clearest contrasts between Gianni’s mother and Modesto, is when Modesto is with Andrew in his room teaching him the codes of social conduct from a book by Amy Vanderbilt entitled The Complete Book of Etiquette. Whereas Gianni’s mother brings out the best in Gianni’s creativity, Modesto discourages it from his youngest son. When Andrew tells Modesto that he would like to be a writer, Modesto instantly dismisses it and says that unless someone offered him a lot of money to write a book, he should forget about it. Interestingly, in another episode and one of the few occasions where Andrew meets Gianni, Gianni encourages Andrew to write his book and tells him how aspiring for success just for the sake of success is a futile and hollow endeavour.

In Modesto’s world, nurturing superficiality such as how one looks, what one says, how one behaves, is of more importance than nurturing talent or aspiring to any notions of truth and beauty. From this, one can make comparisons with the character Willy Loman from the Arthur Miller play Death Of A Salesman. Like Modesto, Loman is also a person drowning in his own delusions valuing etiquette, presentation and current social mores over developing talent and instilling healthy values in his children. Being a ‘social success’ is what reigns supreme in the world of Modesto and Willy. As Loman says to one of his sons, ‘Be well liked and you will never want’ as if by being well liked great wealth and status will automatically follow. By that same token, Modesto relentlessly conveys to Andrew, ‘to remember that you’re special, and when you feel special, success will follow’.

Via the infectious influence of Modesto on his life, Andrew is already displaying signs of brattish and entitled behaviour from an early age. In one clip when he opens the door to the postman, he snatches the mail from his hand and duly slams the door on him rather than offering as much as a ‘hello’, ‘thank you’ and ‘goodbye’. In another clip, a young Andrew is in his room reading a book by an electric fan. When he leaves the room, he forgets to turn off the fan.

Andrew’s behaviour manifests itself into abnormally high levels of self confidence by the time he’s a late teenager. By this point, he is driving his sports car and wearing high end designer clothes. He is already a shining example of all the Amy Vanderbilt etiquette drummed into him every evening by his father. He looks and feels invincible and many of his high school peers are in awe of him even if its all merely a façade.

Yet things soon take a turn when Modesto unexpectedly flees the country for Manila. Just a few years earlier, he managed to hustle his way into a stockbroker job at Merrill Lynch beating over 500 applicants. Despite not having the conventional academic qualifications or any previous work experience in the financial services sector, Modesto goes into turbo charge mode with the Vanderbilt playbook in the interview stage weaving a powerful story and promising to ‘cross oceans’ and create unimaginable levels of growth for the company. His patter works. Yet with his lack of financial experience cracks occur. He makes dubious trades, engages in fraudulent activity, and, in one case, swindles an elderly lady out of all her savings. In an attempt to reduce his chances of getting caught, he frequently changes firms. With each change, he opts to work for a firm lower down in the ranks from the last. It is deliciously ironic how someone who gives a lot of weight to status and prestige, decides to demote themselves in such a way.

Modesto’s luck soon runs out when the FBI are called into the firm he is currently working for to arrest him. When he is tipped off about their arrival by his secretary, he immediately tries to destroy all the evidence of any dodgy trades and proceeds to call his travel agent to confirm his same day flight to Manilla. An epic chase ensues. On the way he crosses path with Andrew in his sports car who is oblivious to what is going on. Modesto gets into Andrew’s car and drives off to the airport. When Andrew gets home, he finds his mum distraught. In her despair, she tells him that Modesto has fled ‘like a rat’ back to Manilla and left them with no money. What’s more, their home will be repossessed in the coming days. Andrew, though, doesn’t believe any of this and is indignant that his mother is wrong about his father. He also refuses to believe that his father could leave them with no money. Such a notion is simply inconceivable in his world.

Andrew travels to Manila to try and track his father down. When he does finally arrive at his father’s residence located in a down at heel area in the deep outskirts of Manilla, he is shocked to discover how his father, whom he always looked up to, could live in such an impoverished and threadbare dwelling. Afterall, wasn’t his father supposed to be this high-flying stockbroker whom he boasted about to all his friends? Instead he meets his father in a basic room in a rickety old wooden house – the kind of room that a seasoned backpacker on an ultra-tight budget would shell out $3 a night for – where he greets his son and serves him a plate of chicharron or pork skins. Andrew is clearly shocked but continues to tread carefully with his father only meekly asking him if there is any money. His father, acting like a bent second-hand car salesman, tells him there are ‘millions’ yet is vague regarding the whereabouts of this money.

It is only during the middle of the night, when Andrew is unable to sleep, that he wakes up his father and broaches the money issue with him again. When his father admits that there is no money the ice finally breaks. For the first time in his life, Andrew properly confronts his father. The floodgates open: ‘My father is a liar and a thief’ ‘You were everything to me dad but it’s a lie and I can’t be a lie’.

This scene is reminiscent of the scene in Apocalypse Now with Marlon Brando where he quotes T.S Eliot’s poem The Hollow Men. It is Oscar winning material. This particular scene is akin to an initiation or the end of innocence. Adam and Eve thrown out of the garden of Eden. The end of a prolonged smoky dream. For the first time, the wool is removed from Andrew’s eyes revealing the real Modesto and not the distorted and artificial version of him he grew up with. Where once Modesto would put him on the highest of pedestals, this time he throws his own son under a bus with taunts calling him ‘weak, just like your mother’, ‘my special sissy boy’ or a ‘sissy kid with a sissy mind’. Modesto has been challenged and he doesn’t like it. Yet Andrew has finally seen the light regarding his relationship with his father and vows to never be like him.

When Andrew returns from the Philippines to the family home, which is already in the process of being repossessed, he flies into a blind rage grabbing the Amy Vanderbilt book his father used to read to him every evening, and starts ripping all the pages out of the book to shreds. What is interesting is that this moment in his life now marks a turning point, which can go either way. This is highlighted whilst he is applying for a job in a local convenience store. Everything is going fine until the owner asks him what his father does? Instead of telling the truth and being cordial with the owner, he embellishes a fantastical story about how his father is an owner of multiple plantations in the Philippines ‘further than the eye can see’. It is clear from now on that rather from vowing never to be like his father, he is prepared to inherit his traits by dealing in the currencies of lies and deception. He had an opportunity to turn his life around but decided not to.

This episode is a masterclass of human psychology. I often wonder how different Andrew’s life would have been if he had a parental figure who, like Gianni’s mother, brought him up well. How different things would have been. Yet one can equally speculate with Gianni how he would have turned out had he been brought up by a Modesto father figure who would have knocked out of him any creative inhibitions.

Another interesting point to note is the growth of reality TV and social media stars in the years since both Versace and Cunanan died in 1997. The reason I make this point is because many of these reality TV and social media stars are famous just for the sake of being famous. There’s a rampant narcissism, entitlement, insecurity and perpetual feeling of lack that drives them. These are exactly the traits that Andrew demonstrated and I sometimes wonder had he grown up in the age of the internet, reality TV and social media what his chances would have been of being one of those insipid reality TV bores? I think he would have lapped up this vacuous culture and taken it to his bosom.

One of the most apt comparisons one can make between Gianni and Andrew is from the biblical story of Cain and Abel. The quintessential creator and destroyer story. Andrew wanted to be rewarded without having to properly earn it through honest hard work and putting his all into it. Gianni worked hard, tirelessly and diligently, and against all odds was rewarded and became a fashion icon. Andrew was jealous of Gianni. He wanted everything that Gianni had, but without having to endure any struggle or battles to get there. So like Cain he murdered Gianni.

By Nicholas Peart

(c)All Rights Reserved

Fishing For Bargains In The Market Carnage (UK MARKETS)

deep sea fish

Disclaimer: All financial recommendations in the article are those of the author and should not be taken as financial advice. It is best to do your own research before investing in any security or to speak with a financial advisor. 

The market crash since February has been painful for all long term investors. Yet at the same time it has presented opportunities to buy several good quality stocks and securities at a lower price than normal. In this article I will focus on some of those, which I think may be worth a look at.

Travel Industry

Lots of the big multi billion pound FTSE 100 blue chip companies are currently trading at much lower valuations than before the crash. One of the industries most affected by the current coronavirus pandemic has been the travel industry, which includes airline and cruise ship stocks.

On the FTSE 100, three companies springs to mind; International Airlines (IAG), EasyJet (EZJ) and Carnival (CCL). The share prices of all three companies have been heavily impacted and currently look very cheap. However, as cheap as they may be, they now carry a lot of risk as there’s no guarantee that, despite their size, they will have enough cash to see them through this difficult period before they are back to operating at normal capacity again.

International Airlines group owns multiple airlines in its portfolio including British Airways, Iberia, Aer Lingus and the low cost airline Vueling. Out of the three companies, this one is in my view the safest bet if I had to chose, which one I would invest in. The principle reason for this is, because of the fact that it owns multiple airlines rather than just one. Furthermore, it also employs the greatest number of people (over 60,000) and it is likely, although not guaranteed, that it would be at the receiving end of a government bailout should it really struggle to remain a going concern in the coming weeks and months. Allowing the firm to go bust, would result in a lot of people out of work.

Easyjet carries more risk than International Airlines. Although it has decent cash reserves, it has entered into an agreement with Airbus for £4.5bn to purchase 107 aircrafts. Considering that Easyjet’s current market cap is less than half that amount, such a transaction puts the company in a very difficult situation at a time when precious cash reserves are king. Unless the company scraps the Airbus deal and temporarily suspends it’s dividend, it runs the risk of becoming insolvent in no time and is unlikely to be bailed out either.

But Easyjet is not the riskiest of the three. That prize would go to cruise ship company Carnival. In the wake of all the well publicized coronavirus cases occurring on cruise ships, I cannot see that industry recovering for at least several months. Unlike flights, which are a necessity, it is not a necessity to take a cruise. It’s share price has reacted accordingly falling from a 52 week high of £41.75 in May 2019 to a 52 week low of just £6.06 earlier this month. The share price is currently £8.69. If the company wants to ride out this crisis, it will need to embark on some pretty substantial cost cutting measures going beyond simply cutting the dividend. Earlier this month, the company increased it’s borrowings to give it more financial flexibility, but the consequence of this is that the company has got itself into debt even more.

Personally, I would think very carefully about investing in either company as cheap as the shares may be. The trick is to find high quality blue chip stocks that are beaten down, but fundamentally have a robust enough margin of safety that will see it through the worst of a crisis without having to resort to options such as taking on more debt or any kind of dilutive rights issue.

Oil and Gas Industry

The other industry that has taken a hammering is the oil and gas (o&g) industry. As the market crash began to develop steam, the price of oil fell a whopping 30% in just one day. Towards the end of March, the two largest UK listed oil and gas companies, Royal Dutch Shell (RDSB) and BP (BP.), were both trading at discounts of more than 50% of their share prices at the start of the year. As I write this, their share prices have recovered a bit off their recent lows, yet they still have a way to go to reach their previous levels from the beginning of the year.

I think o&g prices will be incredibly volatile over the new few years and long after the worst of this current coronavirus pandemic is over. Even though o&g prices may currently be at very low levels, it doesn’t take much for prices to suddenly spike again in very little time. In the coming weeks and possibly months, o&g prices may continue to stay low or go even lower to lows that are unthinkable. When investing in o&g companies, especially when prices are low, it is always important to invest in companies that have very low production costs and/or a large downstream business. Such companies are able to weather lower o&g prices better than those that are either producers with high production costs or worse o&g exploration companies.  The latter are much more vulnerable to lower o&g prices and a prolonged slump in these prices can have a very real existential impact on these businesses as their operations become economically unviable.

For those reasons, I am attracted to the more solid players in this industry who will be able to get through this challenging period the best. I already mentioned the two main players, Shell and BP. Their share price erosion has now meant that both companies now pay even higher dividends. Yet there is always the very real possibility that these dividends get temporarily cut, which I actually think is a good thing in the short run if only to boost essential cash reserves. There is currently a lot of negative sentiment in the o&g industry and its not a popular industry. I have a contrarian mindset towards this industry and believe that in due course there will come a time when o&g prices will be much higher than their current levels.

Consumer brands companies

There are some consumer brands companies that are presently very under-priced. A neglected industry that immediately springs to mind is the tobacco industry. Like the oil and gas industry, it is a very unpopular industry and sentiment continues to be poor. What I find interesting is that whilst sentiment has been poor for some years now, there was a period not so long ago where there was a lot of hype in the nascent cannabis industry. I recall the share prices of exotic hot Canadian pot players such as Tilray ascend to ridiculous valuations that were very debased from their fundamentals. I fortunately stayed well clear of all the hype and I am glad that I did as today the current share price of Tilray is a mere fraction of what it was at the apex of the hype.

Rather than chase these hot pot plays, there was and is far more value to be had investing in some of the large public tobacco companies such as British American Tobacco (BATS) or Imperial Brands (IMB). Both companies have been depressed for some time and currently pay very large dividends. In the case of Imperial, it’s dividend is now more than 10%. In the current economic turmoil we are all experiencing, there is no guarantee that these dividends will not be cut, yet I remain certain that the share price of these companies will recover. Whilst it is true that less people are smoking traditional cigarettes than before, these companies will increasingly become entities where they do not have all their eggs in one basket. Going back to the much hyped cannabis industry; who’s to say that once cannabis becomes increasingly legalised in a growing number of jurisdictions across the world and there is more robust consolidation in this industry, those large players don’t also get a piece of the action?

I am also interested in those large consumer brands companies of essential products. The two biggest ones on the FTSE 100 are Unilever (ULVR) and Reckitt Benckiser (RB.). Both are global, robust and defensive non cyclical companies. Yet there is one smaller company, which I think offers a lot of upside to long term investors. This company is called PZ Cussons (PZC). It has been undervalued for a while now and currently has a total market cap of less than £1bn, which I think is very cheap. What’s more, it is well exposed to emerging markets with high growth potential. It is best known for owning the Imperial Leather soap brand and also the Carex brand too. This is important to know since as this current coronavirus pandemic has escalated there has been an acute shortage of hand sanitiser products. Carex is one of the leading producers of hand sanitisers in the world and whilst it may not have a monopoly, I expect record sales for PZ Cussons’ Carex brand when their next financial report covering the last few months is published.

Index Funds and Investment Trusts

Rather than focus on picking individual company stocks, I also like looking at index funds that track entire stock markets and also well run investment trusts. Investing in index funds is ideal for those who don’t want to invest in individual companies and undertake all the fundamental analysis that goes with it. What’s more, by investing in a small select number of index funds rather than lots of individual stocks, you are also cutting down on your dealing costs, which can eat into precious cash.

In the UK, the two principle stock markets are the FTSE 100 and the FTSE 250. The FTSE 100 contains the largest 100 UK companies by market capitalisation and the FTSE 250 the next round of large UK companies, which are not part of the FTSE 100. The FTSE 250 companies, although smaller than the FTSE 100 ones, have generally more growth potential. Yet what the FTSE 100 companies may lack in the growth potential of the FTSE 250 ones, they make up for by paying generally larger dividends. Both indexes are trading at vast discounts to their levels befor the start of the crash. If you are a long term investor, buying some units in both a FTSE 100 and FTSE 250 index fund at current levels could be a very smart move. One could also slowly drip feed money on a weekly or monthly basis. This may also be a good move if these markets continue to fall before they recover.

I have selected a few LSE listed investment trusts, which I consider sound and well managed. One investment trust which I recommend more for income than growth and is currently trading at quite a discount is the City Of London Investment Trust (CTY). It consists mainly of large multi billion pound FTSE 100 companies paying good dividends and thus the trust pays a decent dividend. Some of these companies have temporarily halted their dividend payouts and that is I feel reflected in their current share prices. I expect this trust though to recover strongly when the markets recover and for the companies in the trust that have cut their dividends to reinstate them. The trust also has one of the lowest fees in the industry.

Another LSE listed investment trust I like which is focused more on smaller FTSE 250 companies is the Henderson Smaller Companies Investment Trust (HSL). This trust also pays a dividend although its smaller than what CTY pays and the trust’s fees are also higher. However it has much more potential for growth, without it being reckless.

Both CTY and HSL are currently trading at discounts of more than 30% of their January highs.

The Templeton Emerging Markets Investment Trust (TEM) is also trading at a large discount and is one of the best trusts invested in some of the largest emerging markets comapnies in the world. I prefer this trust over ones focused on just single emerging market countries and I recommend drip buying on any dips in this current downturn.

Finally, I am always keeping an eye on the largest LSE listed investment trust by market cap, the Scottish Mortgage Investment Trust (SMT). This trust contains many high growth companies in its portfolio from holdings in some of the largest tech companies in the world to several promising unlisted companies. NASDAQ listed tech stocks have been some of the best performing stocks during the ten year plus bull market. However it remains to be seen whether the next ten years will be equally generous to these companies. Like other stocks, SMT has also suffered during the current downturn although its held up better than others. I have included this trust as although I still think it is rather richly valued, it may wobble more over the coming months and could present a very good buying opportunity for the long term.

Precious Metals

I continue to remain very bullish on precious metals. In particular, gold and silver. Rather than typical investments to make money, precious metals for me are a form of insurance in a world simply awash in debt, cheap money and uber low interest rates. One of my biggest fears is the effect all this accumulated debt will eventually have on the world’s major currencies, especially the US dollar. Several economists are predicting many years of deflation and sustained low or even negative interest rates, but I beg to differ and think that all this debt and enormous current stimulus packages to soften the blows inflicted by the current coronavirus pandemic could likely lead to inflation rearing its ugly head. As I explained in my previous articles, this will lead to central banks raising interest rates and all this outstanding global debt becoming more expensive to service.

All these factors considered I think gold will do very well over the coming years and even from its current high levels, I don’t think the price is expensive. Silver, on the other hand, is very cheap compared to gold and perhaps for value investors, there is more upside and an even stronger case for silver. I like silver very much for those reasons and think it could rally much harder than gold.

Regarding investment opportunities for exposure to both metals, I think the best mining companies are the biggest ones, Barrick Gold and Newmont Mining, which are both listed on the Toronto and New York stock exchanges. I am not so keen on the smaller mining companies with high production costs and too much exposure to politically unstable countries. One can of course buy physical gold and silver from a dealer and keep it in a vault. Bear in mind though that storing silver, especially in modest amounts, will be more costly than storing gold. I like very much gold and silver ETFs, which are backed by physical bullion in a vault. It is very important that each unit of such an ETF is directly backed to a portion of the physical metal in a vault. Two precious metal ETF securities I recommend are the Wisdom Tree Physical Gold ETF (PHGP) and the Wisdom Tree Physical Silver ETF (PHSP).

 

By Nicholas Peart

(c)All Rights Reserved 

 

Image: PublicDomainPictures