The economist John Maynard Keynes said it best with his immortal words about financial markets being able to stay irrational longer than one can stay solvent. I think it was Keynes who said those words yet it doesn’t matter. What matters is how important and powerful those words are. I personally think these are some of the most important words of advice for any investor whether they are a novice or seasoned. One may have complete confidence and conviction in a security they are investing in yet there is always the chance that things don’t go according to plan regardless of how much due diligence they may have done on it.
The Big Short is a well known book by Michael Lewis, which was later made into a successful film. The book is about an investor and fund manager named Michael Burry who places an enormous bet against subprime mortgage bonds. He was one of a small handful of investors who at the time discovered how rotten those bonds were and how they had the power to create an enormous financial crisis, which they eventually did in 2007-8. He placed his bet relatively early in around 2005. At the time, it was seen as a rather contrarian thing to do as the majority of people in the financial world were amazingly unaware of how toxic those bonds were.
Although Burry would eventually be vindicated and handsomely rewarded for his bet, I personally think that the way he went about it wasn’t so smart. To be clear, I am not for one moment knocking his deep research and analysis. In fact, I applaud his diligence and ability to discover serious flaws in that corner of the market whilst everyone else it seemed was asleep at the wheel. Yet I don’t think it was a smart move for the following reasons. Firstly, his move to short those bonds represented a very high percentage of his total fund, which made a lot of investors very nervous. If you are a fund manager or work for a fund, it is quite common for an individual security to not represent more than 10% of the total fund. Anything higher than that percentage has the potential to create a lot more risk and volatility to the fund. What’s more, it was expensive to hold such a large short position as large payments to service it were due every month. It was understandable why those investors and others at his fund were nervous and had very little patience. Secondly, and more importantly, I don’t think Burry ever familiarised himself with Keynes’ quote. Although it took about two years for his bet to come good it could have taken much much longer. It is entirely plausible that had his fund had to wait even longer for his bet to come good there would have been so much pressure on Burry to finally close his short and thus cut the loses the fund was making by holding it.
You see it doesn’t matter whether Burry was fundamentally right in his analysis. He was completely correct. These bonds were a train wreck waiting to happen. But that’s not the point. The point is that timing the markets is very very difficult. Alternatively, Burry could have done the following. He could have still made his bet yet it wouldn’t have represented more than 10% of his total fund for example. That way, there would be less tension and pressure on Burry to close his position in the event that it was going to take so long to come good. What’s more, it would have still made him and the investors in his fund a lot of money when that day would eventually arrive.
This brings me to another well worn adage in the investment world of never having all your eggs in one basket. Although this may be a cliché it is so very true. Although enormous fortunes are made by putting all one’s huevos in one single basket, it is also the fastest way to blow up a portfolio. Burry’s enormous bet came good and he was rewarded, but he could also have been fooled by randomness by some unusual twist of fate.
Over the last few years many investors, including some well known names, lost a lot of money shorting Tesla. Although the rationale behind their decision to short the company was completely understandable, namely that the market capitalisation of the company was not reflective of it’s fundamentals, the share price has nonetheless continued to climb even higher. This right there should be a warning in the perils of going for that ‘big short’. As I already stated, it is ok if such a position is not so great that it poses a serious risk to an entire portfolio. But one can only imagine those legions of investors having a Michael Burry style moment with Elon Musk’s company.
Interestingly, it seems that Burry himself has now thrown his hat in the Tesla Short ring. I may be wrong, but it appears that his fund is betting against Tesla to the tune of 40% of the entire weighting of the fund. I wish him luck. Will his bet come good again? Or will he join the scores of other investors who got badly burnt betting against Elon?
Whenever someone asks me to choose between The Beatles or The Stones I will sometimes reply with ‘neither’. Instead I will say The Kinks. There is something special and close to my heart about that band. Throughout the 60s they had hit after hit and were certainly one of the leading British groups of that era. Yet many listeners of The Kinks I feel only penetrate the surface of this great band. They know the hits, but few venture beyond those songs as popular as they may be. I came to the band a little late. I first got into the group via a greatest hits compilation I purchased when I was 19. As much as I cherish all those well loved songs, what struck me as odd was that the compilation ended at the 1970 hit single Apeman; as if the group ceased to exist after that song. It seems to be the same with many other Kinks compilations.
Most of their well known hits are from the time when they were signed in the UK to the Pye record label from 1964 until 1970. The vast majority of their most well known songs such as You Really Got Me, Sunny Afternoon, Tired Of Waiting, Waterloo Sunset, Days and Lola fall within those years. Personally, my favourite years are from 1968 to 1975. I love those early songs and they will never get stale and always retain a timeless quality to them. For me though, the most exciting years are when the group’s chief songwriter Ray Davies began to compose these brilliant and ambitious concept albums starting with the 1968 album The Kinks Are The Village Green Preservation Society(TKATVGPS) and ending with the 1975 album Schoolboys In Disgrace. Those albums receive mixed reviews from fans. For example, the former is today frequently heralded as a classic landmark album and can be seen in many ‘greatest albums of all time’ polls. The latter album, on the other hand, gets invariably torn apart. Perhaps those journalists and listeners never even bothered to actually listen to Schoolboys? They probably saw the hideous front cover and decided that they didn’t need to investigate further; their prejudices already set in stone.
During the few remaining Pye years, The Kinks released some very strong albums. In 1968 they released the aforementioned TKATVGPS album. Then the following year they released the album Arthur, which is just as good as VGPS and is equally held in high esteem. The final two albums they released on Pye were the 1970 studio album Lola Vs Powerman And The Moneygoround and the 1971 soundtrack album Percy for the film of the same name. Lola Vs Powerman… produced the hit singles “Lola” and “Apeman”. The former is one of the band’s best known songs.
After the band left Pye, they signed a new deal with RCA records in 1971. Their tenure at RCA would last for four years and during this time the band continued on it’s trajectory of releasing concept albums. Just as they signed to RCA, they released the album Muswell Hillbillies. It’s a strong album with some fine songs on it. The next year they released the album Everybody’s In Showbiz. Personally, I have mixed views about this album. On one hand, I like Ray’s ideas and inspiration behind it as well as songs such as Celluloid Heroes and Sitting In My Hotel Room. Both these songs are excellent. Celluloid Heroes has gone on to be covered by multiple artists – most notably Bon Jovi. It contains some of Ray’s finest lyrics.
Then in 1973 and 1974, the band released two albums; Preservation: Act One followed by Preservation: Act Two. All in all, neither of these albums were particularly well received by music critics at the time; especially the Preservation: Act Two album. However, after listening to both those albums I have come to the conclusion that they are the two lost masterpieces of The Kinks’ cannon of albums. And it is those two albums that I want to make the centre of this article. Whilst it may be too controversial to say that they are the best albums by The Kinks, I think I can firmly say that they are Ray Davies’ most ambitious works. It doesn’t matter whether one thinks those albums are a success or a failure. I don’t personally think they are a failure. What I will say is that those albums took Ray down avenues he never, or at the minimum only casually, ventured down before. He had already explored subjects like greed, poverty, inequality and injustice in society earlier on via songs like ‘Dead End Street’,‘Brainwashed’ and ‘Powerman’. But on the Preservation Act albums he goes right into the heart of darkness. The Village Green Preservation Society(VGPS) album is almost soft liquor by comparison. Whilst the songs on VGPS are very strong and vivid, they are also accessible. They don’t rock the boat nor do they, at least superficially, take the listener to an ostentatiously dark and uncomfortable place. The Preservation Act albums, on the other hand, are much more polemic.
We’ll start with the Preservation: Act 1 album from 1973 before delving more deeply into Preservation: Act 2. One of the gems of this album is the song Sweet Lady Genevieve – a song that could fit quite comfortably with the cannon of better known Kinks hits. Of the two Preservation Act albums this one is lighter in tone and there are even echoes of the earlier VGPS album via songs like Sitting In The Midday Sun and Daylight. Another pearl on this album is the song ‘Where Are They Now?’…
I’ll sing a song about some people you might know They made front pages in the news not long ago But now they’re just part of a crowd And I wonder where they all are now.
For me this song is an affectionate tribute to all the mavericks. The individual and special people who were a blast of colour in a world that is becoming increasingly colourless and homogenous. In the context of the earlier VGPS album that would be characters like Johnny Thunder. Some strands of humanity are evident on Preservation: Act 1. But this is deceptive. The presence of the song Money And Corruption/I am Your Man poisons any idyllic and romantic notions…
Money and Corruption Are ruining the land Crooked politicians Betray the working man, Pocketing the profits And treating us like sheep, And we’re tired of hearing promises That we know they’ll never keep.
With this song Ray dives straight into the underbelly of the system – taking it on like a firebrand revolucionario a la Hugo Chavez. This continues and is reinforced in the end refrain part of the song with it’s Communist Manifesto overtones…
I visualize a day when people will be free And we’ll be living in a new society. No class distinction, no slums or poverty, So workers of the nation unite, Workers of the nation unite, People of the nation unite.
This song sets the tone for the follow up Preservation: Act 2 album. On the later released bonus edition of the Preservation: Act 1 album is the song ‘Preservation’, which wasn’t featured on the album when it was originally released. It’s lyrically not only a very strong song but totally encapsulates the spirit of both Preservation albums as a whole. It also, along with the song Here Comes Flash, introduces the character Flash, a central figure in the follow up album who represents everything that’s wrong in the world – a psychopathic, greedy, amoral, corrupt and duplicitous individual who lacks empathy and is only out for himself. He is the type of person that would make Gordan Gecko blush…
Once upon a time In a faraway land Lived a villain called Flash He was such a wicked man He terrorized the people He broke arms and crushed hands He ruled with a fist and he purchased all the land
Then he plowed up the fields and cut down the trees For property speculation And he did it all for a pot of gold And for his own preservation
Preservation: Act 2 is a dark unsexy beast of an album. Whatever light there was on Preservation: Act One has now been blocked out. If VGPS is all rural fields, church fetes, strong bonds of trust, tea and scones and strawberry jam, then Preservation Act Two is polluted rivers, eyesore landscapes, revolutions, and societal collapse where everyone just looks after number one. The VGPS album has a kind of innocence to it. Even the mildly dark characters in the album like in the song Wicked Anabella completely pale in comparison to Flash. The world of VGPS is a paradise compared with the world of Preservation: Act Two, which represents a paradise that is well and truly lost. It is about as east of Eden as one can get.
The life portrayed in Village Green is overall idyllic and peaceful. Yet it is a bubble shielded from the truly evil and disruptive forces of life. It is naïve to think such a life like that one can just go on forever. Flash hadn’t yet pitched up to turn things upside down.
The first song on Preservation: Act 2 to really get things going is the song When A Solution Comes…
When a solution comes, It’s gonna breathe right down on everyone. When a solution comes It’s gonna cover up the clouds And eclipse the sun And black out a pale blue sky, And everybody’s gonna be terrified, Because they’re all going to feel the bite And there’s going to be a revolution
‘Days’ this song is not; in that iconic song from 1968 there is sadness, loss and grief. But there is no bitterness. There is no hate nor is there fear. This is evident in the following lyrics;
You took my life, But then I knew that very soon you’d leave me, But it’s all right, Now I’m not frightened of this world, believe me.
Yet in When A Solution Comes there is a change in the weather. This is the beginning of a new period of fresh hell that will reign down on all of society. In the book The Fourth Turning, the authors William Strauss and Neil Howe look at the world over the last 500 years and locate a series of cycles each lasting a generation. Within each generational cycle are four turnings. The first turning represents a ‘high’: this is a period of stability. Trust in institutions is strong and individualism is weak. A new civic order is established the old values regime collapses The second turning represents an ‘awakening’ where the civic order established in the first turning begins to come under attack from a new values regime. The third turning represents an ‘unravelling’. During this era trust in institutions begins to weaken and individualism strengthens. The first turning civic order collapses at this point and eventually taken out by the new values regime. The forth and final turning represents a ‘crisis’. By this time the world is in chaos as the the new values regime replaces the original civic order created in the first turning with a new one.
In the context of the trilogy of all three Preservation albums, the song When A Solution Comes represents the ‘unravelling’ phase of society. It is not in the full ‘crisis’ phase yet, but it is already well on it’s way. On the other side of the coin, the opening title track of the VGPS album in some ways represents many attributes of the first turning….
We are the Village Green Preservation Society God save Donald Duck, Vaudeville and Variety We are the Desperate Dan Appreciation Society God save strawberry jam and all the different varieties Preserving the old ways from being abused Protecting the new ways for me and for you What more can we do
The lyrics of the title track of that album for me evokes a strong sense of unity. A sense of everyone looking after each other. Not allowing society to disintegrate. Keeping the peace. And that requires making an effort and caring. Once people stop caring, apathy begins to prevail and with that goes the ties that bind paving the way for disruptive forces to take over. The consequences of this are probed deeply in Preservation: Act 2.
The song Shepherds Of The Nations is one of the strongest songs on the album and in my view represents the new horror show of this dark turning….
Down with sex and sin, Down with pot, heroin. Down with pornography, Down with lust. Down with vice lechery and debauchery.
We are the new centurians. Shepherds of the Nations. We’ll keep on our guard For sin and degradation. We are the national guard Against filth and depravity, Perversion and vulgarity, Homosexuality. Keep it clean.
When all of a sudden all basic freedoms that were once taken for granted have now been eroded and a new cabal of neo-puritan Gestapo-like folk have taken over the asylum. Rather than the world taking a step forward and continuing to evolve and flourish, it has been abruptly thrown off its course and has taken a thousand steps backward towards some unfolding new sterile, lifeless and fearful Middle Ages era wasteland; where all the flowers start to wilt and die, and turn a new shade of grey. All the colours of the Village Green world now dulled to cigarette ash.
The song Nobody Gives is another dark slice of what it’s like to be in the living in the middle of a turbulent fourth turning style world…
I can’t understand why everybody’s quarreling, Nobody gives in case they lose face, And everybody’s guilty and everybody’s innocent, And the fact of it is nobody gives any more.
Once upon a time there was a period of peace, stability and trust amongst one another. The aforementioned VGPS title track nails that sense of societal harmony perfectly with the lyrical couplet, ‘Preserving the old ways from being abused / Protecting the new ways for me and for you‘. But in the song ‘Nobody Gives’ everyone has turned against one another. They have become fearful and full of mistrust. Any attempt at simply performing any altruistic acts of kindness is simply not worth the bother and in a climate of unanimous fear this could even backfire. Thus it is easier and safer to just not care anymore.
As the song gathers pace, it takes the listener on a vivid and sombre journey through the roots of this social breakdown leading to, in the example of this song, the rise of Hitler…
Back in nineteen hundred and twenty-five There were thousands of people struggling to survive. There was hunger, unemployment and poverty, Then in 1926 they decided to be free So they all went on strike and The workers told the unions, who blamed it on the government, The politicians blamed it on the strikers and the militants, Everybody’s guilty and everybody’s innocent, But the fact of it is nobody gives any more.
Back in nineteen hundred and thirty-nine There were scores of German military waiting in a line, And the Fatherland wanted what the world wouldn’t give, And then Hitler decided he could take what was his, So they all went to war and said Kill all the left-wing intellectuals, Annihilate the Jews and wipe out their race, Eliminate the weak because they’re ineffectual, And the fact of it is nobody gives any more.
In 1923, when Germany was then the Weimer Republic, the country experienced a period of devastating hyperinflation. This had the effect of throwing millions of citizens into acute poverty – especially those who didn’t own any hard assets that could protect them from this inflation. Any savings in the local currency that had been accumulated via hard work and over a long period of time had very quickly become worthless. The grinding poverty and desperation aside, one can also only imagine the extreme anger and injustice felt by those who had lost all their life savings. They wanted blood and someone to blame. Hitler emerged at a time when this anger and desperation was reaching boiling point. It is only when a society is in meltdown and in the eye of a fourth turning that a figure as evil Hitler can rise to the top. In a Village Green world of togetherness and mutual respect for one another, Adolf wouldn’t stand a chance.
Overall, I think both these Preservation Act albums should be essential listening and certainly deserve to be much more wildly known. They not only complement the earlier and more well known VGPS album, they also give the listener a glimpse into the more intricate and visionary workings of the mind of Ray Davies. I think this was perhaps lost on some of the music critics who were reviewing both albums at the time. The lyrics aside, I think some credit also needs to go to Ray’s brother Dave. Generally, I don’t think he gets another credit as a guitarist. His guitar work is a really important part of both albums and I feel it sets the tone very effectively on some of the songs.
Two further albums followed in 1975, Soap Opera and Schoolboys In Disgrace, before the group left the RCA record label. Like the earlier Preservation Act albums, neither album got overly favourable reviews. Yet I think they are both interesting in their own ways. Soap Opera is a flawed hit and miss album yet the concept behind it is strong and very relevant. I particularly like the songs Everybody’s A Star (Starmaker) and You Can’t Stop The Music. The former song quite simply describes how anyone can be a star; even the blandest and most personality and talent bereft of individuals. Ray created a character called Norman to personify such people.
Schoolboys In Disgrace also has it’s moments. Unfortunately, it suffers from a front cover that is quite frankly a veritable abomination. I feel it unfairly undermines the whole album. That is certainly one reason why many listeners do not give this album a proper chance. However, those who look beyond this monstrosity of an album cover will be rewarded for their curiosity. It is not a perfect album, but there are some gems on there like Schooldays, I am In Disgrace and The Hard Way . It is also conceptually a very interesting album as it is based around a disruptive and unruly schoolboy who would eventually develop into the vile and evil character Flash of the earlier PreservationAct albums. So, in a way, this album plays an notable role next to those albums. It is an important part of that complex puzzle.
Fame can be a dangerous thing. Some people seek it because in their minds it fills a void. If you are talented and have a lot to offer it presents the opportunity to be valued and respected by many people. Fame has always had it’s drawbacks yet I feel there are two different periods of time that one must be aware of. These are Before The Adoption Of The Internet (BTAOTI) and After The Adoption Of The Internet (ATAOTI). In The last 25 years, the growth and development of the internet has been staggering. We currently live in a world of instant hyper connectivity.
If I had to pick a time to be famous I would pick BTAOTI in a heartbeat. News travelled slower back then. The digital world was less developed. I have no nostalgia or desire to live in the past, but when I look at the growth and development of social media today I flinch at the concept of fame. I would even go as far as saying that eventually it may even lose it’s appeal. It would take real guts to go down that path so much so that anonymity would become increasingly attractive. Andy Warhol said that everyone would be famous for 15 minutes. The internet has provided a platform for everybody to publicly project themselves if they want to. There is so much content on the internet today. There is no way one would be able to absorb all the digital content out there in one lifetime. According to Statista, as of May 2019, more than 500 hours of video content was uploaded to YouTube alone every minute.
It is increasingly a rarity nowadays to not have any personal platform or content online. To be purely anonymous will be rarer and more cherished than fame itself.
Start-ups are an important part of the business landscape. More crucially, the best start-ups provide much needed solutions to long standing problems. They provide real value to consumers. However, one thing I have observed over the years with certain start-ups is this mantra of ‘growth at all costs’.
If you are the founder of a start-up that provides a product or service that people really need and for a reasonable price, it is fair to say that this start-up has a bright future with a large potential for sizable growth over the coming months and years. That is all well. Yet, it does concern me when I observe the ones that have this ‘growth at all costs’ mindset.
No matter how driven or ambitious a founder may be, it is absolutely paramount that there is a healthy working environment amongst all the people who work at the company. There is currently a huge scandal with the UK craft beer company BrewDog over the maltreatment of many of its workers. BrewDog has been a huge success story. Ever since it’s founding a little over a decade ago, it has grown exponentially and is now the largest craft beer company in the country. It’s become a ubiquitous brand with it’s beers sold in all major supermarkets.
I could be wrong, but I am guessing that during those years when BrewDog was growing at such a fast pace, there was very much a ‘if you can’t stand the heat..’ atmosphere in the organisation. Even though BrewDog do make very good beers, the craft brewery industry is very competitive. There are many players and the way that BrewDog has been able to get to the position it is currently at today has been by scaling very fast in a relatively short period of time. By growing at such a rapid pace, it has now got to a size that gives it a clear edge over it’s competitors. If it had not embarked on this journey of aggressive growth it likely would have lost out to another competitor in the space.
Yet a big consequence of adopting an aggressive growth strategy is that it can create a toxic environment in the workplace. It suddenly becomes very easy for founders/chief executives to forget to care about the wellbeing of the other workers in the organisation as, in an almost single minded fashion, they have their eyes set on reaching their lofty targets they have set themselves out to achieve. They fail to understand that the workers are an integral part of the growth/success of their business. Without those workers, it is unlikely that their company would have been able to grow so spectacularly. This is especially true of those founders with very large egos and a lack of empathy for others.
A more extreme example of a growth at all costs business that makes Brewdog look like a plain vanilla enterprise is the rise and fall of office rental space company WeWork under the leadership of it’s colourful founder Adam Neumann. Unlike Brewdog, WeWork never made a profit and simply haemorrhaged cash. Billions of dollars of venture capital money was thrown at the company, most notably by Softbank whose founder and CEO, Masayoshi Son, really believed in the company. At one point WeWork had a valuation of over $40 billion. An eye watering valuation when one takes into account the fundamentals of the business.
WeWork also suffered from a toxic workplace culture. Those Brewdog workers, who via the Twitter group Punks With Purpose are bringing to light the less than perfect behind the scenes picture of the business, accuse the company of being ‘built on a cult of personality’. They take aim at how the company and it’s founders cultivated an image of the company as authentic (applying a ‘punk ethos’), caring about the environment, being forward thinking and progressive, and an amazing and cutting edge place to work at. Yet the irony is that it was anything but rosy. In their own words they scathingly say that “The true culture of Brewdog is and seemingly always has been, fear”.
Yet compared with WeWork this is small beer (no pun intended). The larger than life WeWork founder Adam Naumann would make make Brewdog co-founders James Watt and Martin Dickie blush. He took the term ‘cult of personality’ to another level. To the point where he was able to get some of the most powerful heavyweights in the venture capital space to invest megabucks in his business. Even though, with just a modicum of due diligence, it would soon seem apparent that WeWork was essentially a start-up with very poor fundamentals. The emperor had no clothes. Those VCs who were smart enough to see beyond the hype and mega personality of Neumann and actually did some stone cold research on the fundamentals of his business, saved themselves a packet.
Sometimes it is not necessary for a start-up to pursue a ‘growth on steroids’ strategy. It may be that you can create a lot of value and provide a unique solution without the need to aggressively grow. Sometimes large growth can happen by default if suddenly there is a massive demand for your products and services. And that is fine. There is nothing wrong with growth. Hell, there is nothing wrong with full on hyper growth. But not when it’s at all costs. Not when workers are not feeling valued and a dysfunctional and toxic workplace environment manifests.
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?’
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.
‘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.
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.
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.
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.