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As you’ve observed, twice in the last three years I have been scared by the prospects for the companies in my portfolio. First, in the period leading up to Covid lockdowns in early spring 2020 when I sold off a number of companies vulnerable to what I thought might be a deep recession, moving 40% of my portfolio to cash.
Second, when central bankers were talking about the “transitory” nature of the then slowly rising inflation in early 2022. Again, I went to 40% cash.
Sure enough, the money pumped into the economy by the central banks and the cash stuffed into people’s pockets by governments, as well as all the supply side problems, created rising inflation. The war in Ukraine exacerbated this.
To a lot of people it seems that we are now in yet another crisis, this time sparked by poor banking practises. I could be wrong (all economic/social phenomena are far from perfectly predictable), but I’m not worried.
I think this bank storm will pass. Also that it will be confined to banks plus a few others who made poor decisions in allocating cash piles to assets that fell in market value (see Charles Schwab, a stock broker with piles of cash invested badly, for an example outside of banking).
So I’m still 96% invested in equities and only 4% cash (for full disclosure, I still have a few properties which help my diversification).
Why am I not worried, much?
First, most UK and European banks and their American cousins (of the larger type – “systemic” banks) are well capitalised; they have plenty of money put in the business by shareholders (or left there from retained earnings) to be able to pay out to depositors should they become nervous and want money returned.
Since 2008 banking cultural change and regulation have led to banks holding vast amount in both capital reserves and in liquidity reserves (with the exception of smaller US banks).
Second, most banks were much more sensible than Credit Suisse and Silicon Valley Bank in where they put the money deposited in them.
Credit Suisse was daft in lending to a series of crooks; SVB was daft in buying US government bonds and mortgage-backed bonds when they yielded one or two percent. They are supposed to have managers who can imagine interest rates rising to say 4% and the impact that will have on their assets (those bonds declined by billions when interest rates rose).
Third, even if millions of depositors suddenly wanted all their money out of Lloyds or JP Morgan Chase we have the back up of the major central banks around the world.
I could be wrong, but I’m betting that scared investors are, like the proverbial Generals, fighting the last war – they fear the things that killed the economy and companies in 2008. But the ingredients are not the same in 2023.
In other words, this is a “molehill” moment, not a major setback, as in the words of Benjamin Graham written 100 years ago:
“The market is fond of making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks”
It is normal to have interest rates at 4 – 6% (we lived through a very abnormal time when interest rates were around 0 – 1%, but that is an aberration).
It is normal to have the odd (sometimes really odd) bank go bust from time to time. It would be strange if we didn’t see this; after all there are some bad managers out there.
Ben Graham also said, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.” Charlie Munger recently added “If you keep making something more valuable, then some wise person is going to notice it and start buying.”
The wisdom in those words is very reassuring to real investors: concentrate on analysing good companies, buying their shares when they are a bargain price and then following them through the evolving business landscape. Eventually, Mr Market will catch up and see the value in those companies; it will weigh properly.
Something else from Charlie Munger (in a recent interview) to restore your zest for shares: “Now that share prices have fallen many investments which were already good value have become real bargains. Now is the time to buy into sound companies and wait for the market jitters to pass. Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”
My message: Welcome falling market prices of good companies selling at a low price!
More significant than the news coming from the banking sector today is the news coming from the gas market. Gas now sells in Europe for €40 per MWh compared with €340/MWh in August.
If maintained, this will have a profound impact on the business environment in the year ahead – maybe even negative inflation and the central bankers having to respond to that! Will that be another “molehill” or will it be “a major setback” – we’ll have to see nearer the time, and act accordingly.
(Oil has almost halved in price helping inflation come down. Also the current bank jitters might impact on banker confidence reducing loan activity somewhat so this might help dampen the economy, bringing inflation lower than many expected only a couple of weeks ago. Supply chains have been improved and the volume of cheap renewables and LNG from American is coming in great quantities. All these are ingredients which might make for low/negative inflation. Keep an eye out for it.)
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
