How not to invest
Terry Smith was one of the City’s best-known analysts, but his unconventional thinking drove him out of the major stockbroking firms to set up his own business. Five years later, he wrote in the Financial Times [21.11.15] of his successful development of his unit trust Fundsmith.
“One thing I have observed is the obsession of market commentators, investors and advisers with macroeconomics, interest rates, quantitative easing, asset allocation, regional geographical allocation, currencies, developed markets versus emerging markets – whereas they almost never talk about investing in good companies.
What has continued to amaze me throughout the past five years is not just this largely pointless obsession with factors which are unknowable, largely irrelevant, or both, but how infrequently I hear fund managers or investors talk about investing in something which is good.”
It is good companies that will be the key to success over the next decade or more but of even greater importance to investors is their standard of living in retirement. Market returns are going to be bad, and investments that cannot do significantly better than the markets are going to leave their owners impoverished and dependent on state aid.
Not too much hope should be placed on that. To be sure, the chancellor’s latest spending plan shows that he is determined to change the structure of government spending in favour of those that vote. Spending on education and business is expected to reduce from
24 per cent of GDP in 2008 to 20 per cent by 2020, while overall the amount spent on the old and dying increases from 35 per cent to 42 per cent by 2020. But it is the young and energetic that drive an economy, and increasing productivity that makes us all better off.
Bull and bear markets
Stockbroker economics assure us that shares are always cheap, and that markets are, if not in a bull phase, cheap since they are at a bear market low. But a look at the 20th century shows clearly that stockbroker economics are wrong. Stock market cycles take a long time to play out, as the broad Wall Street figures show in Table 1.