Latest / Merryn Talks Money / The Year of the Value Hunter Has Arrived

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The Year of the Value Hunter Has Arrived · Merryn Talks Money

0:00
Speaker 1: John, I have something I need you to read. It's
0:04
Speaker 1: possibly the best book I've ever read on markets. I know,
0:07
Speaker 1: even better than the Adams Smith when I was going
0:09
Speaker 1: on about last year. There's one is called Invested. How
0:11
Speaker 1: three centuries of stock market advice reshaped, reshaped our money,
0:16
Speaker 1: markets and minds. I'm not going to read all the authors,
0:18
Speaker 1: because there are five incredibly dedicated, dedicated academics who sat
0:22
Speaker 1: down together and actually written a history of things that
0:25
Speaker 1: you and I think we know more about than most
0:26
Speaker 1: of the history of newsletters, financial advice books, financial advice magazines, etcetera.
0:32
Speaker 1: Absolutely fascinating. Now the first one, first one came out
0:36
Speaker 1: hang on, I can tell you this seventeen sixty one,
0:40
Speaker 1: Mortimers Pioneering. They called it an actual first guide to
0:44
Speaker 1: investing in the market, every Man his own Broker, seventeen
0:49
Speaker 1: sixty one. And then in the UK we got going
0:52
Speaker 1: in the UK first, you know where it was a
0:54
Speaker 1: leader and this stuff, right, I didn't even realize that
0:57
Speaker 1: then we normally student so the So Sea bubble then
1:01
Speaker 1: the only bind stocks for as after that you could
1:04
Speaker 1: still buy and South stuff, you know, And this was
1:08
Speaker 1: just staring out through the railway bubble, right, you needed
1:10
Speaker 1: lots and lots and lots of financial advice books for that.
1:13
Speaker 1: You know, I've written about written a column about some
1:16
Speaker 1: of them. There's some really good ones. Moses Smith, he
1:18
Speaker 1: wrote Plain Truths about stock speculation. That's a little later on,
1:22
Speaker 1: moving into the eighteen hundreds of them, and then moved
1:25
Speaker 1: right through right through until the most recent ones. You know,
1:28
Speaker 1: there's all the Jim Kramer books, etcetera, the things we've
1:31
Speaker 1: written you and I over the years, and then there's
1:33
Speaker 1: Don't Panic, how to manage your finances and financial anxieties
1:36
Speaker 1: during and after the coronavirus. So you know, it goes
1:39
Speaker 1: all the way through. There's three hundred years worth of
1:42
Speaker 1: people writing these books and they're all the same. Yeah.
1:47
Speaker 1: I was just going to see that. That fast one
1:49
Speaker 1: sounds remarkably like it could have been published like tomorrow.
1:53
Speaker 1: Well you could. You could publish a book tomorrow called
1:55
Speaker 1: be Your Own and everyone would buy it. Every man
1:58
Speaker 1: his one broken? Yeah, everyone they're overbroaker, I think, is
2:03
Speaker 1: where we are today. Right. But the question that I
2:08
Speaker 1: asked I wrote about this for for Bloomberg Opinion. The
2:11
Speaker 1: question I ask is, given that there are all these
2:14
Speaker 1: books I mean hundreds of thousands of them. We many
2:16
Speaker 1: tens of thousands. I haven't got the end of the
2:18
Speaker 1: book yet. And they all say roughly the same thing,
2:21
Speaker 1: which is, you know, don't be taken in by stories,
2:23
Speaker 1: don't pay too much for staff, you know, control your
2:27
Speaker 1: emotions around investing. Don't forget that the price you pay
2:30
Speaker 1: at the beginning is the main indicator of your long
2:32
Speaker 1: term returns my book The Skeptical invest This remarkable, also
2:38
Speaker 1: says this. John's book says this, but it says this
2:40
Speaker 1: in the best possible way, by John's book, by John's book, um,
2:44
Speaker 1: but also by investing, because it tells you about the
2:47
Speaker 1: other books which say similar. Thanks. Anyway, the key point
2:51
Speaker 1: is if there are this many books out there, if
2:54
Speaker 1: they all say the same thing, If in the main
2:57
Speaker 1: the advice is good because it is because good advice,
3:01
Speaker 1: why aren't we all rich? You know? What is the
3:04
Speaker 1: same reason than not everyone is skinny and happy. Obvious.
3:12
Speaker 1: It's entirely obvious, but you need something to see it
3:15
Speaker 1: to you in a way that collects with you. Basically,
3:18
Speaker 1: I mean, these are basically these books are self help
3:21
Speaker 1: books in the same way that diet books are self
3:23
Speaker 1: help books and how to start a business books and
3:26
Speaker 1: self help books. I mean, I actually remember a financial
3:28
Speaker 1: publisher who we both know very well, said to me
3:31
Speaker 1: about a decade ago, um, he was launching more and
3:34
Speaker 1: more things, and I said, well, what are we doing here?
3:36
Speaker 1: And he said, well, it's just like the diet entertry mare,
3:38
Speaker 1: and we're not selling action, we're selling hope. That is
3:44
Speaker 1: the brutally cynical thing I see. I do. I actually
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Speaker 1: I am quite a believer in self help and fatasty yeah,
3:54
Speaker 1: and all of those kinds of things. But it's just
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Speaker 1: that there's that thing of people can tell you something
4:01
Speaker 1: that is very obvious and you can intellectually know it,
4:06
Speaker 1: but until it sinks through and it's something that connects
4:08
Speaker 1: me you behavior wise or you're ready to change, or
4:11
Speaker 1: but I don't really know what it is that triggers it.
4:14
Speaker 1: But that's why this stuff does kind of get recycled
4:17
Speaker 1: over and over again, because it's thinking, yeah, it is
4:22
Speaker 1: true and it is obvious, but people don't do it
4:25
Speaker 1: and and yeah, and yeah it does say a hope
4:27
Speaker 1: to an extent. It's like, but here's this thing in
4:30
Speaker 1: your life that you perceive to be a problem. You
4:32
Speaker 1: want to change it. I've got a solution, and just
4:35
Speaker 1: what happens. The solution is the same solution everyone else
4:38
Speaker 1: will tell you. But maybe if you hear it from
4:40
Speaker 1: me in my inimitable style, then you will something. I
4:44
Speaker 1: can find the right metabor, the right comparison, the right
4:46
Speaker 1: whatever it is to get through to you. I will
4:48
Speaker 1: like this. The diets things is the same. It's like
4:51
Speaker 1: they most apart from the really flaky ones, they mostly
4:54
Speaker 1: boiled down and eat something that's kind of like the
4:56
Speaker 1: Mediterranean diet and just don't eat too much yet, but
4:59
Speaker 1: maybe if you do. He's gonna write a diet, but
5:02
Speaker 1: was going to call the skeptical diet the skeptical dater
5:05
Speaker 1: skeptical data. Oh, fortunes are made, John, tell me one
5:09
Speaker 1: thing that's obvious in the market today? Um, what is
5:15
Speaker 1: obviously UK equities? I'm setting you up so well, just
5:18
Speaker 1: take it on. UK equities are cheap, too obvious. That
5:22
Speaker 1: always cheap at the moment. And actually that's toy a
5:25
Speaker 1: topic for our discussion at some point. Why are they
5:27
Speaker 1: always cheap because they're constantly outflows? Why are they're always outflows?
5:32
Speaker 1: That's the book you can read about this by the
5:34
Speaker 1: way in johnson news letter Money Distilled. He's written about
5:36
Speaker 1: UK equities and you can also read about it in
5:38
Speaker 1: a Bloomberg opinion econom I wrote relatively recently also on
5:41
Speaker 1: UK equities. And then you know, go and buy some
5:44
Speaker 1: books prefrobably Welcome to Marin Talks Money, the podcast in
5:54
Speaker 1: which people who know the markets explain the markets. I'm
5:57
Speaker 1: there in some set work this week I'll get is
6:00
Speaker 1: Ben Inca. Ben is the co head of our allocation
6:03
Speaker 1: at GMO, which is a value orientated investment house founded
6:07
Speaker 1: by Jeremy Grant. Some now, the most interesting thing about
6:10
Speaker 1: GMO in this context is the value orientated bit, because
6:13
Speaker 1: something that we've seen very little of over the last
6:15
Speaker 1: decade is a focus on value and what the price
6:19
Speaker 1: of any particular investment when you buy it means for
6:22
Speaker 1: its future returns. And we've had regular papers out from
6:25
Speaker 1: GMO explaining to us over the last few years that
6:28
Speaker 1: if you buy you high, you will not make a
6:31
Speaker 1: good return over the following decade or so. And everyone
6:34
Speaker 1: has ignored that, haven't they, Ben, It did seem so
6:38
Speaker 1: for quite a while. Not ignoring it anymore, though, are they? Well,
6:42
Speaker 1: I don't know. They didn't ignore it last year, But
6:45
Speaker 1: the beginning of this year has been a little bit weird.
6:48
Speaker 1: It has, hasn't it. Well, let's come back to the
6:50
Speaker 1: beginning of this year. Let's start. Let's start with you know,
6:53
Speaker 1: we knew that there was an everything bubble kicking off
6:56
Speaker 1: a few years ago, and I think everybody thought that
6:58
Speaker 1: there would be what you might call it a blow
6:59
Speaker 1: off phase of some kind at the end of the bubble.
7:02
Speaker 1: But what we didn't expect, or certainly what I didn't expect,
7:06
Speaker 1: and I suspect you didn't die them, was that that
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Speaker 1: blow of phase, this massive end of the everything bubble,
7:12
Speaker 1: would coincide with the economic and financial conditions that we
7:18
Speaker 1: had during during COVID. That felt weird, didn't it. I
7:20
Speaker 1: know you wrote in one of your notes that this
7:22
Speaker 1: was one of the most disorientating times for professional managers
7:27
Speaker 1: to live through. Yeah, i'd say. I mean. We have
7:30
Speaker 1: spent a lot of time studying bubbles over the years,
7:35
Speaker 1: and one of the things that is common across almost
7:39
Speaker 1: all bubbles is they occur at a time where the
7:42
Speaker 1: underlying um economic situation is very good and has been
7:48
Speaker 1: very good for quite a while. So the particularly odd
7:52
Speaker 1: thing about the COVID bubble was you know, the economy
7:56
Speaker 1: wasn't going very well. Um. And if you look at
7:59
Speaker 1: times like nine, nine or two thousand, they were events
8:04
Speaker 1: where the economy had been going great and the bubble
8:08
Speaker 1: was really generated by people saying, well, I think these
8:11
Speaker 1: great times are going to last forever. Um. And they're
8:15
Speaker 1: wrong on that. The great times never last forever. But
8:19
Speaker 1: normally you at least have great times. Um. You know,
8:23
Speaker 1: was not a great time. One was weird, but I
8:27
Speaker 1: wouldn't call it a great time. Um. And yet we
8:32
Speaker 1: saw what has been claimed the everything bubble. Absolutely everything
8:37
Speaker 1: went up at the same time in a way that
8:41
Speaker 1: I'm not sure we have seen well honestly ever so interesting.
8:47
Speaker 1: So we learned something really great then, which was which
8:49
Speaker 1: we can use in later day later times, that you
8:52
Speaker 1: can drag out a bubble by printing fast amounts of
8:55
Speaker 1: money and putting it directly into people's pockets. This is
8:57
Speaker 1: valuable information, right Who could have guessed? Yeah? I mean
9:02
Speaker 1: that is that That is the interesting thing about this.
9:05
Speaker 1: We have never before put the money quite as directly
9:10
Speaker 1: into people's pockets, especially at a time where they didn't
9:13
Speaker 1: really have very much to spend it on. Um, So
9:17
Speaker 1: in retrospect, you can understand why. I can't remember who
9:22
Speaker 1: coined it, the boredom hypothesis, but people had nothing to do,
9:25
Speaker 1: so they speculated. But my god, did the speculation go wild.
9:31
Speaker 1: M So we had all these people sitting at home,
9:33
Speaker 1: big pile of money in their pockets. Um they've lived
9:36
Speaker 1: through I mean most young people in particular, I have
9:38
Speaker 1: never seen a proper band market or certainly no one
9:40
Speaker 1: that lasts very long. So they can look at all
9:43
Speaker 1: these statistics for what happens when you put your money
9:45
Speaker 1: in equities. They put their money in equities, and nobody
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Speaker 1: tells them that risk is about the price you pay
9:50
Speaker 1: at the beginning. No, well, nobody tells them. But I
9:56
Speaker 1: would say, if you you know, certainly a lot of
10:01
Speaker 1: them were pretty naive, but not all of them were
10:06
Speaker 1: right the if you actually spent time reading you know,
10:11
Speaker 1: Wall Street bets on Reddit. These were people who were
10:16
Speaker 1: very aggressively saying fundamentals don't matter. What you have learned
10:22
Speaker 1: in you know, high school or university doesn't matter. Uh,
10:27
Speaker 1: you have to unlearn everything you've learned about investing. That's
10:30
Speaker 1: not the same thing as just being a naive person
10:35
Speaker 1: who hasn't experienced the stock market or learned anything about it,
10:40
Speaker 1: that is aggressively saying the rules don't matter anymore. Now
10:45
Speaker 1: we have that as well from some of the big
10:47
Speaker 1: fund managers. Didn't we and we won't name any names
10:49
Speaker 1: on this podcast because we're not like that, but you know,
10:51
Speaker 1: we heard from a lot of the big investment houses,
10:54
Speaker 1: the very growth orientated ones, again, that we should unlearned
10:57
Speaker 1: what we thought we knew about investing, and that all
10:59
Speaker 1: the big turns over long periods come very small numbers
11:02
Speaker 1: of very very very high quality companies, and what you
11:06
Speaker 1: pay for those companies doesn't matter because they're the ones
11:10
Speaker 1: that are going to deliver the returns long term. And
11:11
Speaker 1: that was a sort of academic backup for the idea
11:15
Speaker 1: that what old fashioned investors might have perceived as fundamentals
11:19
Speaker 1: are not as relevant as those old fashioned investors might think.
11:22
Speaker 1: So it wasn't just driven by individuals. It was driven
11:24
Speaker 1: by this new era of growth investing backed by some
11:29
Speaker 1: of the really big names. Yeah, and I do. I
11:33
Speaker 1: think you're absolutely right, and I think there is this
11:36
Speaker 1: really important piece of investing that that kind of analysis
11:42
Speaker 1: just completely leaves out um and it is what makes
11:46
Speaker 1: growth investing a challenge. And I'm not saying growth investing
11:50
Speaker 1: is a bad idea, but one of the issues with
11:53
Speaker 1: it is the mental image we have of how you
11:59
Speaker 1: make money as a growth investor misses out on an
12:03
Speaker 1: incredibly important piece of your portfolio UM. And it's understandable
12:09
Speaker 1: that it does so because it is a piece of
12:10
Speaker 1: your portfolio that doesn't stick around that long. The problem
12:14
Speaker 1: with growth investing, Yes, you want to find these companies
12:18
Speaker 1: that are going to wind up ruling the world. Right,
12:21
Speaker 1: and if you find a company early that winds up
12:24
Speaker 1: ruling the world, that company is going to generate great
12:27
Speaker 1: returns uh. And even if it is trading at an
12:30
Speaker 1: optically high pe multiple or price to book or what
12:34
Speaker 1: have you, Yes, it will generate good returns. The problem
12:37
Speaker 1: is not all of the companies that you hope and
12:41
Speaker 1: expect will do that do that. And when they fail
12:46
Speaker 1: to do that, when those growth stocks disappoint, the returns
12:50
Speaker 1: are really bad. UM. It is a term that I
12:55
Speaker 1: have tried to uh popularize and have completely failed. UM.
13:00
Speaker 1: But as a value manager, we always get pushed what
13:03
Speaker 1: do you do about value traps? How do you avoid
13:06
Speaker 1: value traps? UM? And the thing I try to talk
13:10
Speaker 1: to people about is Yeah, it's true, it's a problem.
13:13
Speaker 1: Owning a value company that turns out to disappoint and
13:17
Speaker 1: isn't worth what you thought it was stinks. But the
13:21
Speaker 1: same thing happens on the growth side. And when those
13:24
Speaker 1: growth companies disappoint their returns are really bad because not
13:30
Speaker 1: only did the earnings you expected not come in, but
13:34
Speaker 1: the pe that you're prepared to pay for that company
13:37
Speaker 1: as you realize it is less growthy than you thought,
13:40
Speaker 1: is a lot lower. So the returns of owning a
13:43
Speaker 1: disappointing growth company are really bad. And the growth stories
13:47
Speaker 1: are of course ex post only about the successes. So
13:51
Speaker 1: a mistake in the value arena as much less painful
13:54
Speaker 1: in the end than a mistake in the growth arena. Yeah,
13:57
Speaker 1: that's not to say it isn't painful, right, So I
14:01
Speaker 1: I've I've defined a value or growth trap as just
14:05
Speaker 1: any company, uh in the relevant universe that has disappointed
14:11
Speaker 1: on revenues and seen its future revenue forecast come down
14:15
Speaker 1: in the course of a given year, and in the
14:17
Speaker 1: value universe, they underperformed the average value stock by nine
14:20
Speaker 1: points a year. I mean, that's really bad. But in
14:22
Speaker 1: the growth universe. Those growth traps underperformed the rest of
14:27
Speaker 1: the growth universe by thirteen points a year, and over
14:31
Speaker 1: the last couple of years they've underperformed by twenty plus.
14:35
Speaker 1: So the last couple of years have been some of
14:37
Speaker 1: the worst years in history to be a growth company
14:41
Speaker 1: that disappointed investors. Okay, so what does the phrase we're
14:44
Speaker 1: trying to popularize here growth trap? Growth traps? We're trying
14:47
Speaker 1: to make people say growth traps. Okay, we can help
14:49
Speaker 1: with that. I can definitely help you with that. Okay.
14:52
Speaker 1: So let's move into last year when, which is when
14:57
Speaker 1: growth investors got what some might call the come up
15:00
Speaker 1: and some might call a small blood before everything goes
15:02
Speaker 1: back the way again. Um, but that was that was
15:04
Speaker 1: a chokra VF for growth investors and a chokra vf
15:07
Speaker 1: for everything that wasn't providing the returns that one might
15:10
Speaker 1: have expected. Um. How did you feel last year? Vindicated
15:14
Speaker 1: or like things weren't quite as they should have been? Still? Uh,
15:18
Speaker 1: well it was, I mean there was a certain amount
15:21
Speaker 1: of satisfaction seeing some of the uh kind of some
15:26
Speaker 1: of the most speculative assets and the backers of those
15:31
Speaker 1: assets get their come upance. Um. But it's hard to
15:35
Speaker 1: be excited about a year where pretty much everything went down,
15:39
Speaker 1: and our ability to shield our clients from the losses
15:44
Speaker 1: really depended on the extent to which the clients gave
15:47
Speaker 1: us the authority to move out of stocks and bonds entirely.
15:51
Speaker 1: Where we could do that, we could make them some money,
15:53
Speaker 1: because there were things in the liquid alternative space that
15:57
Speaker 1: actually did make money. Where we were stuck in stocks
16:00
Speaker 1: and bonds. We protected some, um, but it's never fun
16:05
Speaker 1: having to talk to your clients about the fact that
16:07
Speaker 1: you lost them a bunch of money, even if you
16:10
Speaker 1: lost them less money than their benchmark. Yeah, even if
16:12
Speaker 1: you were intellectually correct, you still lost the money. Yes,
16:16
Speaker 1: that's gonna hurt. Um. But presumably you were fairly heavily
16:18
Speaker 1: into the the classic value stocks, energy, et ctera last year. Yeah,
16:24
Speaker 1: we were, uh, and that definitely helped. We were generally
16:28
Speaker 1: able to in the ASCID Allocation team UH, deliver returns
16:32
Speaker 1: that were better than benchmarks. But you know, even value
16:35
Speaker 1: stocks around the world lost money. Um, they had their
16:39
Speaker 1: best year in twenty years relative to the market, in
16:44
Speaker 1: relative to growth stocks, but they still lost money. And then,
16:48
Speaker 1: interesting me, there's something in your latest letter or the
16:51
Speaker 1: letter at the end of last year about how it
16:54
Speaker 1: was unexpected to find the deep value it under performed
16:58
Speaker 1: value as a whole one. It should normally be the
16:59
Speaker 1: other around. Yeah, you know, that was one of the
17:02
Speaker 1: slightly weird things most times when you have a really
17:08
Speaker 1: big year for value stocks, And again this was a
17:11
Speaker 1: really big year for value stocks, even if they were
17:13
Speaker 1: going down in absolute terms. Most of the time, the
17:18
Speaker 1: story is kind of about value. Even in two thousand,
17:22
Speaker 1: when we were experiencing the bursting of the Internet bubble,
17:25
Speaker 1: what people were rotating into were the very cheapest value
17:29
Speaker 1: stocks um. And this year we didn't see that. In
17:33
Speaker 1: two value stocks again had a very good year relative
17:38
Speaker 1: to the market. It's almost always the case when value
17:41
Speaker 1: beats the market that the very cheapest stocks. Uh. We
17:45
Speaker 1: refer to it as deep value is the cheapest twenty
17:48
Speaker 1: of the market, and shallow value is the next thirty UM.
17:53
Speaker 1: And deep value almost invariably beats shallow value in any
17:58
Speaker 1: year where value wins, except last year. In last year,
18:03
Speaker 1: deep value stocks in the US underperformed shallow value stocks
18:08
Speaker 1: by close to five um. You know, at least over
18:12
Speaker 1: the last forty years, it's the only situation we've seen
18:16
Speaker 1: like that, and it was a little bit frustrating frankly
18:18
Speaker 1: as a value manager focusing on the very cheapest stocks
18:21
Speaker 1: and seeing the mildly cheap stocks beat you. Um. But
18:24
Speaker 1: on the other hand, it has led to an opportunity
18:28
Speaker 1: we are pretty excited about because those deep value stocks
18:31
Speaker 1: are trading at an extraordinary discount to the overall US market,
18:35
Speaker 1: and the US market fell a good deal last year,
18:38
Speaker 1: so in absolute terms, they're kind of the most exciting
18:42
Speaker 1: thing in the US we have seen in a number
18:45
Speaker 1: of years. Okay, that brings us very neatly on to
18:49
Speaker 1: where we are now. And you know, looking looking through
18:53
Speaker 1: what you wrote at the end of last year, you
18:54
Speaker 1: became it came as as as close to being excitable
18:57
Speaker 1: as I think possibly Jim managers can and saying that
19:01
Speaker 1: having seen possibly the worst outlook for the future, you
19:05
Speaker 1: can imagine at the end of one everything horribly expensive,
19:10
Speaker 1: absolutely nothing you want to hold for the long term,
19:12
Speaker 1: horrible environment. At the end of last year, you begin
19:15
Speaker 1: to look around and go, well, do you know what,
19:16
Speaker 1: nothing is really expensive anymore? You know, when I look
19:20
Speaker 1: at the charts that you have the volatility in return
19:23
Speaker 1: trade off exent or not really looking at negative returns
19:27
Speaker 1: for anything over the next seven years. Old, that seems
19:31
Speaker 1: like a massive turnaround. It is a very helpful thing
19:36
Speaker 1: to have markets fall considerably, especially in a circumstance where
19:42
Speaker 1: there's inflation as well. Now, I mean, inflation is not fun.
19:46
Speaker 1: Nobody enjoys the inflation. But on the other hand, if
19:50
Speaker 1: the SMP felt by eighteen percent last year and inflation
19:54
Speaker 1: was seven, right, in general, the fair value of equities,
19:59
Speaker 1: because these are real assets, goes up with inflation. So
20:02
Speaker 1: fair value went up by seven the price went down
20:05
Speaker 1: by eighteens, so it's cheaper. Now. That doesn't make it
20:09
Speaker 1: cheap and absolute terms, but it makes it a lot
20:12
Speaker 1: less overvalued than it was. Um. So we're certainly not
20:16
Speaker 1: pounding the table and saying what you really want to
20:19
Speaker 1: buy today is the SNP five hundred um. But whereas
20:23
Speaker 1: a year ago the SMP five hundred was trading at
20:26
Speaker 1: some of the most expensive valuations we have ever seen,
20:31
Speaker 1: kind of second only to the two thousand. Event, now
20:34
Speaker 1: it's just expensive. That doesn't sound great better but no great, um,
20:42
Speaker 1: it isn't great. But the nice thing is in a
20:46
Speaker 1: year where everything else fell to almost everything other than
20:51
Speaker 1: the SMP five hundred was cheaper than the sp F.
20:55
Speaker 1: So if you know, emerging came in mildly overvalued in
21:00
Speaker 1: it fell by twenty well, it fell by twenty inflation
21:04
Speaker 1: was seven, So in real terms kind of relative to
21:07
Speaker 1: fair value, it fell by twenty seven and maybe it
21:09
Speaker 1: was over valued, so now it's cheap. Uh. If the markets,
21:14
Speaker 1: if Europe and Japan were you know, twenty percent overvalued
21:18
Speaker 1: or twenty five percent over valued, and they fell by
21:20
Speaker 1: similar amounts, they're around fair value. So yeah, it's hard
21:25
Speaker 1: for us to be that excited about US large caps
21:28
Speaker 1: as an index. Um. But the nice thing about a
21:32
Speaker 1: market where everything fell was the things that weren't grossly
21:37
Speaker 1: overvalued to begin with are starting to trade at pretty
21:41
Speaker 1: compelling valuations. So if we look at what's really cheap,
21:45
Speaker 1: so that would be emerging market equities. Yeah. Um, small
21:50
Speaker 1: caps across the board. Japan. You know, I'd say our
21:54
Speaker 1: our favorite group of small caps around the world is
21:57
Speaker 1: Japanese small caps. Um. Partially that's because the valuations are low.
22:01
Speaker 1: The other thing that's, uh, that's nice about Japanese small
22:05
Speaker 1: caps relative to say, US small caps. If you look
22:09
Speaker 1: at what's happened over the last decade or so. The
22:13
Speaker 1: average US small company has levered itself up. The average
22:17
Speaker 1: company in the Russell has something like uh six times
22:24
Speaker 1: EBITDA in terms of debt, and that used to be
22:28
Speaker 1: the level of an LBL, so u S small caps
22:32
Speaker 1: have basically all l B O themselves. Japanese small caps
22:36
Speaker 1: on average have about zero net debt on their balance sheet.
22:42
Speaker 1: So a thing it's it is comforting if you own
22:46
Speaker 1: the Japanese ones is even if the economy gets really bad,
22:52
Speaker 1: they're not going to wind up in economic trouble. Whereas
22:55
Speaker 1: in the US and the UK, where these small cap
22:58
Speaker 1: companies have really levered them sells up, they're more vulnerable.
23:02
Speaker 1: They might get away with it uh. And they levered
23:04
Speaker 1: themselves up in an environment with very low interest rates,
23:07
Speaker 1: so it's not crazy, but it does feel risky um.
23:13
Speaker 1: And in Japan and kind of beyond that continental Europe,
23:17
Speaker 1: they did less of that, and they're trading pretty cheap
23:21
Speaker 1: uh and they seem pretty I'm not going to go
23:25
Speaker 1: so far as to say small caps are truly safe, UM,
23:30
Speaker 1: but these are companies that should be able to withstand
23:33
Speaker 1: a significant recession should one occur, and in the UK
23:37
Speaker 1: UK small caps and they had a really nasty ride
23:39
Speaker 1: last year. They certainly did they UM. But but again
23:43
Speaker 1: they look like US small caps from a leverage perspective.
23:48
Speaker 1: And when you talk about emerging market equities, which last
23:52
Speaker 1: year that was kind of top of your BI list
23:54
Speaker 1: as well. Right, emerging market equities, UM, are you excluding
23:57
Speaker 1: China from that? So we are not excluding China from that.
24:02
Speaker 1: But where we have the ability to build the emerging
24:08
Speaker 1: portfolio we want, it has less China than the traditional benchmarks.
24:15
Speaker 1: That is not a statement that we think China is uninvestable,
24:20
Speaker 1: but it is a statement that China is risky. Now,
24:23
Speaker 1: the thing about emerging markets is everything is risky in
24:26
Speaker 1: emerging markets. Every country in emerging markets has greater geopolitical
24:32
Speaker 1: and policy risk by virtue of the fact that their
24:36
Speaker 1: institutions are less well established UM. And the amount of
24:40
Speaker 1: damage that can be done by a uh kind of
24:46
Speaker 1: lousy head of state is quite big. That's always true,
24:51
Speaker 1: That's always been true. The charm of investing in a
24:55
Speaker 1: diversified EM portfolio is the bad thing that happens in
25:01
Speaker 1: Turkey is not bad for Brazil. The bad thing that
25:05
Speaker 1: happens in Brazil is not bad for South Africa, and
25:08
Speaker 1: so a diversified portfolio of e M countries is generally
25:13
Speaker 1: less risky than any of them. The problem with China
25:17
Speaker 1: is it both showed itself to be somewhat riskier from
25:20
Speaker 1: a policy and geopolitical perspective than some people had imagined
25:25
Speaker 1: it to be last year, and it's really big. So
25:30
Speaker 1: last year we saw kind of the ultimate nightmare scenario
25:35
Speaker 1: from the standpoint of a foreign investor investing in Russia. Right,
25:39
Speaker 1: you invested in Russia because it looked cheap, and then
25:42
Speaker 1: you lost it all. Now for the Emerging Markets Index,
25:46
Speaker 1: for the Emerging Markets Universe, yeah, kind of stunk, but
25:49
Speaker 1: it was three percent of the index. So for e
25:54
Speaker 1: M as an index, this was a survivable problem. And
25:59
Speaker 1: that is true across just about everything except China, because
26:04
Speaker 1: China is about of the total. So given that we
26:07
Speaker 1: have a big overweight to emerging markets because we really
26:10
Speaker 1: think these guys are cheap, we want to be more diversified,
26:14
Speaker 1: and the obvious thing that that means owning somewhat less
26:17
Speaker 1: of is China. Um. But that's not a statement that
26:21
Speaker 1: we hate China. It is a statement that we don't
26:23
Speaker 1: want to have too much concentrated risk in any individual
26:27
Speaker 1: risky country. Now, well, let's go back then to the
26:31
Speaker 1: the US, because you know, you said a couple of
26:34
Speaker 1: things about you know, you don't necessarily want to be
26:36
Speaker 1: big into the SMP five hundred there. And one of
26:38
Speaker 1: the things that I've been writing about recently is about
26:41
Speaker 1: how the shift in market environment um slightly suggests and
26:45
Speaker 1: I know people have been saying this for years, but
26:48
Speaker 1: it does really feel like now we're getting to the
26:50
Speaker 1: point where you should not be holding the index. You
26:53
Speaker 1: should not be holding passive investments because you know you've
26:56
Speaker 1: benefited from that massive positive momentum on the way up.
26:59
Speaker 1: But why we do you want to be part of
27:01
Speaker 1: the negative momentum as last year's winners begin to contract
27:04
Speaker 1: inside the the index. So if you're looking at at
27:08
Speaker 1: the US market, let's say, the US large cap market
27:10
Speaker 1: at the moment um, I'm kind of guessing that you
27:13
Speaker 1: wouldn't want to be an index investor right now. Well,
27:16
Speaker 1: we wouldn't largely because we think the US large cap
27:20
Speaker 1: universe is the most expensive broad group of stocks out there.
27:24
Speaker 1: So it is not a place I particularly want to
27:26
Speaker 1: be putting a lot of my money. I mean, the
27:29
Speaker 1: the general charm of index investing is it's cheap UM
27:34
Speaker 1: and you were kind of guaranteed to get the return
27:37
Speaker 1: of that broad group, be that negative or positive, be
27:42
Speaker 1: that negative or positive UM. Now, the S and P
27:46
Speaker 1: five has been difficult for managers to beat for quite
27:50
Speaker 1: a while because it was the returns were driven by megacaps,
27:54
Speaker 1: and it is really hard to own more of the
27:58
Speaker 1: mega cap companies then the index does um. Active investors
28:03
Speaker 1: are almost always more equally weighted than the index is.
28:07
Speaker 1: They've had a bias therefore towards I wouldn't say small,
28:11
Speaker 1: but towards you know, large and medium companies against the megacaps,
28:16
Speaker 1: and that has killed them because of how how wonderfully
28:20
Speaker 1: the megacaps have done in the US, I do think
28:23
Speaker 1: this is probably a tougher time to be a mega
28:27
Speaker 1: cap company. H Some of them are both facing ultimate
28:31
Speaker 1: limitations to growth, which it had seemed they were immune
28:35
Speaker 1: to for a while, as well as more aggressive government
28:39
Speaker 1: activity against them. So the age of megacap dominance maybe
28:46
Speaker 1: behind US UM certainly. The I mean, the other thing
28:50
Speaker 1: is it has been an age of US dominance, right.
28:53
Speaker 1: The US market has just beaten the pants off of
28:56
Speaker 1: every other market out there for the past twelve years. Uh,
29:00
Speaker 1: we think that's poised to change. We've been saying that
29:05
Speaker 1: for a while. Um. Obviously the valuations are all in
29:09
Speaker 1: favor of the rest of the world against the US.
29:11
Speaker 1: But the other thing that has really happened is the
29:14
Speaker 1: US dollar has become very overvalued um. And that is
29:18
Speaker 1: a tough situation for US based companies That will hurt
29:22
Speaker 1: their earnings, and the companies in countries on the other
29:27
Speaker 1: side where their currencies are really undervalued have a lovely
29:31
Speaker 1: tail wind behind them. It's interesting, isn't it that people
29:33
Speaker 1: still have this idea that the US has always been
29:38
Speaker 1: trading at a premium to markets around the rest of
29:40
Speaker 1: the world. And I still talk to people who say, well,
29:42
Speaker 1: that premium will remain because the US has always traded
29:45
Speaker 1: at a premium. But it hasn't, does it. I mean,
29:47
Speaker 1: it's a relatively recent phenomena that the US has traded
29:50
Speaker 1: at a significant valuation premium to everywhere else. So there's
29:54
Speaker 1: no reason at all where they shouldn't. That shouldn't completely
29:56
Speaker 1: mean revert. Yeah, absolutely, It is basically something that occurred
30:01
Speaker 1: over the last ten years or so. In two thousand
30:04
Speaker 1: and twelve, the US was trading a very similar valuations
30:07
Speaker 1: to everywhere else. On average, the US has traded at
30:11
Speaker 1: a somewhat higher evaluation to say, the emerging world, which
30:15
Speaker 1: kind of makes sense because they're risky. Um, but yeah,
30:18
Speaker 1: relative to the rest of developed countries, it doesn't have
30:21
Speaker 1: a long history of trading at a big premium. Uh.
30:24
Speaker 1: It is right now trading at a big premium, and
30:27
Speaker 1: that premium has been growing for long enough that people
30:32
Speaker 1: have trouble remembering that it wasn't a forever thing. Yeah.
30:36
Speaker 1: That's a lot of bit about, isn't there. Okay, So
30:38
Speaker 1: I think what you're telling us is that we need
30:41
Speaker 1: to relearn everything we have a knew about investment. If
30:45
Speaker 1: we learned that stuff about investment in the last decade, well,
30:49
Speaker 1: I do think, um, it wouldn't be a bad idea
30:53
Speaker 1: to brush off those ideas of you know, calculating discounted
30:58
Speaker 1: cash flows and figuring out what UH an asset will
31:02
Speaker 1: be worth based on its earnings and and and payouts.
31:07
Speaker 1: I think that's going to be pretty relevant, um after
31:11
Speaker 1: a little while where even a discussion of that uh
31:15
Speaker 1: made you seem like you were completely out of touch. Okay,
31:19
Speaker 1: So we're going to attempt to avoid the US except
31:22
Speaker 1: for the deep value part. Look at em without really
31:26
Speaker 1: penalizing China too much. Look at Japanese small caps, think
31:29
Speaker 1: about small caps in Europe. We're going to think a
31:33
Speaker 1: little more active than passive. I should have said before
31:36
Speaker 1: I asked you about that bit passive versive active, that
31:39
Speaker 1: that's the part of the podcast we call Well he
31:41
Speaker 1: would say that, wouldn't he, And then we wait and
31:43
Speaker 1: see how good the answer is. Um, you know what
31:46
Speaker 1: one one thing just worth adding in terms of the
31:50
Speaker 1: active versus passive Um, passive can be a fairly tricky thing,
31:57
Speaker 1: right there are It is now very easy to get
31:59
Speaker 1: exposed as you want in in e t F s
32:01
Speaker 1: all over the world. And one of the things you
32:04
Speaker 1: can do if you believe as we do, that value
32:07
Speaker 1: stocks are attractively priced. Okay, you could buy value index
32:10
Speaker 1: well right now, it matters extraordinarily which value index you pick. UM.
32:18
Speaker 1: Last month, the SMP five hundred value index beat the
32:22
Speaker 1: SNP five hundred growth index by a point and a half,
32:27
Speaker 1: whereas the m s c I version of value lost
32:32
Speaker 1: to growth by eight uh. It's an absolutely extraordinary difference. UM,
32:38
Speaker 1: which has to do with the way SNP defines value
32:42
Speaker 1: for for SMP, any stock that has really bad momentum
32:47
Speaker 1: has a tinge of value to it, So it doesn't
32:49
Speaker 1: matter how expensive you are, if you did really badly,
32:53
Speaker 1: kind of get pushed um into the value universe. Uh
32:58
Speaker 1: and last month is one of the sharpest reversals that
33:03
Speaker 1: we've seen. It's not that weird to see it in
33:05
Speaker 1: a January. January often sees negative momentum do pretty well. Um.
33:10
Speaker 1: But a lot of the negative momentum stocks that did
33:13
Speaker 1: really well weren't cheap um. So if you were measuring
33:17
Speaker 1: them on a PE or price to book or price
33:18
Speaker 1: to sales basis, they didn't look so good. But if
33:22
Speaker 1: you were just saying, well, hands up, who had the
33:24
Speaker 1: worst momentum last year, um, and let's take a chunk
33:27
Speaker 1: of those and call them value, it did do well.
33:30
Speaker 1: My concern is, man, I don't know what that S
33:34
Speaker 1: and P value index is. It does not feel like
33:38
Speaker 1: value to me right now. It's interesting, isn't it. It?
33:41
Speaker 1: Kind of them suggests that I'm often write about this
33:44
Speaker 1: saying that we talk about passive, but there is really
33:46
Speaker 1: any thing as passive because you have to take so
33:49
Speaker 1: many active as an allocation decisions to get to your
33:51
Speaker 1: passive in the first place. So it doesn't really exist,
33:55
Speaker 1: this idea that you can passively follow something. It is
33:58
Speaker 1: certainly a lot harder, and it seems like it should be.
34:02
Speaker 1: M Okay, let's very briefly two more things I want
34:05
Speaker 1: to ask you about. The first thing is one earth
34:06
Speaker 1: is going on this year because all the things that
34:08
Speaker 1: we've been tooking out then I'm playing up. Yeah, I
34:10
Speaker 1: don't understand it. Um, you know, you would have thought
34:14
Speaker 1: that the pain in crypto and meme stocks would have
34:20
Speaker 1: been enough to cause people to say, yeah, maybe this
34:25
Speaker 1: wasn't such a good idea. Right. Normally, in a really
34:28
Speaker 1: painful event, you lose sixty two eighty to of your money. Um.
34:34
Speaker 1: You know, we used to talk about the fact that
34:36
Speaker 1: after an event that painful, it took a generation to
34:39
Speaker 1: get another speculative event because the people who lost that
34:43
Speaker 1: money are never going to play again. Well, if we've
34:47
Speaker 1: experienced the generation I mean, maybe a generation of may flies.
34:51
Speaker 1: I don't understand because people are plowing back into the
34:55
Speaker 1: same stuff. Bed Bath and Beyond was up yesterday for
35:01
Speaker 1: a company that is not merely teetering on the verge
35:05
Speaker 1: of bankruptcy. But my god, it is hard to imagine
35:08
Speaker 1: how it's ever going to generate positive cash flows even
35:11
Speaker 1: if it got out from under its deatload. But people
35:15
Speaker 1: are leaping back in. Do you know, Ben, You may
35:18
Speaker 1: have just you may have just learned something that those
35:20
Speaker 1: of us in Scotland have known for a long time,
35:22
Speaker 1: which is that the generation is way way shorter than
35:24
Speaker 1: it used to be. You didn't need munch downe that
35:27
Speaker 1: that's a joke for the Scots. But you know, as
35:31
Speaker 1: Jeremy has been talking about, Jeremy Grantham, our firm's founder,
35:34
Speaker 1: has been talking about the fact that the the bear
35:39
Speaker 1: market isn't really over until there's full repudiation of the
35:45
Speaker 1: prior underlying thesis. Um. And if he's right, then this
35:51
Speaker 1: one doesn't feel like it's over now. Everything doesn't have
35:55
Speaker 1: to turn out, you know, as as a morality play.
36:00
Speaker 1: But there is a certain amount of sort of self
36:04
Speaker 1: fulfilling prophecy to financial markets. Um. And what we have
36:09
Speaker 1: been seeing is certainly uh, not evidence that investors are
36:17
Speaker 1: back to actually worrying about what assets are truly worth, um,
36:23
Speaker 1: but rather what assets do they hope are going to
36:26
Speaker 1: be up a lot in the afternoon. It's more fun
36:30
Speaker 1: thinking about what's going to be up in the afternoon
36:32
Speaker 1: than thinking about long term value of different asset classes.
36:35
Speaker 1: I get that would you have a buy crypto ban
36:38
Speaker 1: a little bitcoin holding on the side, I someone would
36:43
Speaker 1: have to convince me of the actual use case um.
36:47
Speaker 1: And I think what we've seen across two is that
36:53
Speaker 1: the use case of crypto was enabling people to do
36:57
Speaker 1: speculation in crypto UM and it was really good at that.
37:01
Speaker 1: But that's man, that's not a very stable um use case.
37:06
Speaker 1: So maybe there will be some other use case that
37:09
Speaker 1: comes up, But otherwise, right, it's not it's not an investment.
37:15
Speaker 1: There are no future cash flows. You can't say what
37:18
Speaker 1: should this thing be worth? Um uh And I mean
37:22
Speaker 1: the thing that is amazing to me about crypto is
37:26
Speaker 1: that lack of cash flows, that lack of anything you
37:31
Speaker 1: could get your brains around or your hands on in
37:34
Speaker 1: terms of what this thing would be worth was viewed
37:37
Speaker 1: as a feature, not a bug. UM. That was part
37:40
Speaker 1: of its charm. Is there anything that we haven't talked
37:44
Speaker 1: about that you think that the ordinary investor should be
37:49
Speaker 1: holding for the next couple of years or have we
37:51
Speaker 1: covered everything UM, you know, we've covered most of it.
37:56
Speaker 1: The thing I just want to emphasize is that even
37:59
Speaker 1: though in two it was the best year for value
38:02
Speaker 1: in a long time, after fifteen years of value relentlessly
38:09
Speaker 1: losing to growth, it's still trading very cheap relative to
38:13
Speaker 1: the market. So the general value opportunity is really good today. UM.
38:19
Speaker 1: I'm a little bit nervous about the implementation of value
38:22
Speaker 1: across some of the index providers. UM, so you want
38:27
Speaker 1: to be careful about what you're doing, but we really
38:29
Speaker 1: do think the next five to ten years should continue
38:34
Speaker 1: to be a good one for value investing in stocks. Brilliant. Then,
38:41
Speaker 1: thank you very much, Thanks very much for having me,
38:49
Speaker 1: Thanks for listening to this week's Man Tooks Money. We
38:51
Speaker 1: will be back next week. In the meantime, if you
38:54
Speaker 1: like our show, rate review and subscribe whatever you listen
38:56
Speaker 1: to podcasts, and do remember that if you are going
38:59
Speaker 1: to review at review it well because we prefer those reviews.
39:03
Speaker 1: Thank you to everyone who has already reviewed the podcast.
39:05
Speaker 1: We usually appreciate it, and of course our podcast our
39:08
Speaker 1: producer is absolutely obsessed with reading those reviews. This episode
39:12
Speaker 1: was hosted by me Marin zumset web It was produced
39:14
Speaker 1: by Summer Siety. Additional editing by Blake Maple's and special
39:18
Speaker 1: thanks of course to Ben Inca. Thank you very much, Ben,
39:20
Speaker 1: and to John Steppic And of course I'll weak your
39:22
Speaker 1: reminder to sign up to John's daily newsletter, Money Distilled
39:26
Speaker 1: this week. I know you're all obsessed with house prices.
39:28
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