Terry Smith, recession fears, oil price, meme stocks and the essentials of leadership
Hello! Welcome to what is really the first ‘official’ sending-out of the Fully Invested Newsletter. I’ve been taken aback by the number of people who signed up to get this over the past week - so huge thanks to you.
Over the coming weeks I’ll explain more about what I’m doing with this, and why. In essence it’s about finding and curating the best stock market investing commentary - and making that a really valuable resource for readers. It’s early days but I’m excited about where I can take it. As always, feel free to contact me any time with ideas or just to say hi.
Terry Smith, the fund manager, has spent more than a decade outwitting the market with his particular brand of ‘quality’ investing. Buying highly profitable, cash generative, financially stable firms without overpaying and then sitting tight has paid off handsomely for the Fundsmith Equity Fund. After 12 years since launch, it’s currently sitting at a size of about £22+ billion.
But until recently, one of the crosses Smith has had to bear is that he was untested in a major downturn. An absence of the bearish conditions most managers hope to avoid has actually created doubts about how the fund would fare when markets took a dive. It was one of the reasons Hargreaves Lansdown kept it out of their top picks lists for so many years (though that turned out to be a bit of a backhanded compliment).
So has Smith’s approach been in a lucky sweet spot all this time, or will it hold up in tough phases too?
Well, 2022 has delivered the first big test and conditions haven’t been kind. The fund was down -17.8% in the first six months of the year, versus -11.3% for (what it uses as) the main comparator, the MSCI World Index. Inflation, possible recession, rate hikes and global supply chain frictions are all part of the problem. And as with everyone, it’s impossible for Smith to know how that will all play out. Or how long it’ll take. But like always, he’s still bullish on his picks…
In fact, the very reason the Fundsmith strategy bought the stocks it did is arguably reason enough to believe those companies will hold pretty well up through inflation-plus-recession. Think Microsoft (Nasdaq:MSFT), Philip Morris (NYSE:PM) and Pepsico (Nasdaq:PEP). They’re solid and have the kind of outsize margins that should help them defend their profitability. But whether their share prices are so resilient, of course, is far from certain. Bear markets are brutal and no stocks are immune when investors start panicking. We’re all being reminded of that.
In his latest Q2 letter to fund holders, Smith… how can I put this?... isn’t exactly graceful in conceding that ‘value’ has worked a little better than ‘growth’ and ‘quality’ in the current conditions. While Smith likes to buy at a “reasonable price”, value, as an investing style, is completely anathema to him.
It’s true to say there are lots of moving parts in the much-heralded growth/value rotation over the past 12 months. As we stand today, all major factor strategies are underwater, it’s just that value is performing the least worst. So for the time being, Smith isn’t conceding much ground at all. He’s sticking by his strategy and his positions… and that’s exactly the kind of resolute confidence needed when markets are headed south.
Either way, of all the letters written by fund managers, Smith’s are always good value (I guess he’d prefer to describe them as high quality). Maybe they’re a bit of both. You can find the download here: Fundsmith Semi Annual Letter to Shareholders 2022.
Highlights this week
It isn’t just fund managers wrestling with this stuff, of course. There has been quite a lot of soul searching in the half-year performance reviews from many bloggers in recent weeks. It has been a tough six months and the heightened uncertainty has been cause for reflection. A good example is this post from DIY Investor (UK): The Market Risks are Building… who captures both the mood and a few of the questions about managing risk that I imagine are on the minds of many at the moment. Likewise, this from Quality Share Surfer: Catching up sums up some of the questions about positioning, cash allocation and bargain hunting that many of us are pondering.
One of the only bright spots in markets this year has been energy: oil and gas stocks (particularly the majors) have done extremely well. In the UK, Shell (LON:RDSA) has seen its share price rise by 40.5% over the past 12 months. In the States, Exxon Mobil (NYSE:XOM) is up by 41%. The Paris traded shares of TotalEnergies (EPA:TTE) are up by 29.1%. You get the idea.
You can see the driver of those performances in this 5-year chart of the price-per-barrel of West Texas Intermediate crude oil:
This might be good news for oil stocks, but the price surge obviously comes with pros and cons (mostly cons): from directly hitting consumers in the pocket at the pumps to just about every other sector in some form or other.
So a broader question is not what the price will do today, tomorrow or next week, but what will be a likely new normal average for energy prices from here? This post by Lyn Alden looks at that question: Energy: The Area Under the Curve. Her view? That the base level of oil and gas prices is likely to shift to a persistently higher level than we’ve been used to in recent years. And we’ll all need to make adjustments for that.
Podcasts
It feels like there’s a certain inevitability about that fact we’re either in a recession, or there’s one on the way. I have no idea whether that’s true, but if it is, what does it really mean for investors and should we even be worried?
This is the subject of the latest (45 minute) episode of This Week in Intelligent Investing: The Futility of Recession Forecasting as Part of an Investment Process. There’s a US focus to the discussion between Philip Ordway, Elliot Turner (both asset managers) and John Mihaljevic (Manual of Ideas), but the thrust is universal.
First, recessions are pretty academic in their definition and generally we only know about them some time after they’ve started (and sometimes when they’re already over). But more broadly, while fear of recession does rattle markets, the truth is that good companies can weather them and opportunities arise when markets overreact. One of the takeaways here is that investors instinctively shorten their time horizons when markets get volatile. But if you can maintain a long-term view, and be sanguine when others are fretting, it might be worth seeing recessions as simply inevitable bumps along the road.
Talking of investing for the long term, this is a great podcast interview with John Kingham, who blogs at UK Dividend Stocks. This interview actually dates back to last year but I mention it because A) it’s a really interesting story of his investing journey - and worth a listen for that alone. But also, B) The Investor Way podcast was completely new to me, and it’s excellent. They've been publishing weekly episodes since September 2020, usually involving pretty in depth discussion on stocks, with occasional interviews thrown in. Definitely one to keep an eye on.
The interview with John Kingham is here (on his site): E67 - Interview with John Kingham. John has also been on the Capital Employed podcast this week, and written a separate blog on his own site (details below). You can find the latest episode from The Investor Way here: E93 - Currys, Moonpig, Sainsburys, Polar Capital Holdings, Persimmon & Adidas.
Meanwhile, when it comes to outlandish moments in the stock market, one recent gem is the tangled web of craziness involving GameStop (NYSE:GME), Reddit and Robinhood (Nasdaq:HOOD) during the Covid pandemic. For onlookers it may have looked like speculative mania triggered by a group of young investors intent on sticking it to the man. But this was actually a story with a lot of depth, intriguing characters, with jeopardy and astronomical profits on all sides. In his recent Masters in Business podcast, Barry Ritholtz spoke to Wall Street Journal reporter Spencer Jakab, who’s written a book about how the meme stock mayhem unfolded. It’s a fascinating tale and surprisingly hard to pinpoint any genuine bad guys. If anything, the lesson is that there’s a young generation of investors out there who have a very different view of risk and high conviction. And like everything, the payoffs can be huge but most don’t achieve them. Catch it here: Spencer Jakab on the Death of Meme Stocks.
Finally, I started reading and listening to work by Shane Parrish (Farnam Street) quite some time ago because he’s an inspiring thinker on issues of psychology, especially as it relates to investing. He’s covered a huge amount of ground on using mental models to make better decisions. This week he was in conversation with Marshall Goldsmith, a renowned executive coach, about what it takes to be an exceptional leader. It doesn’t specifically relate directly to markets but it does cover some really important ground around self-awareness, perspective and life. At a time when it’s likely that we’re all feeling drained by the market, a bit battered and bruised and in need of some mental calibration (and I very much count myself in this), this is worth a listen: Marshall Goldsmith: The Essentials Of Leadership [The Knowledge Project Ep. #142].
Have a great weekend,
Ben
Best of the rest
Thinking & Strategy (Blogs)
It’s hard to deny the sense of vulnerability in some of the mid-year blogs I’ve been seeing this week. If you want to catch up with some portfolio updates, you could try this from Monevator: The Slow and Steady passive portfolio update: Q2 2022, this from value and opportunity: Performance review 6M 2022 – Comment “The Siren’s Song of Fallen Angels and (very) low P/E stocks”, this from Crow Knows: Report on Q2 2022 or this from Novel Investor: 2022: First Half Returns.
Other round-ups and reviews included Aswath Damodaran’s Country Risk: A 2022 Mid-year Update! and Alpha Architect’s Global Factor Performance: July 2022.
Also out this week…
High-end brand stocks defy the gloom but investors must be picky
Investing | Mail Online
Market history teaches us the value of patience
The Evidence-Based Investor
Forecasts are hard, part 1
Klement on Investing
Forecasts are hard, part 2
Klement on Investing
Why the Financial Goalposts Are Always Moving
A Wealth of Common Sense
The Upside of Downside
Compound Advisors
Sell Slowly
Of Dollars And Data
Digital Gold or Fool’s Gold: Is Crypto Really a Hedge against Equity Risk?
CFA Institute Enterprising Investor
Equities Ownership: Concentration on the Rise?
MSCI Our Blog feed
Crypto Tokens: Does Security Selection Matter?
FactorResearch
It’s Time to Rediscover the Importance of Interest
Blog - Frank K. Martin, CFA
Predictably Irrational — Dan Ariely on Habitual Comparisons and Arbitrary Coherence
Athenarium
The Risk of Deflation is now Greater than the Risk of Prolonged High Inflation
Pragmatic Capitalism
Thinking & Strategy (Podcasts)
RWH010: High-Performance Habits w/ Guy Spier (Part 2)
We Study Billionaires - The Investor’s Podcast Network
RWH009: How to Build Enduring Wealth w/ Guy Spier (Part 1)
We Study Billionaires - The Investor’s Podcast Network
Edward Chancellor: why interest is the force that holds everything in place
The MoneyWeek Podcast
George Mack — Marketing, Mental Models, and Technology (EP.214)
Infinite Loops
PE, Private Credit and $160 Billion in Multi-Assets - A Conversation with Jonathan Lavine, Co-Managing Partner at Bain Capital
The Money Maze Podcast
#428 – Eric Balchunas, Bloomberg – Bogle is One of the Investing GOATs
Meb Faber Show Podcast
Larry Siegel – Ideas Lab Series – July 13th, 2022
Top Traders Unplugged
S3 Ep. 42 Portfolio for the Future with John L Bowman
Investment Uncut
675 - Backtesting Trading Psychology
The Trading Coach Podcast
Investing in a World of Low Expected Returns with AQR's Antti Ilmanen
Excess Returns
237 · Biggest ‘n Baddest, Billionaire Bond Trader: Bill Gross w/ Mary Childs
Chat With Traders
Securities & Markets (Blogs)
Small-caps have been feeling the worst of the market pull-back this year, and this week we had more analysis on recent events (and potential opportunities). You can catch up with the Small Caps Live Weekly Summary from Small Cap Life, plus this blog from Maynard Paton: M WINKWORTH: Outstanding FY 2021 Heralds Promising FY 2022 Following 23% Q1 Dividend Lift And Prospect Of Sales Again Exceeding Lettings. Further up the market cap scale, John Kingham covered this on his UK Dividend Stocks Blog: A bear market would leave the FTSE 100's CAPE at attractive levels.
Investment ideas – Calling all boring, defensive investors : Ecofin’s Global utilities fund might be worth another look
David Stevenson's Adventurous Investor Newsletter
“a mild recession”
The Reformed Broker
Open letter to the $TWTR board: take Elon to court
Yet Another Value Blog
CWS Market Review – July 12, 2022
Crossing Wall Street
NASDAQ Midyear Rally Fizzles and Bears Not Expected to Hibernate Until Late Q3/Early Q4
Almanac Trader
The 20 Highest Yielding Dividend Kings Now | Yields Up To 8.6%
Sure Dividend
Securities & Markets (Podcasts)
Among the highlights this week was this podcast from MyWallSt / Stock Club: Cyclical Stocks: Recession-Proof Alternatives? It actually kicks off with discussion of a couple of interesting, unrelated subjects: one is the incredible social media juggernaut that is TikTok (and just how frighteningly powerful it is). The other is Klarna and the changing conditions in the buy-now-pay-later market. There’s some interesting stuff in there.
Animal Spirits: Volatility Hits Main Street
A Wealth of Common Sense
High Quality Dividend Growers (w./ John Kingham)
Capital Employed FM
Will the rest of 2022 be better for investors? Investing Show
Investing Show videos: Watch the Investing Show for tips and ideas | Mail Online
The Richard Hunter Interview: bargain-hunting in the post-pandemic ‘wild’
interactive investor
Talking Trusts: Weekly Review with Simon Elliott (09 Jul 2022)
Money Makers