At the end of this year, I will retire after 9 years at LGT Wealth Management. This will bring to an end my 43 years working in the City of London, and for my family at least 113 years. My father was Chairman of the Stock Exchange in 1975 and my grandfather was a partner in a firm of stockbrokers back in 1909. As I look back over my time in markets, I wonder what lessons I can pass on to my successors.
I started out as a Stock Jobber’s blue button. Stock Jobbers no longer exist, and few people remember what a blue button was. Jobbers were market makers in equities and bonds. Blue buttons were the most junior staff on the Stock Exchange trading floor, not allowed to deal, but running messages and bookkeeping while learning how it worked. I was part of their first graduate intake and actually started as a messenger carrying stock transfers around the city. I learnt all the little alley ways and short cuts in the square mile very quickly.
There is a standing joke that if I mention anything pre-1985 I have to buy coffee for the team, looking back to the start of my career and beyond is going to be expensive. Over the last 43 years, I have seen fads come and go, disaster strike and fortunes made and lost. The time has been far from uneventful. Black Monday in 1987, the ERM crisis, the dot-com bubble and burst, the financial crisis, Brexit, COVID-19and this year the war in Ukraine, are etched into my memory. Looking back further, I remember exchange controls and witnessing the 1974 stock market crash and the three-day week. When I started in 1979, they still had oil lamps and candles in the office in case of power cuts.
While lunches have become shorter and the hours longer, what investment managers do remains in many ways remarkably unchanged. We continue to try and make money for our clients by analysing companies and markets to make the best investment selection. In the past, it took time to read company reports and to send out commentary often by post, then it could be some time before an investment decision and the instruction sent back to trade. Now we see hedge funds using algorithms to generate trades in a millisecond. Market valuations have always swung much more than the financials of the underlying businesses do, and the speed of trading and volumes just make this more so. Hence my first lesson is to look at the fundamentals of the business and remember the price is just a snapshot of the market perception. Do not get carried away by short term moves.
There are great investment gurus in the market who attract followings. Most of these have eventually been found out. Perhaps the one exception to this rule is Warren Buffett who has made a fortune by taking a very long-term view, but even he has had the occasional challenging year. A recent case comes to mind where a star fund manager with a tremendous long-term track record, and substantial following, had a bad down turn and when clients tried to withdraw their money the fund had to halt redemptions. Elon Musk is seen by many as a genius, but if you followed him into Bitcoin at about $50,000 you would be looking at substantial losses today. I prefer to look at a team and a process rather than a single individual star manager. This gives me my next lesson: if someone refers to a fund by the name of the manager be careful, if they refer to it by the managers first name be extra careful.
The trend may be your friend, but when it becomes the fashion beware. The 2000 dot-com bubble is a case in point. During bubbles, buying becomes indiscriminate. Any idea associated with the internet could find a buyer. The internet has changed our lives and companies like Amazon have become huge successes, but the price on many assets and the rate of cash burn meant there were many other failures. In the 18th Century during the South Seas Company Bubble, it was said that a company was floated that was described as being “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”[1] This continues to this day. Last year there was a tracker on FOMO (Fear Of Missing Out) investments launched. There are fortunes made in these times, but more are lost. John Guy took sufficient profits on his holdings in the South Sea company to found Guy’s Hospital in London. The lesson from this is that being a dedicated follower of fashion can be dangerous, but if you do get caught up in this type of situation, take profits while you can. The fundamental lesson is to look at what the company does relative to the price and make rational decisions. Missing out may be better than getting stuck in.
The most extreme bubbles happen when the investment is perceived to be risk free, where everyone is doing it and when there is leverage in the market. At the peak of the dot-com bubble in early 2000, I was told by one client, who was up 30% in a year, that “any monkey could make 70% in a year buying stocks”. Another came to me and said they had three years to retirement. When I proposed a cautious portfolio including bonds, they asked why not 100% equities that the competing managers had all proposed. I was a bond specialist, newly appointed to the private client team at Deutsche bank and wondered if I would ever see a private client bond portfolio. In 1929 J.P.Morgan is said to have ordered the bank to sell equities after the man polishing his shoes asked if he should buy shares. When all your friends are asking for equity tips, it is time to think about selling.
When markets do collapse, they take the good with the bad. I remember a time during the height of the 2008/9 Financial Crisis, I was told by a colleague that ”equities were a dead asset class and that no one would ever invest in them again”. Historically bond markets have nearly always priced in more rate rises than actually occur. It is often right to buy markets when it is hardest to do so. Having followed bond markets for many years, people assume that interest rate rises are bad for the market but often the best buy opportunities turn out to be halfway through the rate rising cycle. Remember to look at what is priced into the market relative to your expectations.
To make money you have to take risk. The price in the market is arrived at from a balance of views. It is always possible to find the downside as well as the upside if you look hard enough. One of my more cautious clients once said to me that he and I would have made more money if we had focused on the gains rather than potential losses. Many entrepreneurs concentrate all their efforts on the opportunity, rather than the potential dangers. We don’t often hear about their failures and the winners will be sure to remind you how clever they are. My advice would be, weigh up the risks, but do not miss the opportunity for fear of getting it wrong. No fund manager is right all the time, he just needs to be right more often than wrong. The upside opportunity is usually more than the potential loss. Don’t let risk blind you to the potential return.
In my time at LGT Wealth Management, I have chaired over a hundred monthly investment committee meetings. One of the strengths of these meetings is that we have members and contributors who are not afraid to speak their minds. There are those that tend to have a positive outlook, those that are usually more cautious, those that want lots of changes and those who favour very little turnover. This means that any decisions get thoroughly debated and researched. As chair, there are two dangers we as a committee have guarded against. Firstly, debate can make agreeing changes harder. As chair, it is my responsibility to reach a conclusion. The second danger is that when markets are up, the bulls speak loudest and when markets are down the bears will speak loudest and say, I told you so. This is encouraged by the press who will talk to those that are right today more than those who may be right tomorrow. We need to be aware of this trend and it may be wise to be contrarian at times. As one pension trustee said, they had spent too much time sacking the last worst performing manager and hiring the last best performing manager, only to find they had hired the next worse performing manager. Be wary of the loudest voice in the room and don’t underestimate the quietest voice.
When I started in 1979 the Stock Exchange had only accepted women members for six years prior. The trading floor was almost entirely white British and male, with very few women amongst hundreds of men. Today we look to foster an inclusive work force for a wide range of social reasons, but in reality, it also simply makes commercial sense to encourage a diverse talent pool. However, in my view this should extend beyond race, social class, age, sexual orientation and any other defined categories. If you employ mixture of people but they have all been educated at a Russell Group University with degrees in economics, mathematics and business, you may not get the diversity of thought that benefits decision making.
When I started my career, financial services were very different with a wide diversity of education and interests. Many had started directly from school aged 16 and learnt the job from the ground upwards. My own father did not go to university and yet became the youngest chairman of the stock exchange aged 48. Some of the best fund managers I have known have never formally studied economics. That is not to undermine the importance of such qualifications, but we cannot rely exclusively on a single area of academic study. When looking at the market, consensus is priced in, it is important to think in other ways to benefit from non-consensus views. We should value diversity in all its forms, including people who think differently. In some ways, I have always learnt more from my clients than I have from my colleagues. They know their own businesses and sector better than any of us will ever do. Listening to experts in a particular field and to a diversity of opinions can only help make better decisions.
Having given you some indication of the lessons from history that may encourage you to trade, remember that Mr Hindsight is always a great trader. Despite the huge corrections that have occurred, equity markets have recovered. Even as I write today, they have outperformed inflation in the last 43 years even after the price action this year. However, a warning, if you miss just a few up days, you may miss the return of the market. There is an old saying that it is time in the market rather than timing the market that makes money in the long run. The key is to know your pain limit and to avoid risking that. I was speaking to a Cambridge college investment committee with a potential investment horizon of many hundreds of years and asked them why they would not be 100% in risk assets, such as equity. The answer was that they would be criticised for their short-term performance if they had a negative year. I have seen many clients over the years that say they have a long-term horizon who when asked how they would react if we lost 20% in the first year, say they would sack the manager. Begging the question as to whether they have a truly long-term investment horizon after all
In the first magazine article I wrote back in 2014, I used a quote from the Greek philosopher Heraclitus which says “no man enters the same river twice, for it is not the same river and he is not the same man”. The water has moved on and the man is older. It looks the same but isn’t. It is to be hoped that we learn from history, but recognise that it is not the same. From an investment point of view, it is never the exactly the same and hopefully we don’t make the same mistakes twice. The last few years have seen interest rates at record lows. When I started in 1979, they were near record highs. This swing in interest rates when we look back 200 years is exceptional and I certainly hope it will not be repeated.
As I head off into the sunset, I will not be entirely moving away from the world of investment. I sit on the investment committees of various charities so may now attend meetings as a client rather than manager. I also look forward to indulging my interest in antiques and history, without it costing me a cup of coffee. I send my very best wishes to our new CIO, Sanjay Rijhsinghani and his deputy Jeremy Sterngold as they take up the reins. In the reverse of the old Chinese curse, may they live in less interesting times. One thing we can be sure of, the biggest challenges come from events that no one sees coming.
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