Hopefully all is well with everyone as we move into the second quarter of 2021 already.
Our more formal Monthly Investment Update was released last week where we reported a poor return of -3.8% for the month of March, which was weak both in absolute terms and also relative to our benchmark, as well as leading equity indices around the world. Obviously, we were disappointed to deliver this return to our shareholders.
These updates are not ever intended to be taken as investment advice – you should have your own financial planners/advisors/brokers for that – rather this is a platform for me to share with our shareholders and other interested folks, my views from the Hearts and Minds Investments engine room and my 30 years in equity markets, so that the bumpy ride known as equity investing can hopefully be as comfortable as possible.
I quoted Benjamin Graham once before (he was Warren Buffet’s mentor) – “in the short term the equity market is a voting machine, while in the longer term it is a weighing machine”, which refers to the momentum that often drives share price movements in the short term, based on what seems popular in the media or elsewhere. The recent moves in GameStop and other stocks affected by the Reddit thread are testament to that. In the short term, stocks do not necessarily move on fundamentals. Good stocks can go down and not-so-good stocks can go up over a few months, but eventually, fundamentals will prevail, and the cream of the crop will rise to the top.
As we reported in the Monthly, we have seen bond yields (ie interest rates) rising in the last 6-9 months, despite Central Banks assuring us all that rates will remain on hold for another 2-3 years, until we see more inflation. When analysts put higher interest rates into their valuation model for companies, ones that have more expected earnings further out in time (like technology companies, but especially disruptive technology companies that are trying to come up with something new, where no earnings are expected for a few years) will show lower valuations. When analysts publish these new (lower) valuations, there will always be some investors that get spooked, and decide to exit their positions for fear of further losses. And sometimes they will be right to do so. But, sometimes they won’t, as quality companies can still increase earnings in a rising interest rate environment. Whilst this may not happen straight away, and both good and bad companies see their share prices fall over a few months, often this presents opportunities for savvy investors who can find the good ones whose share price have fallen too far.
I was talking to a friend recently who told me about his nephews’ recent success in the share market. He had a stock that had increased by some 10x in a very short period of time! Now this lad thinks he knows all about markets, and so his (wise) uncle asked me how he could help keep his feet on the ground. I told him to read a great book – it’s called Fooled by Randomness, and you guessed it, it’s centred on the concept of short-term market moves often being basically random. I think you get the picture. Yes, good news should increase share prices, just as bad news will deflate them, but by just how much it should? That takes time.
The largest stock in our portfolio fell heavily in March. It did not report earnings, and I saw no news of substance reported in any of the publications I spend my days searching for information. Even after a fall of almost 20% in a month, the position has delivered us a return of almost 230% since November 2018. Has anything changed in the company fundamentals in the last few weeks? Not that I can see. Have some shareholders decided to take profits? Looks like it! Does our expert manager who recommended buying it at 1/3rd of the price it’s currently trading at still see value in the share price? Absolutely. And so, we hold it. As we do with all of our stocks while our managers still see excess value over risk in the company’s outlook.
No share price moves in a straight line all of the time. Up or down. Simple. The media has far more impact in the short term than people give it credit for. People get spooked, people jump on bandwagons (eg Reddit), and people sometimes need cash for things other than shares, which can cause temporary share price declines. Some people borrow too much, and get margin called. There are so many reasons for short term share price moves that have nothing to do with company fundamentals – I could go on, but I won’t.
Instead, I’ll leave you with a great investing maxim: “Time in the market beats market timing” And here is a short and simple article which explains it.
Chief Investment Officer
Hearts and Minds Investments Limited
If you would like to receive these weekly updates direct to your inbox each Monday, sign up here.