Chaos unfolds weekly in one sphere or another. Myself and the Dennehy Wealth investment team sometimes feel surprised that we are making decent gains. Yet we shouldn’t be. There are clear processes and we work hard to stick to them. Buy good value, buy funds with momentum, avoid overvalued asset classes. Have a stop-loss - that’s non-negotiable.
Plan for decent gains. Prepare for storms, whenever they might arise.
This is where I begin to worry. Many of you might have been invested in Fundsmith, which has now underperformed for a number of years. It’s not his fault. I know that sounds strange, but he is simply applying his style. It worked brilliantly in a period such as 2010-2020 – that period has been behind us for a number of years. I believe Fundsmith Equity fund enjoyed a peak value of around £26 billion in April 2022, and is now nearer £17 billion. Investors with billions in the fund voted with their feet.
Yet that is an extraordinary £17 billion still in the fund. Don’t blame Terry Smith, the boss. At the AGM this week he displayed a rare honesty for the investment world:
“One word that I would use to describe the last 12 months is poor, because it seems that if we keep going the way that we’re going, we will become poor.”
A very large proportion of this £17 billion is retail money, individual investors. What’s their problem? Emotional attachment, yes. Not wishing to admit you were wrong, yes. (Peak inflows were in 2019-2021, as the fund began to underperform.) Complacency, indeed. Believing that investing is easy, yup. Having no sense of the behavioural problem when investing. I could go on.
Yet there is a single and simple solution, whether you are a retail investor or discretionary investment manager. A tight review process. It begins with writing down why you bought that holding. You review every 6 months, as per using Dynamic Fund Ratings, so you quickly identify underperformance, and get out. And on heavy falls between review points, you apply a stop-loss and sell.
The lack of simple and effective processes is going to be a huge problem for both retail investors and most wealth managers in the years just ahead.
Talking of chaos unfolding, the UK financial markets were unmoved this morning as news broke of the historic win by the Greens in the by-election. FTSE 100 and 250 were up – Germany and France were down, the US futures were down, gold was flat. More evidence of the UK outperforming and ploughing its own furrow – as strange as that might seem.
Over the week, Japan and Brazil and France were in the vanguard, up 2.5%-3%, with the UK just behind. The US again lagged, though still eked out a gain of 0.7%, despite a potpourri of chaos, though without the fragrance.
The stink began with Trump’s unedifying response to the Supreme Court’s (predictable) judgement that the tariffs weren’t legal. In a pubescent temper tantrum he abused those men and women who have given their lives to selflessly uphold the law, and particularly the constitution of which most Americans are so proud.
The unpleasant smell continued overnight with allegations of the US Department Of Justice deliberately holding back Epstein-linked files which mention Donald Trump – he vehemently denies any wrong-doing. This one will run for a while.
Though US financial markets have underperformed for an extended period, none of this has triggered falls of substance. But it does continue to eat away at confidence, both within the US and beyond.
In recent days Ray Dalio put another nail in the coffin of “Trump Believers”, which we might define as those who remain content to go down with the ship.
“The world is now shifting rapidly in fundamental ways that have never happened in our lifetimes, but have happened many times before” said Ray Dalio in his 2021 book, “The Changing World Order”.
Last year he said:
“The big thing to keep in mind is that we are seeing a classic breakdown of the major monetary, political and geopolitical orders. This sort of breakdown occurs only about once in a lifetime, but they have happened many times in history when similar unsustainable conditions were in place”.
He set out a template for how events would unfold, leaning on an analysis of 2,000 years of major economic and geopolitical cycles, and it has been spookily accurate as to how events have unfolded since 2021.
Ray now says we are at stage 6 of his template, when the existing world order begins to break down, not just within the dominant nation or nations, but between nations. Trump’s attack on the Supreme Court couldn’t have been better designed to illustrate the point. As Abraham Lincoln put it:
“A house divided against itself cannot stand.”
The seriousness of the situation, within and between nations, is even being publicly acknowledged by leaders within the EU, a bit late but nonetheless to their credit:
“The world order as it has stood for decades no longer exists”
So said German Chancellor Friedrich Merz at the Munich Security Conference. All of this is true. But the markets haven’t blinked – just make sure you are prepared when they do.
Sadly you cannot invest today without having a balanced (as balanced as possible!) view on these events and their impact on how you should invest for years to come. More on all of this in an upcoming webinar, TBA.
In the meantime, try not to catch falling knive’s (bitcoin). Be wary of shiny metals which might be midst a multi month correction. Sidestep indices and sectors which might be on the verge of multi year bear markets (US equities). And avoid bonds with attractive yields which might only be worth pennies in the pound at the onset of the next credit crunch.
Perhaps if you do noting else, try The Overnight Test:
· Assume someone sold all of your investments tonight without your knowledge, and tomorrow you woke up with 100% in cash.
· Here's the test…
· You can re-purchase the same investments at no cost.
· Which would you re-purchase? What changes would you make?
· Now ask yourself the question why aren't you making those changes now?