The Investment Perspective – June 2021

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

Is Your Trust In Others Well Placed?

One of the biggest questions around investing is “Who do you trust?”

This is likely closely followed by “How safe is my money?”

Those questions are easier to answer when you’ve been around the investment world for a while but for most, especially those new to investing, the answer to those two questions can be problematic.

When one accountant and or one lawyer or one financial advisor steals money from a client, does that mean those professions and the individuals within those professions can now no longer be trusted?

Of course, the answer is that when you look at how many accountants and lawyers and financial advisers steal clients’ money, it’s clear that they are significant outliers.  

Most professional advisers do not steal from their clients.  Most, indeed, almost all professional advisers take very seriously their fiduciary responsibility and the well-being of their clients.

What I know is that it can be difficult to differentiate or single out the one ‘bad egg’.

Can you trust the media about money?

In my May Investment Perspective last month, I canvassed the challenge that many face when they naively believe what the media says about money and investing.

Interestingly, many people agree and yet lots of people find themselves following what the media is saying.

Can you trust the markets?

Whilst trusting the media is possibly easier to work out one way or the other, markets are more nuanced and can be more difficult to distinguish.

That’s because money channels like CNBC often include useful information and data about money and investing.

The challenge soon emerges though when we look below the surface at what some of the market banter is saying – reading ‘between the lines’.

The recent example

The recent example that you will be familiar with if you follow markets and commentators is the so-called ‘rotation out of big tech into value’.

This is a constant theme that you’ll have heard across the markets over the last several months.

Indeed, over several weeks of May, we saw talk about inflation and possible rising interest rates along with rising commodity prices scare the market, further supporting the idea that rotation out of big tech into value is indeed a real thing.

The trading prices of a number of large tech companies that we all know declined whilst those commentators were highlighting other companies such as the banking sector for example whose share prices were looking to rise on the back of this rotation. By all accounts, this so-called rotation is, in theory, still underway.

Should you believe it?

It’s difficult not to believe in it to some degree when markets become volatile, and the media banter perpetuates the rotation out of big tech and into value stocks as an ongoing theme.

It looks valid and believable.  Indeed, there is some evidence that to some degree this has actually taken place, albeit in a limited way.  

The point here is that when markets are volatile and the popular media talks loudly, it gets our attention.

For those less experienced, looking for direction or suffering from FOMO this “news “can be highly influential.

Valid or right?

I’ve talked over many years about the difference between valid and being right.

They are two different things.

Sometimes events that are valid are also right.

However, that’s not always the case.

It would appear that those who play the markets or who worry about missing out, or worry about risk are more susceptible to well-promoted themes ( thematic investing ), such as rotation out of big tech stocks into value stocks for example.

I’m not convinced.

I’m not convinced about the rotation out of big tech stocks into value stocks.

I’m not suggesting that there is not some element of validity to what is actually happening in the markets, however I am a long way from believing that I should jump on the bandwagon and follow the herd so to speak.

That’s because at WISEplanning we have a simple but firm methodology based around investing in the business rather than playing the markets.

If the so-called rotation out of big tech stocks into value stocks becomes real and significant, we will likely look to build our positions in those large cap tech stocks, not because we are simply contrarian but rather, because we invest in the business.

We know that good businesses that become unpopular can often represent a good buying opportunity. Patience however is required which apparently is something that can be in short supply across the market at times.

There may even be money to be made in the short term out of the momentum shift into so-called value stocks ( what ‘value’ means these days ? ) as their trading prices rise on the back of the weight of money being allocated in their direction.

Still, I’m not convinced.

That’s because the weight of money moving trading prices means that those trading prices may start to depart from the ability of the business to generate operational profits.

But you say, they’re value stocks because they’re cheap!

Maybe.  However, at WISEplanning at least, value means quite a bit more than a low trading price compared to their intrinsic value.

For us it extends to the underlying economics of the business.

For example, should a well-positioned large tech company such as PayPal become unpopular because of a market theme or the weight of money moving out of that particular business to somewhere else, assuming that the underlying economics of the business remain unchanged, I struggle with the idea that a lower price means the business is no longer worth investing in.

Of course, if you are playing the markets; are vulnerable to popular media noise and market themes that permeate the market from time to time, it can be difficult not following the crowd.

For us at WISEplanning though, it’s not that complicated.

Good businesses are those with sound business economics and a lower trading price generally suggests it may be a less expensive proposition or a better buying opportunity – regardless of what the media and the markets say.

Trust

I find it’s easy to trust our value/eco-Investing methodology when compared to an everchanging market, trading prices and market themes.  What do you think?

Ryman Healthcare and Smartpay

Let’s for fun look at two different business models.  Neither are recommendations.

The above comparison between Ryman Healthcare and Smartpay may offer limited clarity around the importance of the underlying economics of each business as it overviews the financials and to a limited degree the underlying economics of each business for comparison purposes.

As you can see Ryman Healthcare and Smartpay are two totally different business models.

Ryman Healthcare is a large well-established business with scale and strong branding, is profitable and continues to grow although possibly at a slower pace than it has in the past.

The recent report about the unfairness of the business model promoted by those operating in the retirement village sector so far appears to have had limited impact but is something to watch.

Smartpay is a small cap and therefore more vulnerable to changing conditions and competition.

However, it has progressed favourably over the last few years, continuing to grow profitably and with a useful level of cash.  

The high level of debt enables growth and is offset to some degree by $8 million of cash on the balance sheet.  Smartpay therefore while small and vulnerable, navigated the COVID-19 recession pandemic well.  This resilience suggests good management and a sound business model.

If I had to choose between these two businesses, I would likely go for Smartpay because of the opportunity for potentially faster growth over the next few years but then everybody is different.  

For those less advanced investors looking for stability and certainty, Ryman Healthcare could be a good option depending on their investment goals and investment risk preferences.

For other investors looking to maximise investment performance and who are happy to tolerate the uncertainty of a small cap and the volatility that goes along with it, Smartpay could be the preferred option out of these two businesses.  What do you think?

Media, markets, and trust?

It’s easy just to believe what people say.  It’s convenient.  Simple, and can even be valid but it’s not always right.

I argue, it’s actually easier to have trust in the methodology rather than the media or the markets.

I say that because the methodology at WISEplanning is reliable and consistent throughout a variety of market cycles and economic conditions.  

I also argue for the methodology ( over the markets and certainly over popular media ) because of the inherent simplicity.  The methodology is so fundamental and straightforward.

The media and markets on the other hand are everchanging and less certain, less reliable.

Hence my mantra…“In methodology we trust”.

“Markets can remain irrational longer than you can remain solvent.”

John Maynard Keynes