The Investment Perspective – March 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

Some Sanity Amidst a World of FOMO

Covid-19 created some much needed volatility last year – thankfully.  At the same time, markets awash with Central Bank fiscal and monetary stimulus appear to be taking the view that everything is going to be okay.  With all that stimulus, what could possibly go wrong!?

Hamish Douglas of Magellan Funds Management coined it nicely when he recently stated that we are now living in a world of speculative frenzy and FOMO.

In that environment, investors and particularly speculators believe that the trading price is the value of their investment.  Indeed it is……until it isn’t.  The trading price and the underlying intrinsic value generally line-up over the long-term.  However in the short-term there can be at times significant disparity. 

In the case of the likes of Bitcoin of course, there is no intrinsic value.  The trading price is based on a number of variables including supply and demand and a voting machine that can work over time at both ends of the extreme.

As you know, FOMO is the acronym for “Fear Of Missing Out” – behaviour that is now widespread across the market. 

This is where perfectly sensible, educated and intelligent people increasingly struggle to resist the temptation to dabble in Bitcoin, Tesla and other highly visible investment options.  It’s almost as though the extent of their research and analysis is the headlines on the internet. 

Of course they’ll tell you that they’ve studied it.  They’ve done their research and they are going in with their eyes open (with a small amount so that if it doesn’t work out then they won’t lose much!).

My own preference is to invest where I have a high degree of certainty about the outcome.  Admittedly, I was not always this way with my investing.  I’ve learned from experience and from others much smarter than I, who have gone before me – but hey,  each to their own.

The above four charts track the trading price of A2 Milk, Tesla, Bitcoin and Apple

Those who suffer from FOMO can become obsessive about the trading price and are lured in by the fast pace of the price rise.  If we look for example at Tesla, the question is, “Will Tesla be a good investment in the future?”  

It is difficult to know at this stage but what we do know is that if it is a good investment in the future, it will be for factors other than the meteoric rise in the trading price over the last year or so. 

Hopefully then, the rise in the share price is not what the more recent buyers of Tesla are unwittingly relying on as ‘in-depth research and analysis’ about future performance. 

After all, if we’re investing to make money, we know there is real risk around investing in any asset whose trading price has risen strongly.  That’s often because the trading price is based on projected sales and profits that likely rely on a large amount of operational perfection and market conditions playing nice.

Bizarre

This example is about the market’s fascination with tech stocks whose trading prices rise swiftly and who are reported widely across the popular media.   Fast rising trading prices are news, as are fast declining prices.  Fundamental analysis is much less riveting!

The trading prices of these companies almost develop their own momentum whereby the more widely publicised they become, the more people know about them and then, the more people invest.  This in turn creates the demand that pushes the trading price into an upward spiral. 

If you’ve followed Berkshire Hathaway over the last year or so, you’ll possibly be aware that toward the end of 2020, Apple was almost 50% of Berkshire Hathaway’s portfolio by market capitalisation.

Yet, over that time the market shunned Berkshire Hathaway as an old-fashioned out of touch value investment in favour of far more exciting tech stocks.  Consequently the trading price of Berkshire Hathaway was relatively flat over 2020 whereas the trading price of Apple rose significantly over the same period – go figure!

Sanity

This is about share buybacks and the power of this simple tactic.  We all know that companies that undertake share buybacks when their trading price is riding high could be making a mistake because they’re paying too much. 

Arguably this can be an unsatisfactory use of capital. 

Generally though, share buybacks work well because, as companies buy back their own shares, those shares repurchased are taken off the market, increasing every investors ownership of the business. Every investor becomes a bit more wealthy.

Berkshire Hathaway has been buying back its own shares quite strongly over the last couple of years.

“Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 ‘A’ shares, spending US$24.7 billion in the process.  That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.”

Buffett went on to say, “share buybacks offer a simple way for investors to own an ever-expanding portion of exceptional businesses”.

It appears that sanity still holds value in a world of speculation and FOMO.

However, it may be less than obvious and certainly not well-publicised.

“Money and women are the most sought after and the least known about of any two things we have.”

Will Rogers