February 10, 2023 • 39 mins
For a fund manager with a belief in value, 2021 was as discombobulating a year as they come, says Ben Inker, co-head of GMO’s asset allocation team. Valuations went to insane levels across all markets, and there was nothing you could buy or hold that was cheap enough to offer real long-term returns. But the good news according to Inker is that an awful lot of froth came out of the market last year. Prices went down and inflation went up. Add those together and a lot of markets were down 25% plus in real terms, he says.
Inker joins Merryn Somerset Webb on this week’s Merryn Talks Money to explain that, for the first time in several years, it’s possible to find assets with “compelling valuations.” There could be more nastiness to come in the most expensive markets, he warns, but the opportunity set going into 2023 is far better than it was a year ago.
Plus, John Stepek and Merryn discuss was she calls one of the best books she's ever read.
Sign up for John's daily newsletter Money Distilled: https://www.bloomberg.com/account/newsletters/uk-wealth
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
John, I have something I need you to read. It's
possibly the best book I've ever read on markets. I know,
even better than the Adams Smith when I was going
on about last year. There's one is called Invested. How
three centuries of stock market advice reshaped, reshaped our money,
markets and minds. I'm not going to read all the authors,
because there are five incredibly dedicated, dedicated academics who sat
(00:22):
down together and actually written a history of things that
you and I think we know more about than most
of the history of newsletters, financial advice books, financial advice magazines, etcetera.
Absolutely fascinating. Now the first one, first one came out
hang on, I can tell you this seventeen sixty one,
Mortimers Pioneering. They called it an actual first guide to
(00:44):
investing in the market, every Man his own Broker, seventeen
sixty one. And then in the UK we got going
in the UK first, you know where it was a
leader and this stuff, right, I didn't even realize that
then we normally student so the So Sea bubble then
the only bind stocks for as after that you could
(01:04):
still buy and South stuff, you know, And this was
just staring out through the railway bubble, right, you needed
lots and lots and lots of financial advice books for that.
You know, I've written about written a column about some
of them. There's some really good ones. Moses Smith, he
wrote Plain Truths about stock speculation. That's a little later on,
moving into the eighteen hundreds of them, and then moved
(01:25):
right through right through until the most recent ones. You know,
there's all the Jim Kramer books, etcetera, the things we've
written you and I over the years, and then there's
Don't Panic, how to manage your finances and financial anxieties
during and after the coronavirus. So you know, it goes
all the way through. There's three hundred years worth of
people writing these books and they're all the same. Yeah.
(01:47):
I was just going to see that. That fast one
sounds remarkably like it could have been published like tomorrow.
Well you could. You could publish a book tomorrow called
be Your Own and everyone would buy it. Every man
his one broken? Yeah, everyone they're overbroaker, I think, is
where we are today. Right. But the question that I
(02:08):
asked I wrote about this for for Bloomberg Opinion. The
question I ask is, given that there are all these
books I mean hundreds of thousands of them. We many
tens of thousands. I haven't got the end of the
book yet. And they all say roughly the same thing,
which is, you know, don't be taken in by stories,
don't pay too much for staff, you know, control your
emotions around investing. Don't forget that the price you pay
(02:30):
at the beginning is the main indicator of your long
term returns my book The Skeptical invest This remarkable, also
says this. John's book says this, but it says this
in the best possible way, by John's book, by John's book, um,
but also by investing, because it tells you about the
other books which say similar. Thanks. Anyway, the key point
(02:51):
is if there are this many books out there, if
they all say the same thing, If in the main
the advice is good because it is because good advice,
why aren't we all rich? You know? What is the
same reason than not everyone is skinny and happy. Obvious.
(03:12):
It's entirely obvious, but you need something to see it
to you in a way that collects with you. Basically,
I mean, these are basically these books are self help
books in the same way that diet books are self
help books and how to start a business books and
self help books. I mean, I actually remember a financial
publisher who we both know very well, said to me
about a decade ago, um, he was launching more and
(03:34):
more things, and I said, well, what are we doing here?
And he said, well, it's just like the diet entertry mare,
and we're not selling action, we're selling hope. That is
the brutally cynical thing I see. I do. I actually
I am quite a believer in self help and fatasty yeah,
(03:54):
and all of those kinds of things. But it's just
that there's that thing of people can tell you something
that is very obvious and you can intellectually know it,
but until it sinks through and it's something that connects
me you behavior wise or you're ready to change, or
but I don't really know what it is that triggers it.
But that's why this stuff does kind of get recycled
(04:17):
over and over again, because it's thinking, yeah, it is
true and it is obvious, but people don't do it
and and yeah, and yeah it does say a hope
to an extent. It's like, but here's this thing in
your life that you perceive to be a problem. You
want to change it. I've got a solution, and just
what happens. The solution is the same solution everyone else
(04:38):
will tell you. But maybe if you hear it from
me in my inimitable style, then you will something. I
can find the right metabor, the right comparison, the right
whatever it is to get through to you. I will
like this. The diets things is the same. It's like
they most apart from the really flaky ones, they mostly
boiled down and eat something that's kind of like the
Mediterranean diet and just don't eat too much yet, but
(04:59):
maybe if you do. He's gonna write a diet, but
was going to call the skeptical diet the skeptical dater
skeptical data. Oh, fortunes are made, John, tell me one
thing that's obvious in the market today? Um, what is
obviously UK equities? I'm setting you up so well, just
take it on. UK equities are cheap, too obvious. That
(05:22):
always cheap at the moment. And actually that's toy a
topic for our discussion at some point. Why are they
always cheap because they're constantly outflows? Why are they're always outflows?
That's the book you can read about this by the
way in johnson news letter Money Distilled. He's written about
UK equities and you can also read about it in
a Bloomberg opinion econom I wrote relatively recently also on
UK equities. And then you know, go and buy some
(05:44):
books prefrobably Welcome to Marin Talks Money, the podcast in
which people who know the markets explain the markets. I'm
there in some set work this week I'll get is
Ben Inca. Ben is the co head of our allocation
at GMO, which is a value orientated investment house founded
(06:07):
by Jeremy Grant. Some now, the most interesting thing about
GMO in this context is the value orientated bit, because
something that we've seen very little of over the last
decade is a focus on value and what the price
of any particular investment when you buy it means for
its future returns. And we've had regular papers out from
GMO explaining to us over the last few years that
(06:28):
if you buy you high, you will not make a
good return over the following decade or so. And everyone
has ignored that, haven't they, Ben, It did seem so
for quite a while. Not ignoring it anymore, though, are they? Well,
I don't know. They didn't ignore it last year, But
the beginning of this year has been a little bit weird.
(06:48):
It has, hasn't it. Well, let's come back to the
beginning of this year. Let's start. Let's start with you know,
we knew that there was an everything bubble kicking off
a few years ago, and I think everybody thought that
there would be what you might call it a blow
off phase of some kind at the end of the bubble.
But what we didn't expect, or certainly what I didn't expect,
and I suspect you didn't die them, was that that
(07:08):
blow of phase, this massive end of the everything bubble,
would coincide with the economic and financial conditions that we
had during during COVID. That felt weird, didn't it. I
know you wrote in one of your notes that this
was one of the most disorientating times for professional managers
to live through. Yeah, i'd say. I mean. We have
(07:30):
spent a lot of time studying bubbles over the years,
and one of the things that is common across almost
all bubbles is they occur at a time where the
underlying um economic situation is very good and has been
very good for quite a while. So the particularly odd
(07:52):
thing about the COVID bubble was you know, the economy
wasn't going very well. Um. And if you look at
times like nine, nine or two thousand, they were events
where the economy had been going great and the bubble
was really generated by people saying, well, I think these
great times are going to last forever. Um. And they're
(08:15):
wrong on that. The great times never last forever. But
normally you at least have great times. Um. You know,
was not a great time. One was weird, but I
wouldn't call it a great time. Um. And yet we
saw what has been claimed the everything bubble. Absolutely everything
(08:37):
went up at the same time in a way that
I'm not sure we have seen well honestly ever so interesting.
So we learned something really great then, which was which
we can use in later day later times, that you
can drag out a bubble by printing fast amounts of
money and putting it directly into people's pockets. This is
(08:57):
valuable information, right Who could have guessed? Yeah? I mean
that is that That is the interesting thing about this.
We have never before put the money quite as directly
into people's pockets, especially at a time where they didn't
really have very much to spend it on. Um, So
in retrospect, you can understand why. I can't remember who
(09:22):
coined it, the boredom hypothesis, but people had nothing to do,
so they speculated. But my god, did the speculation go wild.
M So we had all these people sitting at home,
big pile of money in their pockets. Um they've lived
through I mean most young people in particular, I have
never seen a proper band market or certainly no one
that lasts very long. So they can look at all
(09:43):
these statistics for what happens when you put your money
in equities. They put their money in equities, and nobody
tells them that risk is about the price you pay
at the beginning. No, well, nobody tells them. But I
would say, if you you know, certainly a lot of
them were pretty naive, but not all of them were
(10:06):
right the if you actually spent time reading you know,
Wall Street bets on Reddit. These were people who were
very aggressively saying fundamentals don't matter. What you have learned
in you know, high school or university doesn't matter. Uh,
(10:27):
you have to unlearn everything you've learned about investing. That's
not the same thing as just being a naive person
who hasn't experienced the stock market or learned anything about it,
that is aggressively saying the rules don't matter anymore. Now
we have that as well from some of the big
fund managers. Didn't we and we won't name any names
(10:49):
on this podcast because we're not like that, but you know,
we heard from a lot of the big investment houses,
the very growth orientated ones, again, that we should unlearned
what we thought we knew about investing, and that all
the big turns over long periods come very small numbers
of very very very high quality companies, and what you
pay for those companies doesn't matter because they're the ones
(11:10):
that are going to deliver the returns long term. And
that was a sort of academic backup for the idea
that what old fashioned investors might have perceived as fundamentals
are not as relevant as those old fashioned investors might think.
So it wasn't just driven by individuals. It was driven
by this new era of growth investing backed by some
of the really big names. Yeah, and I do. I
(11:33):
think you're absolutely right, and I think there is this
really important piece of investing that that kind of analysis
just completely leaves out um and it is what makes
growth investing a challenge. And I'm not saying growth investing
is a bad idea, but one of the issues with
(11:53):
it is the mental image we have of how you
make money as a growth investor misses out on an
incredibly important piece of your portfolio UM. And it's understandable
that it does so because it is a piece of
your portfolio that doesn't stick around that long. The problem
(12:14):
with growth investing, Yes, you want to find these companies
that are going to wind up ruling the world. Right,
and if you find a company early that winds up
ruling the world, that company is going to generate great
returns uh. And even if it is trading at an
optically high pe multiple or price to book or what
have you, Yes, it will generate good returns. The problem
(12:37):
is not all of the companies that you hope and
expect will do that do that. And when they fail
to do that, when those growth stocks disappoint, the returns
are really bad. UM. It is a term that I
have tried to uh popularize and have completely failed. UM.
(13:00):
But as a value manager, we always get pushed what
do you do about value traps? How do you avoid
value traps? UM? And the thing I try to talk
to people about is Yeah, it's true, it's a problem.
Owning a value company that turns out to disappoint and
isn't worth what you thought it was stinks. But the
(13:21):
same thing happens on the growth side. And when those
growth companies disappoint their returns are really bad because not
only did the earnings you expected not come in, but
the pe that you're prepared to pay for that company
as you realize it is less growthy than you thought,
is a lot lower. So the returns of owning a
(13:43):
disappointing growth company are really bad. And the growth stories
are of course ex post only about the successes. So
a mistake in the value arena as much less painful
in the end than a mistake in the growth arena. Yeah,
that's not to say it isn't painful, right, So I
I've I've defined a value or growth trap as just
(14:05):
any company, uh in the relevant universe that has disappointed
on revenues and seen its future revenue forecast come down
in the course of a given year, and in the
value universe, they underperformed the average value stock by nine
points a year. I mean, that's really bad. But in
the growth universe. Those growth traps underperformed the rest of
(14:27):
the growth universe by thirteen points a year, and over
the last couple of years they've underperformed by twenty plus.
So the last couple of years have been some of
the worst years in history to be a growth company
that disappointed investors. Okay, so what does the phrase we're
trying to popularize here growth trap? Growth traps? We're trying
to make people say growth traps. Okay, we can help
(14:49):
with that. I can definitely help you with that. Okay.
So let's move into last year when, which is when
growth investors got what some might call the come up
and some might call a small blood before everything goes
back the way again. Um, but that was that was
a chokra VF for growth investors and a chokra vf
for everything that wasn't providing the returns that one might
(15:10):
have expected. Um. How did you feel last year? Vindicated
or like things weren't quite as they should have been? Still? Uh,
well it was, I mean there was a certain amount
of satisfaction seeing some of the uh kind of some
of the most speculative assets and the backers of those
(15:31):
assets get their come upance. Um. But it's hard to
be excited about a year where pretty much everything went down,
and our ability to shield our clients from the losses
really depended on the extent to which the clients gave
us the authority to move out of stocks and bonds entirely.
Where we could do that, we could make them some money,
(15:53):
because there were things in the liquid alternative space that
actually did make money. Where we were stuck in stocks
and bonds. We protected some, um, but it's never fun
having to talk to your clients about the fact that
you lost them a bunch of money, even if you
lost them less money than their benchmark. Yeah, even if
you were intellectually correct, you still lost the money. Yes,
(16:16):
that's gonna hurt. Um. But presumably you were fairly heavily
into the the classic value stocks, energy, et ctera last year. Yeah,
we were, uh, and that definitely helped. We were generally
able to in the ASCID Allocation team UH, deliver returns
that were better than benchmarks. But you know, even value
stocks around the world lost money. Um, they had their
(16:39):
best year in twenty years relative to the market, in
relative to growth stocks, but they still lost money. And then,
interesting me, there's something in your latest letter or the
letter at the end of last year about how it
was unexpected to find the deep value it under performed
value as a whole one. It should normally be the
other around. Yeah, you know, that was one of the
(17:02):
slightly weird things most times when you have a really
big year for value stocks, And again this was a
really big year for value stocks, even if they were
going down in absolute terms. Most of the time, the
story is kind of about value. Even in two thousand,
when we were experiencing the bursting of the Internet bubble,
(17:25):
what people were rotating into were the very cheapest value
stocks um. And this year we didn't see that. In
two value stocks again had a very good year relative
to the market. It's almost always the case when value
beats the market that the very cheapest stocks. Uh. We
(17:45):
refer to it as deep value is the cheapest twenty
of the market, and shallow value is the next thirty UM.
And deep value almost invariably beats shallow value in any
year where value wins, except last year. In last year,
deep value stocks in the US underperformed shallow value stocks
(18:08):
by close to five um. You know, at least over
the last forty years, it's the only situation we've seen
like that, and it was a little bit frustrating frankly
as a value manager focusing on the very cheapest stocks
and seeing the mildly cheap stocks beat you. Um. But
on the other hand, it has led to an opportunity
(18:28):
we are pretty excited about because those deep value stocks
are trading at an extraordinary discount to the overall US market,
and the US market fell a good deal last year,
so in absolute terms, they're kind of the most exciting
thing in the US we have seen in a number
of years. Okay, that brings us very neatly on to
(18:49):
where we are now. And you know, looking looking through
what you wrote at the end of last year, you
became it came as as as close to being excitable
as I think possibly Jim managers can and saying that
having seen possibly the worst outlook for the future, you
can imagine at the end of one everything horribly expensive,
(19:10):
absolutely nothing you want to hold for the long term,
horrible environment. At the end of last year, you begin
to look around and go, well, do you know what,
nothing is really expensive anymore? You know, when I look
at the charts that you have the volatility in return
trade off exent or not really looking at negative returns
for anything over the next seven years. Old, that seems
(19:31):
like a massive turnaround. It is a very helpful thing
to have markets fall considerably, especially in a circumstance where
there's inflation as well. Now, I mean, inflation is not fun.
Nobody enjoys the inflation. But on the other hand, if
the SMP felt by eighteen percent last year and inflation
(19:54):
was seven, right, in general, the fair value of equities,
because these are real assets, goes up with inflation. So
fair value went up by seven the price went down
by eighteens, so it's cheaper. Now. That doesn't make it
cheap and absolute terms, but it makes it a lot
less overvalued than it was. Um. So we're certainly not
(20:16):
pounding the table and saying what you really want to
buy today is the SNP five hundred um. But whereas
a year ago the SMP five hundred was trading at
some of the most expensive valuations we have ever seen,
kind of second only to the two thousand. Event, now
it's just expensive. That doesn't sound great better but no great, um,
(20:42):
it isn't great. But the nice thing is in a
year where everything else fell to almost everything other than
the SMP five hundred was cheaper than the sp F.
So if you know, emerging came in mildly overvalued in
it fell by twenty well, it fell by twenty inflation
(21:04):
was seven, So in real terms kind of relative to
fair value, it fell by twenty seven and maybe it
was over valued, so now it's cheap. Uh. If the markets,
if Europe and Japan were you know, twenty percent overvalued
or twenty five percent over valued, and they fell by
similar amounts, they're around fair value. So yeah, it's hard
(21:25):
for us to be that excited about US large caps
as an index. Um. But the nice thing about a
market where everything fell was the things that weren't grossly
overvalued to begin with are starting to trade at pretty
compelling valuations. So if we look at what's really cheap,
so that would be emerging market equities. Yeah. Um, small
(21:50):
caps across the board. Japan. You know, I'd say our
our favorite group of small caps around the world is
Japanese small caps. Um. Partially that's because the valuations are low.
The other thing that's, uh, that's nice about Japanese small
caps relative to say, US small caps. If you look
at what's happened over the last decade or so. The
(22:13):
average US small company has levered itself up. The average
company in the Russell has something like uh six times
EBITDA in terms of debt, and that used to be
the level of an LBL, so u S small caps
have basically all l B O themselves. Japanese small caps
(22:36):
on average have about zero net debt on their balance sheet.
So a thing it's it is comforting if you own
the Japanese ones is even if the economy gets really bad,
they're not going to wind up in economic trouble. Whereas
in the US and the UK, where these small cap
(22:58):
companies have really levered them sells up, they're more vulnerable.
They might get away with it uh. And they levered
themselves up in an environment with very low interest rates,
so it's not crazy, but it does feel risky um.
And in Japan and kind of beyond that continental Europe,
they did less of that, and they're trading pretty cheap
(23:21):
uh and they seem pretty I'm not going to go
so far as to say small caps are truly safe, UM,
but these are companies that should be able to withstand
a significant recession should one occur, and in the UK
UK small caps and they had a really nasty ride
last year. They certainly did they UM. But but again
(23:43):
they look like US small caps from a leverage perspective.
And when you talk about emerging market equities, which last
year that was kind of top of your BI list
as well. Right, emerging market equities, UM, are you excluding
China from that? So we are not excluding China from that.
But where we have the ability to build the emerging
(24:08):
portfolio we want, it has less China than the traditional benchmarks.
That is not a statement that we think China is uninvestable,
but it is a statement that China is risky. Now,
the thing about emerging markets is everything is risky in
emerging markets. Every country in emerging markets has greater geopolitical
(24:32):
and policy risk by virtue of the fact that their
institutions are less well established UM. And the amount of
damage that can be done by a uh kind of
lousy head of state is quite big. That's always true,
That's always been true. The charm of investing in a
(24:55):
diversified EM portfolio is the bad thing that happens in
Turkey is not bad for Brazil. The bad thing that
happens in Brazil is not bad for South Africa, and
so a diversified portfolio of e M countries is generally
less risky than any of them. The problem with China
(25:17):
is it both showed itself to be somewhat riskier from
a policy and geopolitical perspective than some people had imagined
it to be last year, and it's really big. So
last year we saw kind of the ultimate nightmare scenario
from the standpoint of a foreign investor investing in Russia. Right,
(25:39):
you invested in Russia because it looked cheap, and then
you lost it all. Now for the Emerging Markets Index,
for the Emerging Markets Universe, yeah, kind of stunk, but
it was three percent of the index. So for e
M as an index, this was a survivable problem. And
(25:59):
that is true across just about everything except China, because
China is about of the total. So given that we
have a big overweight to emerging markets because we really
think these guys are cheap, we want to be more diversified,
and the obvious thing that that means owning somewhat less
of is China. Um. But that's not a statement that
(26:21):
we hate China. It is a statement that we don't
want to have too much concentrated risk in any individual
risky country. Now, well, let's go back then to the
the US, because you know, you said a couple of
things about you know, you don't necessarily want to be
big into the SMP five hundred there. And one of
the things that I've been writing about recently is about
how the shift in market environment um slightly suggests and
(26:45):
I know people have been saying this for years, but
it does really feel like now we're getting to the
point where you should not be holding the index. You
should not be holding passive investments because you know you've
benefited from that massive positive momentum on the way up.
But why we do you want to be part of
the negative momentum as last year's winners begin to contract
inside the the index. So if you're looking at at
(27:08):
the US market, let's say, the US large cap market
at the moment um, I'm kind of guessing that you
wouldn't want to be an index investor right now. Well,
we wouldn't largely because we think the US large cap
universe is the most expensive broad group of stocks out there.
So it is not a place I particularly want to
be putting a lot of my money. I mean, the
(27:29):
the general charm of index investing is it's cheap UM
and you were kind of guaranteed to get the return
of that broad group, be that negative or positive, be
that negative or positive UM. Now, the S and P
five has been difficult for managers to beat for quite
(27:50):
a while because it was the returns were driven by megacaps,
and it is really hard to own more of the
mega cap companies then the index does um. Active investors
are almost always more equally weighted than the index is.
They've had a bias therefore towards I wouldn't say small,
(28:11):
but towards you know, large and medium companies against the megacaps,
and that has killed them because of how how wonderfully
the megacaps have done in the US, I do think
this is probably a tougher time to be a mega
cap company. H Some of them are both facing ultimate
(28:31):
limitations to growth, which it had seemed they were immune
to for a while, as well as more aggressive government
activity against them. So the age of megacap dominance maybe
behind US UM certainly. The I mean, the other thing
is it has been an age of US dominance, right.
(28:53):
The US market has just beaten the pants off of
every other market out there for the past twelve years. Uh,
we think that's poised to change. We've been saying that
for a while. Um. Obviously the valuations are all in
favor of the rest of the world against the US.
But the other thing that has really happened is the
(29:14):
US dollar has become very overvalued um. And that is
a tough situation for US based companies That will hurt
their earnings, and the companies in countries on the other
side where their currencies are really undervalued have a lovely
tail wind behind them. It's interesting, isn't it that people
still have this idea that the US has always been
(29:38):
trading at a premium to markets around the rest of
the world. And I still talk to people who say, well,
that premium will remain because the US has always traded
at a premium. But it hasn't, does it. I mean,
it's a relatively recent phenomena that the US has traded
at a significant valuation premium to everywhere else. So there's
no reason at all where they shouldn't. That shouldn't completely
mean revert. Yeah, absolutely, It is basically something that occurred
(30:01):
over the last ten years or so. In two thousand
and twelve, the US was trading a very similar valuations
to everywhere else. On average, the US has traded at
a somewhat higher evaluation to say, the emerging world, which
kind of makes sense because they're risky. Um, but yeah,
relative to the rest of developed countries, it doesn't have
(30:21):
a long history of trading at a big premium. Uh.
It is right now trading at a big premium, and
that premium has been growing for long enough that people
have trouble remembering that it wasn't a forever thing. Yeah.
That's a lot of bit about, isn't there. Okay, So
I think what you're telling us is that we need
to relearn everything we have a knew about investment. If
(30:45):
we learned that stuff about investment in the last decade, well,
I do think, um, it wouldn't be a bad idea
to brush off those ideas of you know, calculating discounted
cash flows and figuring out what UH an asset will
be worth based on its earnings and and and payouts.
(31:07):
I think that's going to be pretty relevant, um after
a little while where even a discussion of that uh
made you seem like you were completely out of touch. Okay,
So we're going to attempt to avoid the US except
for the deep value part. Look at em without really
penalizing China too much. Look at Japanese small caps, think
(31:29):
about small caps in Europe. We're going to think a
little more active than passive. I should have said before
I asked you about that bit passive versive active, that
that's the part of the podcast we call Well he
would say that, wouldn't he, And then we wait and
see how good the answer is. Um, you know what
one one thing just worth adding in terms of the
(31:50):
active versus passive Um, passive can be a fairly tricky thing,
right there are It is now very easy to get
exposed as you want in in e t F s
all over the world. And one of the things you
can do if you believe as we do, that value
stocks are attractively priced. Okay, you could buy value index
(32:10):
well right now, it matters extraordinarily which value index you pick. UM.
Last month, the SMP five hundred value index beat the
SNP five hundred growth index by a point and a half,
whereas the m s c I version of value lost
(32:32):
to growth by eight uh. It's an absolutely extraordinary difference. UM,
which has to do with the way SNP defines value
for for SMP, any stock that has really bad momentum
has a tinge of value to it, So it doesn't
matter how expensive you are, if you did really badly,
(32:53):
kind of get pushed um into the value universe. Uh
and last month is one of the sharpest reversals that
we've seen. It's not that weird to see it in
a January. January often sees negative momentum do pretty well. Um.
But a lot of the negative momentum stocks that did
really well weren't cheap um. So if you were measuring
(33:17):
them on a PE or price to book or price
to sales basis, they didn't look so good. But if
you were just saying, well, hands up, who had the
worst momentum last year, um, and let's take a chunk
of those and call them value, it did do well.
My concern is, man, I don't know what that S
and P value index is. It does not feel like
(33:38):
value to me right now. It's interesting, isn't it. It?
Kind of them suggests that I'm often write about this
saying that we talk about passive, but there is really
any thing as passive because you have to take so
many active as an allocation decisions to get to your
passive in the first place. So it doesn't really exist,
this idea that you can passively follow something. It is
(33:58):
certainly a lot harder, and it seems like it should be.
M Okay, let's very briefly two more things I want
to ask you about. The first thing is one earth
is going on this year because all the things that
we've been tooking out then I'm playing up. Yeah, I
don't understand it. Um, you know, you would have thought
that the pain in crypto and meme stocks would have
(34:20):
been enough to cause people to say, yeah, maybe this
wasn't such a good idea. Right. Normally, in a really
painful event, you lose sixty two eighty to of your money. Um.
You know, we used to talk about the fact that
after an event that painful, it took a generation to
get another speculative event because the people who lost that
(34:43):
money are never going to play again. Well, if we've
experienced the generation I mean, maybe a generation of may flies.
I don't understand because people are plowing back into the
same stuff. Bed Bath and Beyond was up yesterday for
a company that is not merely teetering on the verge
(35:05):
of bankruptcy. But my god, it is hard to imagine
how it's ever going to generate positive cash flows even
if it got out from under its deatload. But people
are leaping back in. Do you know, Ben, You may
have just you may have just learned something that those
of us in Scotland have known for a long time,
which is that the generation is way way shorter than
it used to be. You didn't need munch downe that
(35:27):
that's a joke for the Scots. But you know, as
Jeremy has been talking about, Jeremy Grantham, our firm's founder,
has been talking about the fact that the the bear
market isn't really over until there's full repudiation of the
prior underlying thesis. Um. And if he's right, then this
(35:51):
one doesn't feel like it's over now. Everything doesn't have
to turn out, you know, as as a morality play.
But there is a certain amount of sort of self
fulfilling prophecy to financial markets. Um. And what we have
been seeing is certainly uh, not evidence that investors are
(36:17):
back to actually worrying about what assets are truly worth, um,
but rather what assets do they hope are going to
be up a lot in the afternoon. It's more fun
thinking about what's going to be up in the afternoon
than thinking about long term value of different asset classes.
I get that would you have a buy crypto ban
(36:38):
a little bitcoin holding on the side, I someone would
have to convince me of the actual use case um.
And I think what we've seen across two is that
the use case of crypto was enabling people to do
speculation in crypto UM and it was really good at that.
(37:01):
But that's man, that's not a very stable um use case.
So maybe there will be some other use case that
comes up, But otherwise, right, it's not it's not an investment.
There are no future cash flows. You can't say what
should this thing be worth? Um uh And I mean
(37:22):
the thing that is amazing to me about crypto is
that lack of cash flows, that lack of anything you
could get your brains around or your hands on in
terms of what this thing would be worth was viewed
as a feature, not a bug. UM. That was part
of its charm. Is there anything that we haven't talked
(37:44):
about that you think that the ordinary investor should be
holding for the next couple of years or have we
covered everything UM, you know, we've covered most of it.
The thing I just want to emphasize is that even
though in two it was the best year for value
in a long time, after fifteen years of value relentlessly
(38:09):
losing to growth, it's still trading very cheap relative to
the market. So the general value opportunity is really good today. UM.
I'm a little bit nervous about the implementation of value
across some of the index providers. UM, so you want
to be careful about what you're doing, but we really
(38:29):
do think the next five to ten years should continue
to be a good one for value investing in stocks. Brilliant. Then,
thank you very much, Thanks very much for having me,
Thanks for listening to this week's Man Tooks Money. We
(38:51):
will be back next week. In the meantime, if you
like our show, rate review and subscribe whatever you listen
to podcasts, and do remember that if you are going
to review at review it well because we prefer those reviews.
Thank you to everyone who has already reviewed the podcast.
We usually appreciate it, and of course our podcast our
producer is absolutely obsessed with reading those reviews. This episode
(39:12):
was hosted by me Marin zumset web It was produced
by Summer Siety. Additional editing by Blake Maple's and special
thanks of course to Ben Inca. Thank you very much, Ben,
and to John Steppic And of course I'll weak your
reminder to sign up to John's daily newsletter, Money Distilled
this week. I know you're all obsessed with house prices.
There's house prices in there. Sign up and you can
read about that. The link is in the show notes
John, I have something I need you to read. It's
possibly the best book I've ever read on markets. I know,
even better than the Adams Smith when I was going
on about last year. There's one is called Invested. How
three centuries of stock market advice reshaped, reshaped our money,
markets and minds. I'm not going to read all the authors,
because there are five incredibly dedicated, dedicated academics who sat
(00:22):
down together and actually written a history of things that
you and I think we know more about than most
of the history of newsletters, financial advice books, financial advice magazines, etcetera.
Absolutely fascinating. Now the first one, first one came out
hang on, I can tell you this seventeen sixty one,
Mortimers Pioneering. They called it an actual first guide to
(00:44):
investing in the market, every Man his own Broker, seventeen
sixty one. And then in the UK we got going
in the UK first, you know where it was a
leader and this stuff, right, I didn't even realize that
then we normally student so the So Sea bubble then
the only bind stocks for as after that you could
(01:04):
still buy and South stuff, you know, And this was
just staring out through the railway bubble, right, you needed
lots and lots and lots of financial advice books for that.
You know, I've written about written a column about some
of them. There's some really good ones. Moses Smith, he
wrote Plain Truths about stock speculation. That's a little later on,
moving into the eighteen hundreds of them, and then moved
(01:25):
right through right through until the most recent ones. You know,
there's all the Jim Kramer books, etcetera, the things we've
written you and I over the years, and then there's
Don't Panic, how to manage your finances and financial anxieties
during and after the coronavirus. So you know, it goes
all the way through. There's three hundred years worth of
people writing these books and they're all the same. Yeah.
(01:47):
I was just going to see that. That fast one
sounds remarkably like it could have been published like tomorrow.
Well you could. You could publish a book tomorrow called
be Your Own and everyone would buy it. Every man
his one broken? Yeah, everyone they're overbroaker, I think, is
where we are today. Right. But the question that I
(02:08):
asked I wrote about this for for Bloomberg Opinion. The
question I ask is, given that there are all these
books I mean hundreds of thousands of them. We many
tens of thousands. I haven't got the end of the
book yet. And they all say roughly the same thing,
which is, you know, don't be taken in by stories,
don't pay too much for staff, you know, control your
emotions around investing. Don't forget that the price you pay
(02:30):
at the beginning is the main indicator of your long
term returns my book The Skeptical invest This remarkable, also
says this. John's book says this, but it says this
in the best possible way, by John's book, by John's book, um,
but also by investing, because it tells you about the
other books which say similar. Thanks. Anyway, the key point
(02:51):
is if there are this many books out there, if
they all say the same thing, If in the main
the advice is good because it is because good advice,
why aren't we all rich? You know? What is the
same reason than not everyone is skinny and happy. Obvious.
(03:12):
It's entirely obvious, but you need something to see it
to you in a way that collects with you. Basically,
I mean, these are basically these books are self help
books in the same way that diet books are self
help books and how to start a business books and
self help books. I mean, I actually remember a financial
publisher who we both know very well, said to me
about a decade ago, um, he was launching more and
(03:34):
more things, and I said, well, what are we doing here?
And he said, well, it's just like the diet entertry mare,
and we're not selling action, we're selling hope. That is
the brutally cynical thing I see. I do. I actually
I am quite a believer in self help and fatasty yeah,
(03:54):
and all of those kinds of things. But it's just
that there's that thing of people can tell you something
that is very obvious and you can intellectually know it,
but until it sinks through and it's something that connects
me you behavior wise or you're ready to change, or
but I don't really know what it is that triggers it.
But that's why this stuff does kind of get recycled
(04:17):
over and over again, because it's thinking, yeah, it is
true and it is obvious, but people don't do it
and and yeah, and yeah it does say a hope
to an extent. It's like, but here's this thing in
your life that you perceive to be a problem. You
want to change it. I've got a solution, and just
what happens. The solution is the same solution everyone else
(04:38):
will tell you. But maybe if you hear it from
me in my inimitable style, then you will something. I
can find the right metabor, the right comparison, the right
whatever it is to get through to you. I will
like this. The diets things is the same. It's like
they most apart from the really flaky ones, they mostly
boiled down and eat something that's kind of like the
Mediterranean diet and just don't eat too much yet, but
(04:59):
maybe if you do. He's gonna write a diet, but
was going to call the skeptical diet the skeptical dater
skeptical data. Oh, fortunes are made, John, tell me one
thing that's obvious in the market today? Um, what is
obviously UK equities? I'm setting you up so well, just
take it on. UK equities are cheap, too obvious. That
(05:22):
always cheap at the moment. And actually that's toy a
topic for our discussion at some point. Why are they
always cheap because they're constantly outflows? Why are they're always outflows?
That's the book you can read about this by the
way in johnson news letter Money Distilled. He's written about
UK equities and you can also read about it in
a Bloomberg opinion econom I wrote relatively recently also on
UK equities. And then you know, go and buy some
(05:44):
books prefrobably Welcome to Marin Talks Money, the podcast in
which people who know the markets explain the markets. I'm
there in some set work this week I'll get is
Ben Inca. Ben is the co head of our allocation
at GMO, which is a value orientated investment house founded
(06:07):
by Jeremy Grant. Some now, the most interesting thing about
GMO in this context is the value orientated bit, because
something that we've seen very little of over the last
decade is a focus on value and what the price
of any particular investment when you buy it means for
its future returns. And we've had regular papers out from
GMO explaining to us over the last few years that
(06:28):
if you buy you high, you will not make a
good return over the following decade or so. And everyone
has ignored that, haven't they, Ben, It did seem so
for quite a while. Not ignoring it anymore, though, are they? Well,
I don't know. They didn't ignore it last year, But
the beginning of this year has been a little bit weird.
(06:48):
It has, hasn't it. Well, let's come back to the
beginning of this year. Let's start. Let's start with you know,
we knew that there was an everything bubble kicking off
a few years ago, and I think everybody thought that
there would be what you might call it a blow
off phase of some kind at the end of the bubble.
But what we didn't expect, or certainly what I didn't expect,
and I suspect you didn't die them, was that that
(07:08):
blow of phase, this massive end of the everything bubble,
would coincide with the economic and financial conditions that we
had during during COVID. That felt weird, didn't it. I
know you wrote in one of your notes that this
was one of the most disorientating times for professional managers
to live through. Yeah, i'd say. I mean. We have
(07:30):
spent a lot of time studying bubbles over the years,
and one of the things that is common across almost
all bubbles is they occur at a time where the
underlying um economic situation is very good and has been
very good for quite a while. So the particularly odd
(07:52):
thing about the COVID bubble was you know, the economy
wasn't going very well. Um. And if you look at
times like nine, nine or two thousand, they were events
where the economy had been going great and the bubble
was really generated by people saying, well, I think these
great times are going to last forever. Um. And they're
(08:15):
wrong on that. The great times never last forever. But
normally you at least have great times. Um. You know,
was not a great time. One was weird, but I
wouldn't call it a great time. Um. And yet we
saw what has been claimed the everything bubble. Absolutely everything
(08:37):
went up at the same time in a way that
I'm not sure we have seen well honestly ever so interesting.
So we learned something really great then, which was which
we can use in later day later times, that you
can drag out a bubble by printing fast amounts of
money and putting it directly into people's pockets. This is
(08:57):
valuable information, right Who could have guessed? Yeah? I mean
that is that That is the interesting thing about this.
We have never before put the money quite as directly
into people's pockets, especially at a time where they didn't
really have very much to spend it on. Um, So
in retrospect, you can understand why. I can't remember who
(09:22):
coined it, the boredom hypothesis, but people had nothing to do,
so they speculated. But my god, did the speculation go wild.
M So we had all these people sitting at home,
big pile of money in their pockets. Um they've lived
through I mean most young people in particular, I have
never seen a proper band market or certainly no one
that lasts very long. So they can look at all
(09:43):
these statistics for what happens when you put your money
in equities. They put their money in equities, and nobody
tells them that risk is about the price you pay
at the beginning. No, well, nobody tells them. But I
would say, if you you know, certainly a lot of
them were pretty naive, but not all of them were
(10:06):
right the if you actually spent time reading you know,
Wall Street bets on Reddit. These were people who were
very aggressively saying fundamentals don't matter. What you have learned
in you know, high school or university doesn't matter. Uh,
(10:27):
you have to unlearn everything you've learned about investing. That's
not the same thing as just being a naive person
who hasn't experienced the stock market or learned anything about it,
that is aggressively saying the rules don't matter anymore. Now
we have that as well from some of the big
fund managers. Didn't we and we won't name any names
(10:49):
on this podcast because we're not like that, but you know,
we heard from a lot of the big investment houses,
the very growth orientated ones, again, that we should unlearned
what we thought we knew about investing, and that all
the big turns over long periods come very small numbers
of very very very high quality companies, and what you
pay for those companies doesn't matter because they're the ones
(11:10):
that are going to deliver the returns long term. And
that was a sort of academic backup for the idea
that what old fashioned investors might have perceived as fundamentals
are not as relevant as those old fashioned investors might think.
So it wasn't just driven by individuals. It was driven
by this new era of growth investing backed by some
of the really big names. Yeah, and I do. I
(11:33):
think you're absolutely right, and I think there is this
really important piece of investing that that kind of analysis
just completely leaves out um and it is what makes
growth investing a challenge. And I'm not saying growth investing
is a bad idea, but one of the issues with
(11:53):
it is the mental image we have of how you
make money as a growth investor misses out on an
incredibly important piece of your portfolio UM. And it's understandable
that it does so because it is a piece of
your portfolio that doesn't stick around that long. The problem
(12:14):
with growth investing, Yes, you want to find these companies
that are going to wind up ruling the world. Right,
and if you find a company early that winds up
ruling the world, that company is going to generate great
returns uh. And even if it is trading at an
optically high pe multiple or price to book or what
have you, Yes, it will generate good returns. The problem
(12:37):
is not all of the companies that you hope and
expect will do that do that. And when they fail
to do that, when those growth stocks disappoint, the returns
are really bad. UM. It is a term that I
have tried to uh popularize and have completely failed. UM.
(13:00):
But as a value manager, we always get pushed what
do you do about value traps? How do you avoid
value traps? UM? And the thing I try to talk
to people about is Yeah, it's true, it's a problem.
Owning a value company that turns out to disappoint and
isn't worth what you thought it was stinks. But the
(13:21):
same thing happens on the growth side. And when those
growth companies disappoint their returns are really bad because not
only did the earnings you expected not come in, but
the pe that you're prepared to pay for that company
as you realize it is less growthy than you thought,
is a lot lower. So the returns of owning a
(13:43):
disappointing growth company are really bad. And the growth stories
are of course ex post only about the successes. So
a mistake in the value arena as much less painful
in the end than a mistake in the growth arena. Yeah,
that's not to say it isn't painful, right, So I
I've I've defined a value or growth trap as just
(14:05):
any company, uh in the relevant universe that has disappointed
on revenues and seen its future revenue forecast come down
in the course of a given year, and in the
value universe, they underperformed the average value stock by nine
points a year. I mean, that's really bad. But in
the growth universe. Those growth traps underperformed the rest of
(14:27):
the growth universe by thirteen points a year, and over
the last couple of years they've underperformed by twenty plus.
So the last couple of years have been some of
the worst years in history to be a growth company
that disappointed investors. Okay, so what does the phrase we're
trying to popularize here growth trap? Growth traps? We're trying
to make people say growth traps. Okay, we can help
(14:49):
with that. I can definitely help you with that. Okay.
So let's move into last year when, which is when
growth investors got what some might call the come up
and some might call a small blood before everything goes
back the way again. Um, but that was that was
a chokra VF for growth investors and a chokra vf
for everything that wasn't providing the returns that one might
(15:10):
have expected. Um. How did you feel last year? Vindicated
or like things weren't quite as they should have been? Still? Uh,
well it was, I mean there was a certain amount
of satisfaction seeing some of the uh kind of some
of the most speculative assets and the backers of those
(15:31):
assets get their come upance. Um. But it's hard to
be excited about a year where pretty much everything went down,
and our ability to shield our clients from the losses
really depended on the extent to which the clients gave
us the authority to move out of stocks and bonds entirely.
Where we could do that, we could make them some money,
(15:53):
because there were things in the liquid alternative space that
actually did make money. Where we were stuck in stocks
and bonds. We protected some, um, but it's never fun
having to talk to your clients about the fact that
you lost them a bunch of money, even if you
lost them less money than their benchmark. Yeah, even if
you were intellectually correct, you still lost the money. Yes,
(16:16):
that's gonna hurt. Um. But presumably you were fairly heavily
into the the classic value stocks, energy, et ctera last year. Yeah,
we were, uh, and that definitely helped. We were generally
able to in the ASCID Allocation team UH, deliver returns
that were better than benchmarks. But you know, even value
stocks around the world lost money. Um, they had their
(16:39):
best year in twenty years relative to the market, in
relative to growth stocks, but they still lost money. And then,
interesting me, there's something in your latest letter or the
letter at the end of last year about how it
was unexpected to find the deep value it under performed
value as a whole one. It should normally be the
other around. Yeah, you know, that was one of the
(17:02):
slightly weird things most times when you have a really
big year for value stocks, And again this was a
really big year for value stocks, even if they were
going down in absolute terms. Most of the time, the
story is kind of about value. Even in two thousand,
when we were experiencing the bursting of the Internet bubble,
(17:25):
what people were rotating into were the very cheapest value
stocks um. And this year we didn't see that. In
two value stocks again had a very good year relative
to the market. It's almost always the case when value
beats the market that the very cheapest stocks. Uh. We
(17:45):
refer to it as deep value is the cheapest twenty
of the market, and shallow value is the next thirty UM.
And deep value almost invariably beats shallow value in any
year where value wins, except last year. In last year,
deep value stocks in the US underperformed shallow value stocks
(18:08):
by close to five um. You know, at least over
the last forty years, it's the only situation we've seen
like that, and it was a little bit frustrating frankly
as a value manager focusing on the very cheapest stocks
and seeing the mildly cheap stocks beat you. Um. But
on the other hand, it has led to an opportunity
(18:28):
we are pretty excited about because those deep value stocks
are trading at an extraordinary discount to the overall US market,
and the US market fell a good deal last year,
so in absolute terms, they're kind of the most exciting
thing in the US we have seen in a number
of years. Okay, that brings us very neatly on to
(18:49):
where we are now. And you know, looking looking through
what you wrote at the end of last year, you
became it came as as as close to being excitable
as I think possibly Jim managers can and saying that
having seen possibly the worst outlook for the future, you
can imagine at the end of one everything horribly expensive,
(19:10):
absolutely nothing you want to hold for the long term,
horrible environment. At the end of last year, you begin
to look around and go, well, do you know what,
nothing is really expensive anymore? You know, when I look
at the charts that you have the volatility in return
trade off exent or not really looking at negative returns
for anything over the next seven years. Old, that seems
(19:31):
like a massive turnaround. It is a very helpful thing
to have markets fall considerably, especially in a circumstance where
there's inflation as well. Now, I mean, inflation is not fun.
Nobody enjoys the inflation. But on the other hand, if
the SMP felt by eighteen percent last year and inflation
(19:54):
was seven, right, in general, the fair value of equities,
because these are real assets, goes up with inflation. So
fair value went up by seven the price went down
by eighteens, so it's cheaper. Now. That doesn't make it
cheap and absolute terms, but it makes it a lot
less overvalued than it was. Um. So we're certainly not
(20:16):
pounding the table and saying what you really want to
buy today is the SNP five hundred um. But whereas
a year ago the SMP five hundred was trading at
some of the most expensive valuations we have ever seen,
kind of second only to the two thousand. Event, now
it's just expensive. That doesn't sound great better but no great, um,
(20:42):
it isn't great. But the nice thing is in a
year where everything else fell to almost everything other than
the SMP five hundred was cheaper than the sp F.
So if you know, emerging came in mildly overvalued in
it fell by twenty well, it fell by twenty inflation
(21:04):
was seven, So in real terms kind of relative to
fair value, it fell by twenty seven and maybe it
was over valued, so now it's cheap. Uh. If the markets,
if Europe and Japan were you know, twenty percent overvalued
or twenty five percent over valued, and they fell by
similar amounts, they're around fair value. So yeah, it's hard
(21:25):
for us to be that excited about US large caps
as an index. Um. But the nice thing about a
market where everything fell was the things that weren't grossly
overvalued to begin with are starting to trade at pretty
compelling valuations. So if we look at what's really cheap,
so that would be emerging market equities. Yeah. Um, small
(21:50):
caps across the board. Japan. You know, I'd say our
our favorite group of small caps around the world is
Japanese small caps. Um. Partially that's because the valuations are low.
The other thing that's, uh, that's nice about Japanese small
caps relative to say, US small caps. If you look
at what's happened over the last decade or so. The
(22:13):
average US small company has levered itself up. The average
company in the Russell has something like uh six times
EBITDA in terms of debt, and that used to be
the level of an LBL, so u S small caps
have basically all l B O themselves. Japanese small caps
(22:36):
on average have about zero net debt on their balance sheet.
So a thing it's it is comforting if you own
the Japanese ones is even if the economy gets really bad,
they're not going to wind up in economic trouble. Whereas
in the US and the UK, where these small cap
(22:58):
companies have really levered them sells up, they're more vulnerable.
They might get away with it uh. And they levered
themselves up in an environment with very low interest rates,
so it's not crazy, but it does feel risky um.
And in Japan and kind of beyond that continental Europe,
they did less of that, and they're trading pretty cheap
(23:21):
uh and they seem pretty I'm not going to go
so far as to say small caps are truly safe, UM,
but these are companies that should be able to withstand
a significant recession should one occur, and in the UK
UK small caps and they had a really nasty ride
last year. They certainly did they UM. But but again
(23:43):
they look like US small caps from a leverage perspective.
And when you talk about emerging market equities, which last
year that was kind of top of your BI list
as well. Right, emerging market equities, UM, are you excluding
China from that? So we are not excluding China from that.
But where we have the ability to build the emerging
(24:08):
portfolio we want, it has less China than the traditional benchmarks.
That is not a statement that we think China is uninvestable,
but it is a statement that China is risky. Now,
the thing about emerging markets is everything is risky in
emerging markets. Every country in emerging markets has greater geopolitical
(24:32):
and policy risk by virtue of the fact that their
institutions are less well established UM. And the amount of
damage that can be done by a uh kind of
lousy head of state is quite big. That's always true,
That's always been true. The charm of investing in a
(24:55):
diversified EM portfolio is the bad thing that happens in
Turkey is not bad for Brazil. The bad thing that
happens in Brazil is not bad for South Africa, and
so a diversified portfolio of e M countries is generally
less risky than any of them. The problem with China
(25:17):
is it both showed itself to be somewhat riskier from
a policy and geopolitical perspective than some people had imagined
it to be last year, and it's really big. So
last year we saw kind of the ultimate nightmare scenario
from the standpoint of a foreign investor investing in Russia. Right,
(25:39):
you invested in Russia because it looked cheap, and then
you lost it all. Now for the Emerging Markets Index,
for the Emerging Markets Universe, yeah, kind of stunk, but
it was three percent of the index. So for e
M as an index, this was a survivable problem. And
(25:59):
that is true across just about everything except China, because
China is about of the total. So given that we
have a big overweight to emerging markets because we really
think these guys are cheap, we want to be more diversified,
and the obvious thing that that means owning somewhat less
of is China. Um. But that's not a statement that
(26:21):
we hate China. It is a statement that we don't
want to have too much concentrated risk in any individual
risky country. Now, well, let's go back then to the
the US, because you know, you said a couple of
things about you know, you don't necessarily want to be
big into the SMP five hundred there. And one of
the things that I've been writing about recently is about
how the shift in market environment um slightly suggests and
(26:45):
I know people have been saying this for years, but
it does really feel like now we're getting to the
point where you should not be holding the index. You
should not be holding passive investments because you know you've
benefited from that massive positive momentum on the way up.
But why we do you want to be part of
the negative momentum as last year's winners begin to contract
inside the the index. So if you're looking at at
(27:08):
the US market, let's say, the US large cap market
at the moment um, I'm kind of guessing that you
wouldn't want to be an index investor right now. Well,
we wouldn't largely because we think the US large cap
universe is the most expensive broad group of stocks out there.
So it is not a place I particularly want to
be putting a lot of my money. I mean, the
(27:29):
the general charm of index investing is it's cheap UM
and you were kind of guaranteed to get the return
of that broad group, be that negative or positive, be
that negative or positive UM. Now, the S and P
five has been difficult for managers to beat for quite
(27:50):
a while because it was the returns were driven by megacaps,
and it is really hard to own more of the
mega cap companies then the index does um. Active investors
are almost always more equally weighted than the index is.
They've had a bias therefore towards I wouldn't say small,
(28:11):
but towards you know, large and medium companies against the megacaps,
and that has killed them because of how how wonderfully
the megacaps have done in the US, I do think
this is probably a tougher time to be a mega
cap company. H Some of them are both facing ultimate
(28:31):
limitations to growth, which it had seemed they were immune
to for a while, as well as more aggressive government
activity against them. So the age of megacap dominance maybe
behind US UM certainly. The I mean, the other thing
is it has been an age of US dominance, right.
(28:53):
The US market has just beaten the pants off of
every other market out there for the past twelve years. Uh,
we think that's poised to change. We've been saying that
for a while. Um. Obviously the valuations are all in
favor of the rest of the world against the US.
But the other thing that has really happened is the
(29:14):
US dollar has become very overvalued um. And that is
a tough situation for US based companies That will hurt
their earnings, and the companies in countries on the other
side where their currencies are really undervalued have a lovely
tail wind behind them. It's interesting, isn't it that people
still have this idea that the US has always been
(29:38):
trading at a premium to markets around the rest of
the world. And I still talk to people who say, well,
that premium will remain because the US has always traded
at a premium. But it hasn't, does it. I mean,
it's a relatively recent phenomena that the US has traded
at a significant valuation premium to everywhere else. So there's
no reason at all where they shouldn't. That shouldn't completely
mean revert. Yeah, absolutely, It is basically something that occurred
(30:01):
over the last ten years or so. In two thousand
and twelve, the US was trading a very similar valuations
to everywhere else. On average, the US has traded at
a somewhat higher evaluation to say, the emerging world, which
kind of makes sense because they're risky. Um, but yeah,
relative to the rest of developed countries, it doesn't have
(30:21):
a long history of trading at a big premium. Uh.
It is right now trading at a big premium, and
that premium has been growing for long enough that people
have trouble remembering that it wasn't a forever thing. Yeah.
That's a lot of bit about, isn't there. Okay, So
I think what you're telling us is that we need
to relearn everything we have a knew about investment. If
(30:45):
we learned that stuff about investment in the last decade, well,
I do think, um, it wouldn't be a bad idea
to brush off those ideas of you know, calculating discounted
cash flows and figuring out what UH an asset will
be worth based on its earnings and and and payouts.
(31:07):
I think that's going to be pretty relevant, um after
a little while where even a discussion of that uh
made you seem like you were completely out of touch. Okay,
So we're going to attempt to avoid the US except
for the deep value part. Look at em without really
penalizing China too much. Look at Japanese small caps, think
(31:29):
about small caps in Europe. We're going to think a
little more active than passive. I should have said before
I asked you about that bit passive versive active, that
that's the part of the podcast we call Well he
would say that, wouldn't he, And then we wait and
see how good the answer is. Um, you know what
one one thing just worth adding in terms of the
(31:50):
active versus passive Um, passive can be a fairly tricky thing,
right there are It is now very easy to get
exposed as you want in in e t F s
all over the world. And one of the things you
can do if you believe as we do, that value
stocks are attractively priced. Okay, you could buy value index
(32:10):
well right now, it matters extraordinarily which value index you pick. UM.
Last month, the SMP five hundred value index beat the
SNP five hundred growth index by a point and a half,
whereas the m s c I version of value lost
(32:32):
to growth by eight uh. It's an absolutely extraordinary difference. UM,
which has to do with the way SNP defines value
for for SMP, any stock that has really bad momentum
has a tinge of value to it, So it doesn't
matter how expensive you are, if you did really badly,
(32:53):
kind of get pushed um into the value universe. Uh
and last month is one of the sharpest reversals that
we've seen. It's not that weird to see it in
a January. January often sees negative momentum do pretty well. Um.
But a lot of the negative momentum stocks that did
really well weren't cheap um. So if you were measuring
(33:17):
them on a PE or price to book or price
to sales basis, they didn't look so good. But if
you were just saying, well, hands up, who had the
worst momentum last year, um, and let's take a chunk
of those and call them value, it did do well.
My concern is, man, I don't know what that S
and P value index is. It does not feel like
(33:38):
value to me right now. It's interesting, isn't it. It?
Kind of them suggests that I'm often write about this
saying that we talk about passive, but there is really
any thing as passive because you have to take so
many active as an allocation decisions to get to your
passive in the first place. So it doesn't really exist,
this idea that you can passively follow something. It is
(33:58):
certainly a lot harder, and it seems like it should be.
M Okay, let's very briefly two more things I want
to ask you about. The first thing is one earth
is going on this year because all the things that
we've been tooking out then I'm playing up. Yeah, I
don't understand it. Um, you know, you would have thought
that the pain in crypto and meme stocks would have
(34:20):
been enough to cause people to say, yeah, maybe this
wasn't such a good idea. Right. Normally, in a really
painful event, you lose sixty two eighty to of your money. Um.
You know, we used to talk about the fact that
after an event that painful, it took a generation to
get another speculative event because the people who lost that
(34:43):
money are never going to play again. Well, if we've
experienced the generation I mean, maybe a generation of may flies.
I don't understand because people are plowing back into the
same stuff. Bed Bath and Beyond was up yesterday for
a company that is not merely teetering on the verge
(35:05):
of bankruptcy. But my god, it is hard to imagine
how it's ever going to generate positive cash flows even
if it got out from under its deatload. But people
are leaping back in. Do you know, Ben, You may
have just you may have just learned something that those
of us in Scotland have known for a long time,
which is that the generation is way way shorter than
it used to be. You didn't need munch downe that
(35:27):
that's a joke for the Scots. But you know, as
Jeremy has been talking about, Jeremy Grantham, our firm's founder,
has been talking about the fact that the the bear
market isn't really over until there's full repudiation of the
prior underlying thesis. Um. And if he's right, then this
(35:51):
one doesn't feel like it's over now. Everything doesn't have
to turn out, you know, as as a morality play.
But there is a certain amount of sort of self
fulfilling prophecy to financial markets. Um. And what we have
been seeing is certainly uh, not evidence that investors are
(36:17):
back to actually worrying about what assets are truly worth, um,
but rather what assets do they hope are going to
be up a lot in the afternoon. It's more fun
thinking about what's going to be up in the afternoon
than thinking about long term value of different asset classes.
I get that would you have a buy crypto ban
(36:38):
a little bitcoin holding on the side, I someone would
have to convince me of the actual use case um.
And I think what we've seen across two is that
the use case of crypto was enabling people to do
speculation in crypto UM and it was really good at that.
(37:01):
But that's man, that's not a very stable um use case.
So maybe there will be some other use case that
comes up, But otherwise, right, it's not it's not an investment.
There are no future cash flows. You can't say what
should this thing be worth? Um uh And I mean
(37:22):
the thing that is amazing to me about crypto is
that lack of cash flows, that lack of anything you
could get your brains around or your hands on in
terms of what this thing would be worth was viewed
as a feature, not a bug. UM. That was part
of its charm. Is there anything that we haven't talked
(37:44):
about that you think that the ordinary investor should be
holding for the next couple of years or have we
covered everything UM, you know, we've covered most of it.
The thing I just want to emphasize is that even
though in two it was the best year for value
in a long time, after fifteen years of value relentlessly
(38:09):
losing to growth, it's still trading very cheap relative to
the market. So the general value opportunity is really good today. UM.
I'm a little bit nervous about the implementation of value
across some of the index providers. UM, so you want
to be careful about what you're doing, but we really
(38:29):
do think the next five to ten years should continue
to be a good one for value investing in stocks. Brilliant. Then,
thank you very much, Thanks very much for having me,
Thanks for listening to this week's Man Tooks Money. We
(38:51):
will be back next week. In the meantime, if you
like our show, rate review and subscribe whatever you listen
to podcasts, and do remember that if you are going
to review at review it well because we prefer those reviews.
Thank you to everyone who has already reviewed the podcast.
We usually appreciate it, and of course our podcast our
producer is absolutely obsessed with reading those reviews. This episode
(39:12):
was hosted by me Marin zumset web It was produced
by Summer Siety. Additional editing by Blake Maple's and special
thanks of course to Ben Inca. Thank you very much, Ben,
and to John Steppic And of course I'll weak your
reminder to sign up to John's daily newsletter, Money Distilled
this week. I know you're all obsessed with house prices.
There's house prices in there. Sign up and you can
read about that. The link is in the show notes
Host
Merryn Somerset Webb
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