Finance pundits with Y chromosomes mostly become grouchy in old age. Some start earlier. When I hired Robert Armstrong on to Lex a decade and a half ago, he was already, like me, a cynic about markets. Amazon? Bah. Financial crisis? Love it.
I blame my formative years running Japanese equity portfolios. Despite endless roadshows proclaiming a “light at the end of the tunnel”, nothing ever glowed. It’s only been three years since the Nikkei breached the level it was at when I started working in 1995.
Back then colleagues were hoovering up US stocks, including dotcom names. I thought them loons. Valuations were crazy. You’re all making a fortune now, but just wait. Japan was once the biggest economy and stock market in the world too, you know!
And I was vindicated — for a while at least. With a new millennium the arse dropped out of equities. But they were soon hoisted again, and then some. By 2007, I was back telling everyone to brace themselves.
Thanks to the likes of Gillian Tett, those of us at this paper knew about toxic subprime securities. Northern Rock was cracking. No one predicted the carnage to come, but I didn’t need to. Stock prices were ludicrous. Markets had to correct.
So convinced was I that with my meagre savings I went mega-short the Aussie dollar versus the yen. The pay-off when Lehman imploded was enough to buy a condo in New York, with no mortgage.
Here was Japan 2.0, surely. I would at last be proved right. But you know what? No sooner had the FT run its “end of capitalism” series than global equities rebounded. And rebounded and rebounded.
I was still bearish, of course. So much so I bought a synthetic ETF that rose when the S&P 500 went down and vice versa. Tens of thousands of dollars lost. It was then I finally accepted my lesson: negativity doesn’t pay.
And this continues to be the case. MSCI World index returns are 400 per cent since March 2009. I have dumped Cassandra and embraced my inner Abby Cohen, the ex-Goldman strategist who for years could reliably out-bullish anyone.
Now my walls are adorned with long-run charts. They serve to remind me that equities go from bottom left to top right, excluding Japan of course. Buy and hold is my advice to readers now, doubly so after a correction.
Reversing the cliché, therefore, I’ve become more optimistic as my beard whitens. That explains a love of equities, the confidence that interest rates do not matter and my hopes for a productivity-led renaissance.
I even lost a job after a speech that was too positive for the current mood — arguing the climate transition is more an opportunity than a risk for investors. No one, therefore, is more sensitive than I to the creeping gloom in equities.
Last week saw a big sell-off in stocks. Investors fear what buoyant US and Chinese economies, as well as persistent inflation in Europe, mean for interest rates. Many strategists now say the rally since last year was a dead cat bounce (or echo bubble as it seems to be called nowadays, presumably so as not to trigger our feline pals).
Well, I’m having none of it. Markets have calmed, but further drops are a chance to average down in my view. Warren Buffett agrees. In his annual letter to Berkshire Hathaway shareholders last Saturday, he reminds us that corrections make it possible to buy “wonderful businesses at wonderful prices”.
It’s hard to argue with a 4mn per cent return since 1965. But even Buffett confesses he’s made “many mistakes”’ and that “it takes just a few winners to work wonders”. If that sounds like chance, he readily concedes that some “bad moves by me have been rescued by very large doses of luck”.
So while I remain bullish on equities, I’d rather leave stock picking to Warren. His aphorisms sound nice, but identifying wonderful businesses is hard and so is knowing if they’ll stay wonderful. And remember that whoever is selling you the stock believes they’re getting a wonderful price too.
It’s far better to buy the index — which is what I’ll do soon, having finally done the paperwork to transfer my Aviva pension to a Sipp. There’s no shame in the 10 per cent compound annual return of the S&P 500 over the same 60-odd years Berkshire Hathaway has existed. That’s still a 25,000 per cent gain, including dividends.
Will I sleep like a baby? Sadly, no. Like all raving optimists, dark whispers swirl. Perhaps US investors are as blinded by decades of gains as I was by losses. Why can’t another Japan occur? Would I even be able to spot the beginning of a long bear market anyway?
Here is how I settle myself. Sure, the valuations of some US tech stocks were as silly as any Tokyo bank in 1989. And yes, managers from around the world flock to San Francisco today, just as they once did to Japan, desperate to learn the secrets of success.
Parallels exist. But as I wrote in a previous column, returns on equity were never a driving force in Japan, as they are in America. Nor should the innovative approach that gave us Walkmans or colour plasma screens be confused with entrepreneurialism.
The 10 biggest companies in Japan by market cap were founded, on average, before the second world war. By comparison, half of America’s did not exist when I was first managing funds.
In his letter, Buffett also stresses the importance of creative destruction — letting the “weeds wither away in significance as the flowers bloom”. For me, this is why the US is not Japan. Whether Europe isn’t, we’ll return to another day.
The author is a former portfolio manager. Email: [email protected]; Twitter: @stuartkirk__