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Investment has its fashion victims too – so make sure you don’t become one

10/11/2016

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Used horseshoes may seem an odd subject about which to waste too much mental energy but apparently these items – and particularly where they were made – was an issue of great importance in China at the start of the 20th Century. So, at least, we are told by the US entrepreneur Carl Crow, whose 1937 account of doing business in China, Four Million Customers, became something of a classic and is still in print today.

According to Crow, worn-down horseshoes were viewed as ideal for making Chinese razors – what he described as “really nothing more than a glorified and very finely tempered knife, with a blade that is thick and broad”. But not any old worn-down horseshoe, mind – in the eyes of China’s blacksmith industry, only horseshoes from Hamburg made the grade.

Now, this could have been down to the fact, widely believed by blacksmiths and chronicled by Crow, that “the great size and weight of the German draft horses and the day-by-day hammering of the horseshoes on the cobbled streets of Hamburg, gave the old shoes a size and a temper that was just right for the manufacture of razors and could not be duplicated in any other city”.

Or it could be that the enterprising soul who first tried to offload a crate of second-hand horseshoes in China happened to come from Hamburg. Whatever the explanation, China’s blacksmiths were adamant they would not use horseshoes from any other city and there was nothing the burgeoning band of aspiring second-hand horseshoe dealers Crow implies were springing up elsewhere in the world could do about it.

Apart, of course, from to transport all their wares to Hamburg, where they would be appropriately packaged up – these days one might say ‘branded’ – and shipped off to China. Nobody seemed to notice any difference but Crow noted: “It was typical of the Chinese to discover, or to think they had discovered, a definite superiority in the horseshoes from one particular city and then to stick to their convictions.”

Plus ça change, as some of the Parisian-based purveyors of ‘Hamburg’ horseshoes would have said – and as was graphically illustrated by the recent story of the ‘Supreme brick’. A red clay brick no different from one you could buy in Wickes for 30p-odd – aside from it bearing the logo of skateboarding and fashion brand Supreme – these have been retailing for $30 (£24) and for up to $1,000 on eBay.

Clearly that is quite some mark-up and some wags duly set about calculating how much it would cost to build a house out of Supreme bricks – before being slapped down by less imaginative souls for, among other things, a lack of structural engineering knowledge and the simple fact Supreme had not made enough bricks for it to be worth phoning the scaffolders.

As it happens, of course, some of the most popular equity investments at present are the purveyors of popular brands, largely because they are perceived as being able to put up their prices as and when they deem it appropriate – and, the market’s logic appears to run, the customers of these businesses will carry on buying their products regardless.

Every now and then, however – and the spat between Tesco and Unilever over the price of Marmite is a good example – there are reminders these businesses might not after all be able to keep on increasing their prices in perpetuity, that all the wonderful growth being projected way off into the future might not be set in stone and that investors could be left with a nasty taste in their mouth that has nothing to do with yeast extract.

Equally, history has shown time and again the market is every bit as susceptible to a trend as an early 20th-Century Chinese blacksmith and, at present, large sections of it have developed quite an obsession with so-called low-volatility strategies. And while such trends – $30 bricks aside – tend to have some foundations in logic, they all too often end long after logic has left the building.

More and more money is being invested in these supposedly low-volatility strategies but this is being done on the premise volatility is the only risk with which investors need concern themselves. As the prices of these stocks – also known as ‘bond proxies’ – are pushed up by the sheer weight of demand, however, investors are going to be taking on more and more valuation risk and often without realising they are doing so.

As we have argued before in articles such as No defence, this is a huge concern to us, here on The Value Perspective – as it should be for all but those who consider ‘the new black’ to be a portfolio in the red.

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Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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