Prophet warning - Even if investors could predict the macroeconomic future, it would not help
The great majority of investors we come across believe whether or not they make money in the future wholly depends on their making the right macroeconomic calls. Here on The Value Perspective, we have always stressed the futility of trying to do that but today let’s approach things from a different angle – say you could make those calls with 100% accuracy, would that help you as an investor?
The theory obviously runs that, if you know what is going to happen in the broader economy, you will then know which sectors and companies to invest in but is that really the case? Let’s test that idea with the help of The Value Perspective Time Machine™, which has enabled me to travel back in time and chat to your January 2009 self about investing over the next five or so years.
Now, this isn’t Back to the Future. I am not going to give you the stockmarket equivalent of Biff’s sports almanac with all the winning and losing companies of the coming years but I am prepared to answer any macro question you want to ask. Then you can decide on your investments and, rather than waiting five years, I will give you a lift in the time machine and we will see how you have done.
“Fair enough,” you say. “What happened to house prices?” “Well,” I reply. “We saw a really nasty step down and then they pretty much went sideways for five years so, in real terms, you lost maybe 15% or 20%. Things have been picking up a little bit recently but they are still not great.” “All right,” you nod. “What happened to banks?”
“Well, it hasn’t been pretty,” I reply. “There was the personal protection insurance mis-selling and Libor scandals, the euro was on the brink of collapse for much of the period and we saw a double-dip in the UK economy that almost turned into a triple-dip. At the risk of repetition, things have been picking up a little bit recently but they are still not great.”
“OK, last question,” you say. “What about the consumer and the high street?” “Basically, it has been a series of insolvencies,” I reply. “Blacks, Comet, Peacocks – just one business after another. The consumer has been trying to pay down debt but has not really managed it and is still very much in the red. No two ways about it, it has been brutal.”
So there you are, on 1 January 2009, with that information – how do you position your portfolio? You are probably not backing the truck up in housebuilders. You are probably not buying many banks. You are probably not going near any high street retailers. Yet, when we travel through time to November 2013, those turn out to be some of the worst investment decisions you could possibly have made.
Just consider the number of stocks that have blown the lights out in those three sectors over the last five years – for example, Debenhams is up 250%, Dixons is up 450%, Taylor Wimpey is up 750% and Sports Direct is up 1,000%. Meanwhile Royal Bank of Scotland, the bête noir of the entire UK banking sector, is up more than 50% since the bottom while both Barclays and Lloyds are up some 250%.
So much for the macro then. As we never tire of saying, the single most important factor in investment, by a distance, is the price you pay and the great thing is you do not need anything so complex (and made-up) as a time machine to know that – just an internet connection or a copy of today’s FT.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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