In the developed western world, productivity (using GDP as a measure) would appear to be falling. Investment is dropping and there appears to be a popular move against globalisation.
Central banks have pumped vast sums of money into their economies to encourage growth, but unfortunately this approach has failed. All it has done is inflate asset prices whilst growth has virtually disappeared.
This has been good news for the 'haves' who own the assets, but not such good news for the 'have-nots' who see their wages and job opportunities being reduced.
In this type of habitat, capitalism, globalisation and politicians become unpopular, and this is today's investment environment in which we have to operate.
A CORRECTION SEEMS IMMINENT
Financial pundits of all persuasions seem to be of the opinion that stock markets, which are at or close to recent highs, are due for an imminent correction. The only question would seem to be by how much, and what should you do to defend yourself whilst the storm passes over?
In the past the defence might have been to exit from equities and move into gilts. This is no longer the obvious solution, with government bonds now offering investors negative rates, and all bonds being susceptible to falling prices.
Merryn Somerset-Webb recently wrote the following in the Financial Times: 'Bonds come with the potential to make capital losses (if interest rates rise) and gains (if they fall), but the risks have been offset to a degree by the fact that they offer an income.
'That is changing; we are now at the point where the income on a 10-year Bund and a 100-year euro note is exactly the same - zero.
'How can something be a safe haven when your best hope is that your returns will be either very low or negative? So right now, surely a safer haven is cash. Perhaps now is the time to go out and buy yourself a safe!'
At this point it is worth considering a few quotations from the great 20th century momentum investor Jesse Livermore:
- 'It is enough for the experienced trader to perceive that something is wrong. He must not expect the tape to become a lecturer. His job is to listen for it to say "Get out!" and not wait for it to submit a legal brief for approval.'
- 'The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals.'
- 'One of the most helpful things that anybody can learn is to give up trying to catch the last eighth - or the first. These are the two most expensive eighths in the world.'
SHOULD YOU BE OUT OF THE MARKET?
I believe that if Jesse Livermore was alive today he would be out of the market and in cash. He would be relaxed and sleeping at night whilst waiting for the market correction to take place.
Then he would be looking at his numbers and waiting for the next positive asset sector to come forward and declare itself.
The timing was fortunate, with gold, India, Japan, UK smaller companies and some of the 'global' funds all at different times producing great results.
Well, he was as active as a ferret on speed and he moved from winning sector to sector. The result was that he has lifted the value of his portfolio by 27 per cent, which is a very commendable result.
NO OBVIOUS WINNING SECTOR
Now, however, he is disturbed that there is no obvious winning sector to leap upon and has been asking what he should do. Rightly or wrongly, my answer was just to do the arithmetic and not be greedy.
If he were to remain 100 per cent in cash for the next 12 months, then his annualised gain would still be 18 per cent and there is nothing wrong with that result.
Learn to be patient, accept that cash is a genuine sector, watch the numbers and do not try to force the market. Remember that easy come, easy go, is not a sensible investment philosophy.
Since our last update, our cautious demonstration portfolio, the Tugboat, has also become much more defensive with our cash holding growing from 12 to 40 per cent.
We have achieved this by selling a number of holdings including the Newton Global Income fund and the Fundsmith Equity fund, which had both gone up by over 20 per cent since we first bought them last October/November.
We also sold Investec Global Gold, which had gone up by 65 per cent since we bought it in February of this year, probably our most profitable investment yet.
With markets struggling to break through to new highs, and with the uncertainty over Brexit in Europe and the presidential elections in the US, it seems prudent to batten down the hatches and wait for calmer waters.
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