Are "interesting times" a blessing or a curse?
I’m never sure whether the Chinese regard it as a curse or a blessing to live in interesting times, and I’m pretty sure anyone connected to the media in the UK is having a blast with our current shenanigans. Last week’s newsletter came to you a day early due to Kwasegate, and it happened that we pressed the button a mere five minutes before his disciplinary at the head mistress’s office.
And now again – as I write this on Thursday we’ll try to ensure we avoid mentioning anything or anyone that/who is likely to be outdated by the time you read this. Have we ever seen anything like this? Yes – you and I watched Mr Callaghan take his begging bowl to the IMF, though we were probably more interested in ‘Tommy’ or that ‘Midnight train to Georgia’.
To save you having to look it up, Gordon Brown was the shortest reigning PM in modern times, and he was in No 10 for just short of three years; Wikipedia’s entry now cheekily has Liz Truss day by day on the list, currently 44 days and counti….
Doug
Bank of England’s note to Jeremy Hunt: Never, ever run out of cash
There’s a big, big difference between the recessions of past decades, and not just because we have full employment. If you watched Nouriel Roubini on the news last night you’d think blimey, he’s the last person you’d want at a dinner party. Apparently we have five quarters of recession in front of us (probably four now), we have inflation + recession = stagflation, and rising interest rates, and, and, and …..
We have higher rates of employment that we have ever known; Brexit has created an extreme employee shortage as any restaurant will tell you – and we are interviewing a Ukrainian economics graduate refugee this morning (which I’m sure will not be the last).
There is a huge amount of money around though:
US corporates hold $3.83 trillion in their accounts
There’s lots of positive extrapolations that can be made from cash piles, and the chart above is not commercial holdings but cash on overnight deposit at the Fed. The corporate cash shown here is 9I. (Apologies, it’s not a great looking chart but the total at the right is that $3.83 trillion).
So what’s the cash for? It is basically into three uses:
buying companies (M&A)
research and development (Capex & R&D), and
dividends and boosting the share price (buybacks and dividends).
Note above shows that 50% of that giant cash pile is used to pay shareholders their share of profits. Investors ignore this at their peril, and run around chasing asset allocations in their hunt for shares that might rise.
The FTSE was 6930 yesterday. On 31 December 1999 it was 6924
If you ignored dividends and just bought a share tracker then in the last twenty two years there was not a penny of profit. However the FTSE returned 125% to dividend investors without even moving, as the chart shows, so when the marketing departments of investment firms tell you it’s all about asset allocation, and 92% of returns are from being in the right assets, you can now give them the famous answer from the FT’s Gillian Tett.
Back in the days of peak covid fear in April 2020, I was asked by an investor whose portfolio was in the maelstrom ‘Do you only invest this way?’. The answer is not quite ‘only’ – trusts and charities often have different objectives – but pretty much all our investment is done this way. Our core philosophy simply follows the strategy of Charlie Ellis, Benjamin Graham and inevitably the latter’s star student, warren Buffett. Good investments are identified as those generating free cashflow, and it’s the resilience of the cashflow history that tells the story.
Cashflow is not the only way to value a company, but it’s a very simple metric to identify and one that is near impossible for accountants to fudge or fraudsters to fabricate because the cash is identified by a third party – the bank holding the account.
In true private equity style, once you’ve paid – say - £1,000 for your investment, then as soon as you have had that £1,000 returned to you via dividends your investment is risk free. You still have the investment but now have no cost to recoup. On average with trusts, the return profile of the dividends means most investors have been paid back in full in 16 – 17 years. Of course, that also enables the investors to simply compound returns by re-investing dividends, and compounding returns.
I hated maths at school.
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