Investing with leopards and elephants
by Doug Brodie
/1. Investing with leopards and elephants.
Despite a Trump political rally referring to Puerto Rico as “literally a floating island of garbage”, many US resident Puerto Ricans voted for him because they believed he would reduce their taxes and costs of living.
They had seen Trump in power from 2016 to 2020 and had broad experience with political exaggerations and switching direction on a sixpence, so Trump telling the nation on Sunday that his tariffs will cause ‘short term pain’, should surprise or upset no one. It’s what is expected – a vote for Trump was a vote for material change, and if investment markets are predictable in any area, it’s that they do not like uncertainty.
And even more predictable is that the market is never predictable – if it was, JP Morgan and Goldman Sachs would own the planet.
What happens over there may well be front and centre of the media – which thrives on Team Trump’s messages and activities – however, it should not distract from the work and focus on your retirement planning. Here’s where the elephant provides the message for us:
A sculptor was asked how he carved a magnificent elephant from a single block of marble.
”I just remove everything that is not the elephant.”
We have had several clients in the office over the past couple of months whose affairs are fairly complex, involving offshore pensions, US antagonistic investments, US 401k’s, mixed nationalities within a married couple and intentions to retire in more than one tax jurisdiction.
Stop.
Trying to answer all areas needing research and advice at the same time simply calcifies the advisory process. Our recommendation reports have been slimmed down in a major way over the past year, but they still stretch to 25+ pages, down by half. Putting all aspects together simply leaves an indigestible block of technical detail and regulatory explanations, which in total prevents a clear understanding.
The solution is (as you know) to keep it simple, to break down the task into visible parts and focus on delivering the lead objective – for those particular clients that means aggregating assets into one simple pool with visible income for life.
To do so, our work is identifying and putting to one side the parts that we don’t need for the income solution. For example, we don’t need to look at the US pension contracts now, and the fact that ‘we might want to move to Europe in ten years’ time’ is no more than a consideration. We don’t know what EU residency rules will be like then, whether Brussels will tax UK pensions or not, etc. We can flag that such things will come into play in future years but it needs to be put aside now. Get rid of everything that’s not the elephant.
/2. How to lose Mastercard entirely.
If you’ve ever snorkelled or dived in tropical waters, you will probably have seen a feather duster anemone: touch them and in a snap they disappear down into their stems.
On China’s DeepSeek revealing its ability in the field of AI, Nvidia’s share price also – in a snap – disappeared $600,000,000,000 of capital value. $600 billion, not quite ‘Gone in 60 Seconds’, but certainly quicker than you can get DeepSeek to explain Tiananmen Square!
/3. Mag 7? We’ve seen this before.
In 1964, the top 5 stocks accounted for 27.6% of the S&P 500; last year, the top 5 accounted for 25.6%. The make up has changed, and it opens the debate for whether tech stocks are fundamental resources powering the economy in the same way as oil stocks were sixty years ago. [GCSE Economics – discuss]. Interestingly, all five of the current greats are tech, whilst only two oil companies made the grade in ’65 along with one US manufacturer, General Motors.
1965 Corvette, made by GM.
It wasn’t real money. The big value of most companies is simply the extrapolation of value from the last trade.
For example, if you start a new company you can decide how many shares it has – let’s say it’s 100,000 shares. You would pop £10 into the bank account of the company, so issuing those shares at 0.0001p per share. You get your next door neighbour to buy a share – just one – for £10. The company now has £20 in the bank and nothing else, however, the value of all the shares is deemed at the last paid, so your newco is deemed to have a value of £1,000,000. If a block of Aviva shares are traded on the stock market at £5.50, then ALL the shares are nominally valued at that sum. That is also why Messrs Musk, Bezos, Gates, Zuckerberg et al have fantastically huge nominal wealth. It would be interesting to see a list of individuals ranked by actual cash in the bank…
/4. American tech stocks are not all winners.
James Bianco runs his eponymous investment research firm in the US and has some brilliant simplifications.
Back in July ’24 he wrote:
The Fabulous Four – Microsoft, Amazon, Meta, and Nvidia – have had an amazing run. The table [above] shows these four stocks have a market capitalization of $8.277 trillion as of March 1, or 18.48% of the S&P 500. They have accounted for 58.21% of the index’s change in market capitalization this year. The next chart looks at the Fabulous Four’s impact on market returns on the S&P 500.
For this metric we use the change in market capitalization. This differs slightly from the S&P’s “modified market capitalization” measure in calculating its index. Nevertheless, this measure effectively produces the same results.
The S&P 500 (black line), the Fabulous Four (blue area), and the “S&P 496” (green area) are shown.
Note that the “S&P 496” contributed just 2.85% of the 6.82% change in the market capitalization of the overall S&P 500 year-to-date.
What James has split out was that of a 6.82% rise in the S&P 500, just four companies delivered 2.85%, so they delivered 41.78% of the growth.
Is this just looking at markets through our particular kaleidoscope? We don’t think so – we think this is more relevant now. Consider how anaemic the growth of 99% of the companies in the S&P 500 was; now think what the Trump Tariffs will do to their input prices and the available cash of their customers. How long can US markets survive only by the ever higher valuation of 1% of its listed companies?