Stuart Kirk’s Post

Are investment trusts the new Japanese equities? Investment trusts are listed vehicles that trade on exchange – like a public company. Hence the term “closed ended”, as opposed to the “open ended” funds in my portfolio which grow or shrink in size depending on flows. The fact that money cannot be yanked out in a panic means trusts can invest for the long run. It’s their main selling point – and rightly so. Opportunistically buying stocks when everyone is losing their heads, for example. Or owning private assets with decades long return profiles. Add some gearing and these features are attractive indeed. Especially for individuals who do not otherwise have access to private deals. Many institutional portfolios cannot be leveraged either. For these attributes alone they are superior to open-ended vehicles such as mutual funds and ETFs, in my view. But investment trusts are struggling. Share prices are trading at deep discounts to underlying asset values. The latter doesn’t make sense, especially for trusts only invested in liquid public securities, the prices of which are known. I read many explanations for these discounts, but none of them wash. More sellers than buyers of the shares, say experts. Well, that’s impossible for starters, and misses the point that when they do trade, they do so at a price that’s below the value of the assets in the trust. Why on earth would they do that? A lack of faith in the manager? But even if a monkey was running your investment trust, it could be trained to press “sell”, at which point the true value of the assets would be realised and the discount closed. Others reckon the gaps between net asset values and share prices narrow or widen as investment themes move in and out of favour. Really? Sentiment should act on NAVs and share prices alike. I get that some trusts own private assets, most of which have no daily pricing or rely on managers doing their own valuations. Hence to be conservative a discount may be warranted. So this is one plausible reason. It doesn’t explain why discounts endure in trusts that only hold listed shares, though. No, there are only two explanations for these discounts which hold up. The first is that the discounts are an anomaly and eventually will be arbitraged away. This is why I own Japanese equities – where almost a half of companies in the TOPIX index trade below their book values. A second explanation suggests the discount is permanent, akin to bank shares with price-to-book ratios languishing below one. The idea here is that whereas the Japanese economy is huge and diverse, banks could never sell everything on their balance sheets all at the same time. Then again, as activist investor Elliot’s 5 per cent stake in Scottish Mortgage Investment Trust earlier this year showed, discounts can be narrowed merely by drawing attention to them. It worked with Japanese stocks – why not investment trusts? #investing #financialtimes #trusts #Elliot

In more than half of the world’s democracies, voters directly elect their heads of state. Those of us living in countries such as the UK, which goes to the polls in July, are not allowed to choose our own leader. Such is the parliamentary system. But is this approach right for public companies, where elected board members are responsible for hiring a chief executive? Investors are never given a list of candidates and asked to vote. Sure investors can oppose the election or re-election of directors, of which a CEO is usually one. Calpers said this week that it intends to vote against all 12 board members of ExxonMobil, including the boss. But shareholders didn’t get to choose Exxon's CEO. Nor did voters have a say when Rishi Sunak became the UK prime minister. Companies are some of humanity’s most powerful institutions. They create immense wealth. So it’s odd that we allow them to eschew democracy when selecting a leader. What’s worse is that they have opted to embrace a terrible version of the parliamentary system. At least nations and political parties have rules when picking a leader from the legislature. In contrast, even established public companies are all over the place when it comes to finding a CEO. Boards sometimes pick outsiders who are unknown to shareholders and employees alike. Or someone from another industry altogether. Alan Mulally, for example, moved from Boeing to Ford. Were investors polled beforehand? Nope. Internal appointments are more common but the selection process is no more open. Where do boards get it wrong? One mistake is to succumb to the pressure of the internal candidate whose business or region is currently making the most money – usually a function of luck rather than skill. Shareholders also know when lazily moving the chief finance officer into the corner office doesn’t make sense. The role of CEO has never been broader. Only a plebiscite of diverse shareholders has a hope of finding the right person. Boards are too small a sample. They could be tasked with making a short-list, as they do now. But why not go one step further and allow anyone to apply? At a stroke you would increase the range of candidates. It would also put downward pressure on CEO pay as wannabes underbid one other on compensation The arguments against directly electing CEOs are thin. Too difficult a process? Voting systems already exist. What about the issue of holdings concentrated in the hands of a few mega managers? Easy: the underlying owners either allow them to vote on their behalf or they must be polled. Open elections might discourage some external candidates from coming forward if they are already employed. But isn’t being honest better than sneaking off for interviews? Two final reasons to fear direct elections are the risk of ending up with a populist CEO or an activist. If both are good for the share price though, who cares? #FinancialTimes #ExxonMobil #JPMorgan #UKelection #governance #investing #CEO #democracy

Relativism is not only a cultural problem. It is also rife in finance, economics and politics. We are bombarded with comparisons which make no sense at all. Take the news that the UK plans to increase its defence budget to 2.5 per cent of GDP by the end of the decade. What on earth does military spending have to do with the final value of goods and services produced in a country in one year? Even Nato believes its 2 per cent of GDP guideline “serves as an indicator of a country’s political will to contribute”. No it doesn’t — the denominator has nothing to do with politics. If anything should be calculated bottom-up on an absolute basis it’s national defence, assessing risk versus capability. In any rational world, how many 155mm artillery shells are needed should be independent of consumer confidence (the biggest driver of GDP). Carbon intensity metrics are another example of relative hogwash. Our atmosphere needs lower emissions, period — not having them increase less than revenues. Plus you can end up with a ridiculous situation in which companies are praised when sales outpace emissions solely because of inflation. The hot topic of unemployment also suffers from wayward denominators. America has its jobless claims data, but the rest of the world rarely mentions the actual number of real human beings out of work. Mostly we talk about the unemployment rate, expressed as a percentage. But these are a fiction — usually dividing an arbitrary definition of unemployment by a worse estimate of the number of people who are economically active. And therein lies the appeal of ratios and percentages, I suppose. They are one step removed from having to face unpalatable truths in either the numerator (how many tanks do we actually have compared with Russia) or the denominator (better optics on defence spending is merely due to a recession). You may think markets are above spurious relativities. And to their credit they often are. For example, no one cared that Amazon or Tesla had negative margins for years. That said, investors still do things every bit as silly as comparing defence budgets to national incomes. We rank companies by their price to earnings ratios, say, despite the fact every company and sector measures their net profits differently. Strategist reports are also devoured. These mostly consist of charts of variables which seem to move together. Causation is claimed when the two numbers are merely correlated — if even that. Perhaps our most common investment mistake is comparing today with the past. Sure there are ratios which do revert to a mean. But extrapolating historical relationships is often ruinous, as many a failed hedge fund will admit. Absolute numbers can mislead as well, of course. But we must all be more careful not to take relative facts as given. The are especially dangerous as inaccuracies can lurk in two numbers. And very often these shouldn’t even be compared at all. #investing #Tesla #Amazon #Strategy #Russia

I was pondering the issue of quality and China’s woeful stock market performance even before my boat was destroyed by fire on Monday. The cause was a Chinese lithium-ion battery overheating or exploding – as more than 1 per cent of them now do globally. Lucky no one was killed. Memorable, but not a great advertising slogan for a country with a poor reputation for quality. I won’t be rushing out to buy one of the 5,000 electric cars that BYD has just offloaded at the German port of Bremerhaven. Nor am I alone. In a recent European survey, more than 40 per cent of respondents said China was their least-preferred country of origin when it came to buying a car. How come? Low quality, roughly a third of them answered, while almost a half also said they “distrust the country in general”. Whether China deserves this reputation is besides the point. Indeed, the survey admits that most respondents confused Chinese vehicles with Japanese, South Korean and even French ones. In a blind testing, few could tell the difference between the cars.  But prejudice is everything. From Zen and the Art of Motorcycle Maintenance: “Quality is neither mind or matter, but a third entity independent of the two…even though quality cannot be defined, you know what it is.” Or rather, we think we know. And thus investors suffer behavioural biases with regard to quality too. For example, stock prices are marked down more when a company’s products fall in quality than they rise if quality improves. Companies use brands as a way to counter what is known in microeconomics as the adverse section problem. Customers, knowing they have less knowledge about a product than the seller, rightly ask: why should I buy something you’re trying to flog me? Brand loyalty is one way to mitigate information asymmetry. I couldn’t tell you how the inside of a mobile phone works, but provided there is an Apple logo, I don’t care. No wonder Chinese car makers rushed into joint ventures with Western marques. Why then purchase a yacht-bomb from unknown manufacturer? Because the other way to entice nervous customers is to sell products so cheaply that poor quality is sufficiently compensated. This is usually a good long-term strategy too, as Clayton Christensen observed. Competitive threats to incumbents mostly come from below, starting cheap and gobbling their way up the quality curve. Beijing’s Made in China 2025 policy encourages just that. Unfortunately, however, trust deficits take a long time to close. They can also jump boundaries, from products to politics to finance, as the survey above showed. Recent viral videos of angry Chinese buyers smashing up defective robot vacuum cleaners may seem trivial. But they add to lack of trust in local stocks which are already down 15 per cent over the past 12 months. Last year foreigners bought the least Chinese stocks since 2017. As I salvage a melted compass, I can’t blame them. #investing #Apple #financialtimes #iphone #yachts

Even as politicians gouge each other’s eyes out they all agree on the importance of education. Likewise in the corporate and investing world: I bet you’ve never met anyone who says governance doesn’t matter. Is that right, though? Or is it just that a global complex of directors, trustees, headhunters, consultants and money managers has its nose so deep in the sound governance trough that uncomfortable truths are ignored? Like the fact that good management and controls don't even lead to superior shareholder returns? Sorry, but it's true - as I write about in the Financial Times this weekend. #governance #financialtimes #elonmusk #LVMH #shareholders #investing #equities

Arguably the two most influential people in the world skipped it – Xi Jinping and Donald Trump wouldn’t dare risk their dos in a beanie. Their absence didn’t stop Davos’s huffers in puffers talking geopolitics all week though. This year’s World Economic Forum had four themes. But “achieving security and cooperation in a fractured world” and artificial intelligence dominated the agenda. Jobs and growth and the compulsory climate stuff were sideshows. I’m going to write about AI soon. For now, Gaza, Ukraine, the Red Sea and Taiwan hog the headlines. Sabres are rattling everywhere. On Monday the UK defence secretary said, “we’ve come full circle, moving from a post-war to a pre-war world”. Yikes! Everyone says I should care. Not as a human being – I’ve got four young kids for goodness sakes – but as an investor. I’m forever being told in meetings these days “we’re all geopolitics experts now”. Nothing else matters. This troubles me for two reasons. First, investment professionals are terrible ultracrepidarians. What does a Wall Street broker know about Yemeni troop movements? Or your favourite credit analyst about China’s ambitions in the Pacific? And heaven forbid if geopolitics is the only game in town. If you think inflation data or valuing US stocks are hard to fathom (a recent note by Unhedged is a good place to start) try war-gaming the Middle East. Luckily, the influence of geopolitics is exaggerated – the second reason obsessing about it vexes me. Particularly on equities. The truth is stocks can handle most conflicts, despite us being told how much they hate uncertainty. Bonds on the other hand cannot. They simply hate wars. In my column in the FT this weekend I ask the question whether investors should care about geopolitics. The answer is they half should. #war #Trump #Davos #equities #investing #financialtimes #hairstyle #skininthegame

I used to think the SEC would be bonkers if it allowed mum and dad investors to easily invest in bitcoin. But I'm not being consistent am I? The SEC happily lets us lose our money in myriad products and securities we barely understand already! What's new? So go for it, regulators! And if they give a green light, I'm buying me some - as I wrote in my FT column this week. #bitcoin #crypto #cryptocurrency #etf #etfs #financialtimes #investing #ethereum

I’m no psychologist or theologian, but as an investor I’m increasingly of the view that mistaking temporary biases for deeper beliefs — or vice versa — is the main reason I make bad calls. Too much Santa and not enough God, as I explain in the FT this weekend. #christmas #santaclaus #financialtimes #investing #skininthegame #religion #sp500

Advisors and financial commentators such as me bang on like barn doors in a gale about long run returns. But who gives a damn if you're 80 years old? It's amazing how little is written for this increasingly large cohort of investors given the amount of savings they have. And they often come into even more money after downsizing their homes. So what is a sensible asset allocation for an octogenarian? Luckily it's an easier question to answer these days - as I explain in my latest column in this weekend's FT. #financialtimes #investing #equities #federalreserve #inflation #costofliving #cricket

Who would have believed that one of the most useful aphorisms in the history of investing would have come from Donald Trump’s fraud trial in New York’s supreme court this week? “There are many ways to value assets and all are accurate even if they give different results” said the ex-president’s lawyer Christopher Kise in his rebuttal of claims that Trump deliberately inflated his property values. In my opinion nothing out of the wise mouth of Warren Buffett comes close. Nor does John Maynard Keynes’s line that we are all dead in the long run – which I’ve always found to be kind of obvious. Investors the world over should cut out Kise’s sentence and stick it on their monitor. If there is space, add his important reminder that “estimated current values” are not the same as “fair value or market value”. Because never forget that valuing assets is an art not a science. We all pretend it’s the latter, with our spreadsheets, discounted cashflows and comparable ratios. But imagination and interpretation matter more. So I'm afraid I'm with the Don on this one. Read why in FTWeekend or online. #Trump #DonaldTrump #investing #FTWeekend #FinancialTimes #FT #Instagram #valuation #equities