HindeSight Letters #87 April 2022 - INVESTMENT INSIGHTS

APRIL 2022

It is an unwelcome call to suggest that “Peak Wealth” has been experienced, certainly in the UK, where we are far too focused on the value of our houses, which have certainly seen strong growth in many areas and postpandemic recoveries in others.

But, with the FTSE 100 broadly at the same level it was five years ago, including a pandemic 30% slump and a less dramatic 10% Ukraine invasion, the passive index holder is having to get by on 3.5% dividend yields for wealth creation in UK equities, with money printing support waning.

I know many readers are happy to stick to the “Permanent/ Cockroach portfolio” of Equities, Bonds, Gold and Cash, which historically has given growth and substantial protection. But, even that strategy looks challenging for the foreseeable future with bond prices continuing to fall, gold languishing and cash holdings being inflated away at an alarming rate.

It could be worse and it has certainly been an unpleasant time for some of the legendary US market outperformers, that went by the “FAANGS” acronym, Facebook, Apple, Amazon, Netflix and Google.

There is an old saying in the financial markets regarding price chart patterns, “Up by the stairs, down by the elevator”, which has unfortunately been experienced by Netflix in recent weeks. It has been generally observed that the “FAANGS” have held the general market indices up over the last few years, so with the new “FAAGS”, we shall have to see whether they can manage to do the same now.

I just read that legendary macro trader, Paul Tudor Jones, commenting that the current valuations and climate are the worst conditions ever for invested capital in stock and bond markets, but as always there is often a period of time when Road-Runner is in mid-air, unaware of the drop below. Conditions that have been internally deteriorating for years, have been plugged by the central banks money machine but with roaring inflation, even they can’t continue. 

Let’s completely forget about fixed income for now as that is a lost cause, but for equity portfolios, the passive index investor will have to understand that the old text book lessons, may come in handy, and select a basket of stocks that are large, undervalued, pay reasonable dividends and haven’t got years of unrealised earnings growth already baked in the price. 

Take Oatly Group, (Dairy alternative food group), once darling IPO, just a year or so ago, now down 90% in the latter group. There are more of these bad stories than there should be.

Relative to BHP, large mining conglomerate, paying substantial dividends in the former group.

HSL ADD 27/08/2021 HSL CLOSE 01/04/2022 (217 days Holding) Total returns 48%, including 8% dividend payments.

Almost a decade ago, when we first started writing the Hindesight Dividend Letter, it was the belief that all investors, big and small, could benefit from understanding that there were merits involved in not blindly investing in equity indices, or with fund managers who hug the index, “passive investing”. Stock selection, of large, well capitalised companies, paying good dividends at low valuations in their stock cycle with rotation, is not just one of the best risk-adjusted methods for compound return, but an excellent defence in bad times as well. And that might come in handy rather than relying on continual annual % growth in house prices in the UK at such huge multiple of income amid rising interest rates.