Reflections
at the end of a 45 year career in the investment world
In 1973 I qualified as a Chartered Accountant, an occupation I didn’t choose (my father bribed me into it by buying me a motorbike – well what would you have done? Honestly?) but I eventually managed to escape via a journey into taxation. Between 1974 and 1979 when Maggie Thatcher came to power, marginal tax rates were at 98% for some – 83% higher rate plus 15% investment income surcharge. Understanding the tax implications of various investments was critical and I worked closely with the investment manager at the investment arm of the accountancy firm I worked for who were one of the first into the financial services arena.
The investment manager was an “old school” ex institutional operator who rolled up at the office around 10am, which was when the gilt market opened in those days and then swanned off for a round of golf at nearby St George’s Hill in the afternoon. He didn’t last long, and I was asked to monitor the investment portfolios (all £5 million of FUM!) until they found a replacement. I believe they are still looking!
My career in the investment world started in 1979. All trading was done face to face on the stock exchange floor, there was no internet, no mobile phones, no Facebook (my daughter cannot begin to comprehend that) and the fund industry was a shadow of what it has become for better or worse - a bit of both I think. Oh and no regulators! What joy! Yes, there were bandits around, but easy to avoid by applying the “if its too good to be true” mantra. Caveat emptor has always worked very well for me…
It was also the year of my first real bull market…in gold which probably accounts for me being a confirmed gold bug. In January 1979 gold was at $220 an ounce. By January 1980 the intraday high hit $860. In the last few weeks of 1979 the price went vertical and every morning we would sit around the Ceefax screen (BBC text system) to see how gold would close in Hong Kong. Ceefax was pretty much all we had back then for market data. It updated the FT30 index every hour.
The FT30 index was mainly industrial stocks and in 1974 as the epic 1973/74 bear market was unfolding its constituents looked like this.
Some unfamiliar names for many of you but no BP or Shell, no miners and certainly no tech. I do remember the 73/74 bear market – down 73% from the 1972 peak – as I was still in accountancy mode and during that time, was one of the audit team at a firm of stockbrokers. If anyone went near an open window they were gently manoeuvred back to their desks.
What were the catalysts?
· Firstly, and probably most importantly, the US came off the gold standard and killed off the Bretton Woods regime that had governed currency values in the post-World War II era in the process.
· In August 1971, President Richard Nixon severed the link between the dollar and gold, and by March 1973, the dollar was free floating. That was pretty traumatic (a radical change in the world's currency regime) and it was inflationary.
· Then, on top of that, later in 1973, we had the oil shock as oil cartel OPEC embargoed countries that backed Israel in the Yom Kippur War. By Christmas that year, oil prices had tripled from $3 a barrel to $9! Yes, a whole nine dollars! And then you had Watergate and Nixon resigning in mid-1974.
· So, in general, we were embarking on a very inflationary period after a time in which we'd grown used to relative price stability. And it was also a time of lots of political angst. That all sound familiar, doesn’t it?
· And last but not least we had a secondary banking crisis brought on by injudicious lending into the property sector…that sounds rather familiar too!
As with many bear markets the denouement was greeted with disbelief as the market soared upwards in the latter stages of 1974 only to revert back close to the summer lows before exploding upwards by over 30% in the first few months of 1975. This formed the basis of the mantra first espoused by Fidelity that if you miss the best 10 days in a market cycle you will underperform significantly. They conveniently omitted to mention that if you missed the 10 worst you will do significantly better! All we need now is a fool proof method of market timing.
From then on, until 1999, when the FT Industrial index as it was then called, rose by 2,375%. There were a few “diversions” along the way as we will see later. It wasn’t until 1982 that the US equity market finally broke out of a trading range it had been in since 1962. See pink box on chart above. This is a log scale chart so the 1930’s depressionary crash is put in perspective. 1973/74, 1987, the tech wreck in 2000, the GFC in 2008/09 and the recent pandemic blow off hardly show up at all. The chart on the previous page is the Dow Jones 30 index.
In the 80s we had the “Big Bang” and the Financial Services Act. The phrase “Big Bang” was used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open outcry to screen-based electronic trading, effected by UK Prime Minister Margaret Thatcher in 1986. It also heralded the arrival of US institutions into the London market which they proceeded to take apart with a number of stock broking names that had been around for aeons disappearing forever.
The Act used a mixture of governmental regulation and self-regulation and created a Securities and Investments Board (SIB) presiding over various new self-regulating organisations (SROs). Significantly, Section 63 of the Act abolished any oversight of the courts on derivative contracts, which might otherwise have been considered speculative and thus contrary to the Gaming Act 1845. Current developments in the zero-day to expiry options markets and the meme stock frenzy make one wonder if there should be an amendment to the Gaming Act!
The 80s were also the era of Reganomics and Thatcherism. Love ‘em or hate ’em the markets went on a tear until 1987 when we had the next significant market “wobble”. There were four main triggers, apart from the fact that the markets were over valued, although the first was really a meteorological marker.
• In the UK on Thursday 15th October, we had the great Michael Fish, “‘urricanes ‘ardly h’ever ‘appen in ’ampshire”* forecast. On the 16th we experienced a hurricane across most of southern England with gusts of up to 120mph along the south coast. We didn’t realise that it was a warning. *Eliza Doolittle’s immortal line form My Fair Lady
• The week before the crash of 1987, the S&P 500 had dropped 9%, one of the largest weekly declines in decades, which triggered a sell signal for nearly all existing portfolio-insurance models; think put buying along with actual selling. The options markets didn’t have the depth of liquidity that we have today.
• Meanwhile, mutual funds were forced to unload shares to meet redemptions, fuelling the vicious cycle of selling.
• Other contributors to the fall were margin calls that hamstrung liquidity and lack of reliable, real-time information.
That last point in bold highlights a big difference between now and then. We still had no internet and mobile phones were the size of house bricks and about as useful. When people don’t know what is going on the tendency is to panic in times of stress and that is what we saw with the Dow off by 25% on a single day on the 19th October.
One investment house didn’t pick up the phone for two weeks after the event. They held a huge box position in their own units which became as uncomfortable as it sounds. Fund management groups could hold units that were sold back to them by investors either to sell on to new buyers and eliminate the costs of buying and selling (along with picking up the bid / offer spread to add to their bottom line) or in this particular case to hold as an investment for the fund house and reap the gains or as it turned out rather large losses.
Climate change has been an increasingly debated topic during my career. And it probably all started in 1976 when we had an extraordinarily hot summer, between June and the end of August. Temperatures were pretty much in the 90s Fahrenheit that's 30plus centigrade for those of you using “new money”. It hardly rained at all and flying into Heathrow was like flying into Saudi, everything was brown. Trains and many offices weren't air conditioned. I was working in the Tottenham Court Road 10 stories up. We had to shut windows at night in case Spiderman got in…. In the morning when I got into the office at eight o'clock, being an easterly facing office, the sun had been shining in for four hours. The temperature would be around 130 Fahrenheit. I've no idea what that is in Celsius, but it was it was very f hot. So you opened the windows and then went and worked on the west facing side of the building until lunchtime and then everyone would move back over to the east side in the afternoon.
Commuting was a nightmare. The trains were unfeasibly hot, people passed out from heat exhaustion pretty much every night. So, I started commuting by motorbike which made a lot of sense. And I vividly remember when the drought finally ended. It ended partially as a result of rather comical Labour MP, Dennis Howell, being appointed Minister of Drought at the end of August. Days later, we had the most enormous thunderstorms. Whether he actually had the power of God or not we'll never know, but I remember riding home on the bike into this enormous black thunderstorm and actually enjoying being soaked with warm rain, an extraordinary experience. Global warming has been an issue ever since although we've never really had a summer like that although there was one in 1995 that got people quite “heated”.
The 1990s were pretty good for equity markets. There were a few minor bumps along the way. We had a bond crash in 1994 brought on by markets not anticipating a Federal Reserve rate rise to slow incipient inflation; history never repeats does it? And that was followed by the Mexico peso crisis a not untypical emerging market event where tons of borrowing had led to usurpation of the currency which they had valiantly tried to link to the dollar. It does make one wonder whether we are now seeing the “mighty” US dollar become emerging market like or as one pundit put it, Argentina with American characteristics!
Other strange events in the 90s included the Morgan Grenfell European fund, run by Peter Young, which had some quite electric performance. I remember talking to Chris Rice at HSBC, another European fund manager and said, “how does he get this performance?” There was much shaking of heads and it turned out at the end of the day that he had over 10% of unquoted companies in the fund and he was personally providing the valuations for these companies Does this sound like another episode that we've been through in the not-so-distant past? The fund was suspended. People couldn't get out. Young was arrested, charged with fraud, went to court where he turned up wearing a dress, pleaded that he was insane and pretended he was a woman. He might have got away with it today.
And then in 1996, Alan Greenspan, who was the head of the US Fed at the time, made a speech suggesting that markets were acting in a way that he described as irrational exuberance. And for a couple of days, we had a pretty large sell off. But very quickly the market realised that Greenspan didn’t know what he was talking about (they were never sure about him being a self-confessed fan of Ayn Rand) and from then to the peak in 2000, the market actually doubled, having doubled up to the point where Greenspan made his comments which again highlights how very little central bankers understand market mechanics, nor how things actually work in the real world.
1998 gave us the Long-Term Capital Management fall out, which again gives us pause for thought in today’s highly leveraged markets. LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron Scholes and Robert C. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics, still used today for options pricing.
LTCM was initially successful, with annualized returns of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. Their master hedge fund collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve.
As we know, a low interest rate environment is good for equities, so the bubble that Greenspan was blowing, by keeping rates low into what he perceived as a significant IT threat, Y2K, carried on until the early days of 2000. Y2K or Year 2000 was a perceived problem stemming from the use in programming circles to use the last two digits of a yearly date instead of the full four as many programmes were built in the early days of computer tech when memory and data storage were a fraction of what they are today. Windows didn’t really get going until 1993 with the release of the Windows 3.1 operating system and it wasn’t until 1995 that Windows95 and the NT networking systems released us from the chains of 8.3 file names. (a Word document would be saved as “myfile12.doc” for example. Finding stuff was mission impossible for the disorganised – rather like today! As the clocks rolled past midnight on 31st December nothing happened; the world was “saved” yet again by central bankers…
The TMT bubble which ramped into 2000 was short for Technology, Media and Telecoms. The internet was really getting going at that stage and people realised that content was going to be very important, so the media companies did well. And everyone was going to need access by telephone, mobile and landlines, to tap into this new source of information so telecoms companies came to the fore. And at one stage Vodafone was the largest constituent of the FTSE 100 index. It was 12% of the index in February 2000.
I remember having a meeting with Neil Woodford, he was one of the good guys back then, in February 2000. He just come out of an investment committee meeting, and he'd been berated for not owning Vodafone. He said to me, “Clive, on that rating, I cannot own Vodafone; it's a utility company! And he was absolutely right. It’s still a utility company and it has never ever exceeded the price / valuation that it got to in 2000 some 23 years later.
Another fund manager meeting I remember well was with Roger Guy who ran the Gartmore European Special Sits fund. Their sales rep insisted that we had a presentation on the new Gartmore Tech Tornado fund before we met up with Roger. It was run was run by a bright young thing who told us just how wonderful technology was and that share prices were going to the moon and high valuations were nothing to worry about. I introduced him to the Eiffel Tower concept, which we've been shown by Barclays at an earlier meeting that morning.
The illustration above, showing the NASDAQ peak in 2000, gives you an idea. While he was trying to work out what he was being shown, Roger came in, didn’t see the Tech Tornado manager and said, “Guys, I'm really worried about this technology bubble.” Seeing his colleague, he backpedalled a little and the PM shuffled out of the room and then Roger told us what he really thought about tech. I wonder what he’d say today.
The decline from the peak was a classic bear market, with sudden falls and inexorable rallies that seemed to suggest that the new bull market was starting. The initial fall in the NASDAQ 100 was 34% with a subsequent rally of 32%. The market then fell by 46% into December 2000 and then rallied 20% by the end of January 2001. There were further falls and rallies, the final rally being a 50% move up to December 2001 followed by the final down move from there of 52% for a cumulative correction of 82% from the March 2000 peak.
We have just had a 41% rally in the index to June 2023 and the news headlines are talking about the start of a new bull market courtesy of the AI frenzy, and we could be partying like 1999 when the index more then doubled over the course of the year, but the curse of the front page is with us courtesy of Barron’s.
2000’s “final straw” for large caps, tech, and EPS growth arguably was the acceleration of monetary tightening in May 2000. The Fed has just paused accompanied with a firm commitment to resume normal service in the not-too-distant future. Will history repeat itself?
I have ignored the Great Financial Crisis and the recent pandemic / Ukraine war episodes as these are etched in the current market memory and are still unfolding. Although I am retiring from active consultancy work, I shall still be writing about the investment world, amongst other things at Substack. Here’s a link
if you want to continue the relationship which I have forged with many of you as friends as much as colleagues. It’s been a blast. Thank you.
In our eternal quest to control risk, I leave you to ponder Carl Richards’ observation.
“Risk is what’s left over after you think you’ve thought of everything.” Good luck!
https://buymeacoffee.com/bearhavenht