We have long opined that current market levels do not reflect long-term structural weaknesses inherent in the global economy.
Yet, as we write, the Dow Jones is at an all-time high, the Nikkei is back through 14,000 for the first time in many years and the UK’s FTSE 100 index is fewer than 200 points shy of its 2007 peak.
Performance of indices over 1yr
Source: FE Analytics
With the opportunity cost of carrying cash exorbitantly high – given that bond yields and money rates are so low – equities seem to be the only game in town.
Central banks are supportive of loose monetary policy and, as this is unlikely to change for some time, it is reasonable to expect equity markets to move higher from here. In our client meetings, we have taken to repeating the dictum "winning without losing".
It is a phrase that ameliorates the animal spirits that so often draw one to investments in the stock market in the first place.
All too frequently, we are attracted to an idea because of its potential upside, when the most important question we should be asking is do we have a sufficient margin of safety? Or, what is the downside risk?
If we ask whether we have returned to 1996, 1998 or 2000, then it may be that our dictum is more relevant than ever before.
This may mean that investment practice becomes unexciting, but experience tells us that the boring and the dull are good in the long-run.
We learnt our lessons the hard way. Relative to the FTSE All Share index, the first three years of the millennium were outstanding.
By sticking to the basic tenets of income investing, we targeted businesses with high and safe dividend yields, at reasonable valuations.
This was perfectly sensible, and as luck would have it, well timed, as equity markets rolled over at the end of the tech bubble.
Performance of fund vs sector and index 2000 to 2008
Source: FE Analytics
Who knows if we would have had the guts to have made the same investment decisions two years earlier, and maintained our conviction in the face of the inevitable brickbats as markets climbed higher?
Nevertheless, as markets shifted lower, the fund prospered.
Now let us wind ahead four years. Gains in core names across the market cap scale helped us to exploit the exuberance of equity markets, post the 2001 crash, through to a peak at the start of 2007, but there followed a fall.
Everyone had a difficult time, but we had lost our discipline: valuations had become stretched; leverage and business risk had increased. We had lost sight of the all-important margins of safety.
Performance of fund vs sector and index 2007 to 2010
Source: FE Analytics
Hindsight affords 20-20 vision, as the adage goes.
Achieving capital gains in a rising market was the easy bit, but the true definers of our long-term performance were the periods when the market saw serious retracement.
We did best when we were losing least – our experience therefore, was one of "winning without losing".
There is the rub. To win in today’s market, we feel the need to "not fight the Fed", to participate in the game and to ride the market higher. We know that in the long-term, however, global indebtedness will cause a fracture in the markets, but that could be years away.
To "not lose" means being aware of this clear, if not present, danger.
It is a fiendishly difficult matter of timing – short versus long, tactical versus structural.
Our answer is to take several steps back, look at each business that we own as a separate case, and ask, is it a good business? Will it still be around in five years’ time? Also, are we paying the right price?
It is certainly the playbook that worked for us in 2000.
We have little idea what tomorrow will bring; however, prudence encourages us to dust down the year-2000 playbook again.
Carl Stick has headed up the £538m Rathbone Income fund since January 2000.
In spite of its tough run in 2008, it is a top-decile performer since the manager’s appointment, with returns of 211.53 per cent – more than twice as much as the FTSE All Share and IMA UK Equity Income sector average.
Performance of fund vs sector and index since Jan 2000
Source: FE Analytics
The fund has beaten both its sector and the index in every calendar year since 2008.
Rathbone Income requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.56 per cent.
