A regular reader of the Onassis Newsletter recently prompted an invitation to the writer to deliver an after-dinner speech to their Gentlemen’s Dining Club. After meeting in the bar, a pleasant dinner was served, following which I had to make my speech. I took the opportunity to conduct my own market research.
At the very start of the talk, I suggested to all of those present, that they should consider the following – they were to be sent to some far away place with no contact and that for ten years they would be isolated from all news, financial or otherwise.
Before leaving they could only make one choice in which to invest all their savings whilst they were away. The outcome of that decision would be unknown to them until they returned in ten years. They should choose from the following asset classes: equities, bonds, property, commodities or cash. I then explained that I would ask for a show of hands for each of these investment sectors towards the end of my speech.
My speech covered many of the major issues as we see them today, including the impact of China on the world’s commodity markets and reasons why, in my view, the property market was a basket case. Towards the end of my speech, remembering the survey, I asked for a show of hands. There were modest hands shown for each asset class with the exception of property, where there was a much larger vote, and commodities, where not one single hand was raised.
Even though the result was broadly as I expected, nonetheless I was very surprised that not one person in the group put up a hand for commodities. So far as the value of the survey is concerned, based on a contrarian view, the conclusion to be drawn is that yes, the property market is a basket case and yes, the finest long-term investment going forwards from here is the commodity market.
We like to think that, metaphorically, the gravy train leaves platform three every day. That somewhere in the investment firmament each day a new bull market is gestating. The most recent (not including Japan two weeks ago) occurred in 2001 when the commodity market finally made a multi-generational low. Only recently the Daily Telegraph printed a chart, sourced from BHP Billiton, showing commodity prices since 1800 adjusted for inflation. The all-time low of that period was in 2001. If ever there was a case to be made for the start of a new long-term bull market, the case for commodities is as good an example as you will ever find, which makes the nil-point vote even more surprising.
Whereas, just weeks ago, The Economist published a special report on global housing, calling it “the biggest bubble in history”. Yet this market received by far the greatest number of votes.
Grossly overvalued markets close to a bust are always the most loved and grossly undervalued assets about to take off are always most hated. These lessons are most important because the avoidance of investment loss can only be achieved by understanding that at some point, the most popular investment that everybody loves is the most dangerous.
The 21st century has been full of such examples: Equitable Life, with-profit investment contracts generally, precipice bonds, final salary pension schemes, split capital trusts. All of these were well loved and thought to be low-risk and safe. Most people, too late, discovered they were not.
When we think back to the turn of the century, we recall advising many investors of the vulnerability of the above. Even though we would have considered our arguments very persuasive, the majority of people we spoke to and tried to advise, chose to take no action.
The lesson to be learned is that it is very hard to sell a loved investment and very hard to buy a hated investment, but to succeed, that is exactly what you must sometimes do.
By RH Asset Management, in the Onassis newsletter, a fortnightly newsletter that gives insight into the investment markets.