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Time to get cautious?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
JohnnyCyclops
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Re: Time to get cautious?

#449287

Postby JohnnyCyclops » October 11th, 2021, 1:35 pm

simoan wrote:BTW the latest Howard Marks memo covers his thoughts on inflation: https://www.oaktreecapital.com/insights ... arks-memos

Definitely worth a read.
All the best, Si


Enjoyed Marks' book "The Most Important Thing" - a collection of memos. Will hunt out his latest, thank you - I'm on the mailing list but open/read so few. I would add, his is possibly one of the few companies who have my details and which DOESN'T spam me with its offerings - just the memo now and again.

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Re: Time to get cautious?

#449289

Postby simoan » October 11th, 2021, 1:41 pm

JohnnyCyclops wrote:
simoan wrote:BTW the latest Howard Marks memo covers his thoughts on inflation: https://www.oaktreecapital.com/insights ... arks-memos

Definitely worth a read.
All the best, Si


Enjoyed Marks' book "The Most Important Thing" - a collection of memos. Will hunt out his latest, thank you - I'm on the mailing list but open/read so few. I would add, his is possibly one of the few companies who have my details and which DOESN'T spam me with its offerings - just the memo now and again.

When I say it’s his latest memo it doesn’t mean it’s recent! He doesn’t seem to write them as often as he used to
these days. I am on his mailing list too and only get a notification of a new memo; no other emails at all. I’ve read both his books and they’ve greatly helped my thinking and approach to investing. The latest memo in particular correctly emphasises that some things, like inflation, are important but unknowable.

All the best, Si

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Re: Time to get cautious?

#449290

Postby JohnnyCyclops » October 11th, 2021, 1:43 pm

Urbandreamer wrote:Late 50's, planning on retiring in less than 2 years. However average male life expectancy predicts that I need to fund 30 years and if I'm lucky more like 40 years. Bonds are not my first choice for an investment of that duration. Then again what do I know?

I'm going to read Ruffer's anual report and consider if I want to invest in them. Their NAV and price bairly responded to covid at all. My portfolio saw a 40% drop, though it's recovered nicely.

A brief glance seemes to suggest that long term Ruffer perform slightly better than the total return on the FTSE all share, but with a lot lower volatility. The only fly in the ointment is the yield. I'd have to adopt a stratergy of creating income through selling capital. Ughh.


I concur on the timescales. I've not looked much at ITs, which by definition are managed, including Ruffer. Nor at OEICs. The nearest we got was picking the Baillie Gifford Managed fund for Mrs C's company pension choice around eight years ago - also managed.

The downside of a 30 (40?) retirement horizon is the retirement of the fund manager(s) themselves. Arguably, the managers who handle funds when I'm in my 80s/90s are currently running around the primary school playground. Wither fund/IT consistency for the very long haul. Even Terry Smith will retire at some point - same for Warren Buffett.

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Re: Time to get cautious?

#449324

Postby sackofspuds » October 11th, 2021, 4:07 pm

monabri wrote:Is there some risk level that we ( Lemons) understand or are concerned about that the market hasn't already priced in?


Well, the market didn't price in Covid. I sold a big chunk of shares in Feb 2020 and bought back in after 23 March. I have zerohedge.com to thank for that. For once the doomster was correct! Doubt many or any institutional investors did the same. The chap in the Moneyweek podcast points out the same thing. Institutional investors just aren't able to take radical steps. It might go against the stated objectives of their fund and if they were wrong it would be career ending. Plus, most just aren't as nimble as a private investor.

Scarcely anybody with any connection to the investment industry (brokers, financial journalists, etc) is going to suggest cashing in a big percentage of stocks.

In terms of interest rates and house prices, an estate agent once told me that when interest rates start going up, initially at least the number of buyers increases. Seems counter-intuitive but it's because those who are house hunting desperately try to purchase something on the current fixed rate before they go up further.

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Re: Time to get cautious?

#449373

Postby JohnnyCyclops » October 11th, 2021, 7:16 pm

From the Howard Marks July 2021 memo on macro matters and inflation. Him quoting someone else.

"No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future." (Ian H. Wilson, former GE executive).

AsleepInYorkshire
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Re: Time to get cautious?

#449380

Postby AsleepInYorkshire » October 11th, 2021, 7:52 pm

JohnnyCyclops wrote:From the Howard Marks July 2021 memo on macro matters and inflation. Him quoting someone else.
"No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future." (Ian H. Wilson, former GE executive).

How have "we" decided inflation is going to take off? Are we correct? How can we possibly know? We could set all the worlds super computers going on the variables and I'm still not sure they would know anymore about the future than I do. By all means have a way of protecting your investments. But trying to time the market because inflation may rise isn't going to work. Of course you could get lucky.

If you need to live on £2.5K per month in retirement the obvious way to protect that income stream is to make sure that the pension pot can suffer a 50% drop and still give you £2.5K per month. Alternatively have 2-3 years cash in the bank to allow market corrections to pass you by without taking from your pension pot?

There are ways of protecting your pot against downside without trying to time the markets. And if you're trying to retire too early and before your pot can protect your income then you may wish to reconsider your plan.

That's what I've decided and that's what I am doing.

I wish you luck in whatever you decide to do.

AiY

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Re: Time to get cautious?

#449392

Postby tjh290633 » October 11th, 2021, 8:29 pm

simoan wrote:I don't have a HYP but if you did, which typical HYP companies would do well? Unilever, banks may do OK as long as bad debts don't become an issue, maybe Big Oil and Miners as commodities should do OK? But you can hold all these without having a HYP! I can't think of any other sectors as they tend to have low margins, terrible balance sheets and no pricing power because they operate in competitive industries. Surely in a world with Gilts or US Treasuries on yields of 3 or 4% all high yielding equities would be re-priced too? Any fixed income and Utilities would get trashed in that scenario! Insurance companies would get hit equally as hard as the market as the value of their bond and equity holdings dived too. How many HYPs have any significant exposure to precious metals? None, I'd suggest, other than maybe a small amount of exposure gained via BHP or Rio Tinto.

All the best, Si

You might be interested in the change in share price of the companies in my HYP, and see what has done best since Jan 1st.

Epic     Change    Yield 
S32 42.63% 2.58%
BP. 41.41% 4.34%
IMI 40.86% 1.40%
RDSB 38.16% 3.15%
LLOY 31.53% 2.65%
SGRO 26.64% 1.88%
MKS 26.58% 0.00%
AV. 24.66% 5.28%
DGE 23.44% 2.05%
AZN 22.92% 2.27%
KGF 20.53% 2.86%
BA. 19.84% 4.21%
TSCO 16.83% 3.32%
BT.A 10.78% 5.26%
CPG 10.42% 0.00%
UU. 9.79% 4.40%
PSON 9.44% 2.67%
LGEN 6.76% 6.29%
ADM 4.54% 8.08%
GSK 3.79% 5.72%
SSE 3.63% 5.22%
SMDS 2.99% 3.15%
BHP 2.57% 11.36%
NG. 2.53% 5.52%
BLND -0.06% 3.05%
IMB -0.55% 9.11%
TATE -0.65% 4.61%
PHP -0.72% 4.10%
MARS -4.96% 0.00%
BATS -6.19% 8.50%
RIO -6.75% 14.07%
VOD -7.59% 6.97%
IGG -9.34% 5.56%
TW. -9.62% 5.55%
ULVR -12.00% 3.86%
RKT -16.66% 3.18%

Av.Chg 10.23% 4.51%
You can look at PE Ratios yourself, I have shown the yield of each share at the moment, although BT.A is based on what they have indicated is to come.

TJH

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Re: Time to get cautious?

#449400

Postby scotia » October 11th, 2021, 8:58 pm

I think that inflation is very likely - but will it affect interest rates? With huge government debt, the last thing the government wants is an increase in the cost of servicing the debt. Didn't Boris make some throw-away comment that he wasn't concerned about inflation. Was it a suggestion that he has no intention of taking any actions to curtail inflation - i.e. no intention of raising bank rate. OK - I know that he is currently not in charge of setting bank rate - but he could always reverse Gordon Brown's action, and return the setting of the rate to himself. And he can blame it on Covid. And in most of the developed world the same quandary exists - huge government debt, and a desire to minimise the cost of servicing it.
So I'm not sure that we are going to see much pressure on equities. Perhaps I'm being complacent, but currently I'm not altering my inaction strategy.
PS - I'm not into Bonds, although I'm maintaining a reasonable cash buffer.

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Re: Time to get cautious?

#449451

Postby Adamski » October 12th, 2021, 6:38 am

Agree totally caution a good thing cause markets seem frothy.

As well as holding more mixed investments, I've increased China holdings. They've had correction 2021 of 25% already, so arguably bad news is priced in.

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Re: Time to get cautious?

#449453

Postby Urbandreamer » October 12th, 2021, 7:27 am

AsleepInYorkshire wrote:How have "we" decided inflation is going to take off? Are we correct? How can we possibly know?


Well if we look at recent history we can see how the price of certain goods, commodities and services have risen. We are aware of supply restrictions in the logistics train. Supply restrictions lead to some form of rationing and in absence of state dictate such rationing is achieved by price rises. We are aware that the supply restriction is caused by a lack of trained and tested people, but training and testing has it's own restrictions,
These are all things that HAVE happened and are happening.

You don't need a Cray supercomputer for rocket science (it dates back before computers were an industry) and this isn't even rocket science.
There IS inflation. Many central bankers claim that it will be transitory, but honestly would you expect them to say otherwise?

AsleepInYorkshire wrote:If you need to live on £2.5K per month in retirement the obvious way to protect that income stream is to make sure that the pension pot can suffer a 50% drop and still give you £2.5K per month. Alternatively have 2-3 years cash in the bank to allow market corrections to pass you by without taking from your pension pot?

There are ways of protecting your pot against downside without trying to time the markets. And if you're trying to retire too early and before your pot can protect your income then you may wish to reconsider your plan.

That's what I've decided and that's what I am doing.

I wish you luck in whatever you decide to do.

AiY


I too wish you luck. Myself I take the view that the one thing that is universally affected by inflation is cash, so would ideally like little. Certainly less than 2 years worth on hand. Those who have debts may even benefit, as would those issuing fixed interest securities.
I shall look at what and how companies are being effected by inflation. I doubt that my shares in Deagio, Unilever or Astrazenica will have their profits badly hit.
I think that an earlier post raised the question "at what point does asset allocation become timing the market".
I would argue that "timing the market" should only be considered by and of those who buy and sell the entire market. The rest of us try to position and reposition our holdings based upon current and predicted future events. We are seldom 100% right in our predictions, but I honestly think that more than 50% of those who try manage to predict the future tolerably well.

I started to become concerned about inflation back in May with the large increases in prices in iron ore, Aluminium, wood etc. I didn't expect problems with finding wait staff, lorry drivers or the increase in the price of gas. Tell me, are you sure that the evidence doesn't at least hint that there are probable causes for inflation?

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Re: Time to get cautious?

#449462

Postby JohnnyCyclops » October 12th, 2021, 9:08 am

Adamski wrote:Agree totally caution a good thing cause markets seem frothy.

As well as holding more mixed investments, I've increased China holdings. They've had correction 2021 of 25% already, so arguably bad news is priced in.


Depends how one measures 'froth'. P/E ratio often used. Here's the FTSE100 and 250 (links below). Scale out to three years. I believe the significant drop in summer 2021 is the result of firms reporting improved earnings (against the prior year), and the spike early 2021 was the effect of reporting worse earnings in 2020 (Covid). I.e. the PER isn't changing due to large price movements so it must be the rerating of earnings.

So, FTSE100 PE currently ~15. Is that 'frothy'?

FTSE100 : https://markets.ft.com/data/indices/tea ... =UKX.p:FSI
FTSE250 : https://markets.ft.com/data/indices/tea ... =MCX.p:FSI

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Re: Time to get cautious?

#449463

Postby JohnnyCyclops » October 12th, 2021, 9:14 am

scotia wrote:I think that inflation is very likely - but will it affect interest rates? With huge government debt, the last thing the government wants is an increase in the cost of servicing the debt. Didn't Boris make some throw-away comment that he wasn't concerned about inflation. Was it a suggestion that he has no intention of taking any actions to curtail inflation - i.e. no intention of raising bank rate. OK - I know that he is currently not in charge of setting bank rate - but he could always reverse Gordon Brown's action, and return the setting of the rate to himself. And he can blame it on Covid. And in most of the developed world the same quandary exists - huge government debt, and a desire to minimise the cost of servicing it.
So I'm not sure that we are going to see much pressure on equities. Perhaps I'm being complacent, but currently I'm not altering my inaction strategy.
PS - I'm not into Bonds, although I'm maintaining a reasonable cash buffer.


Inflation can help erode debt. I recall friends' parents in the late 1980s when I was a teenager saying how their monthly mortgage payment, likely toward the end of its 25 year term from the 1960s, was then a trivial amount compared to their wages. What had started out as a material debt and monthly payment two decades earlier was helped along by inflation. Anyone borrowing since 2000 has not seen anything like that - chiefly in wage inflation.

I understood inflation can also help governments with debt/bonds, that will be cheaper to service and redeem in xx years/decades time.

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Re: Time to get cautious?

#449465

Postby Adamski » October 12th, 2021, 9:19 am

JohnnyCyclops wrote:Depends how one measures 'froth'. P/E ratio often used. Here's the FTSE100 and 250 (links below).


I was thinking the US market being overvalued which is 56% of world, and everything else follows.

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Re: Time to get cautious?

#449478

Postby JohnnyCyclops » October 12th, 2021, 10:08 am

Adamski wrote:
JohnnyCyclops wrote:Depends how one measures 'froth'. P/E ratio often used. Here's the FTSE100 and 250 (links below).


I was thinking the US market being overvalued which is 56% of world, and everything else follows.


This one, perhaps?

https://www.multpl.com/s-p-500-pe-ratio

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Re: Time to get cautious?

#449482

Postby simoan » October 12th, 2021, 10:36 am

JohnnyCyclops wrote:
Adamski wrote:
JohnnyCyclops wrote:Depends how one measures 'froth'. P/E ratio often used. Here's the FTSE100 and 250 (links below).


I was thinking the US market being overvalued which is 56% of world, and everything else follows.


This one, perhaps?

https://www.multpl.com/s-p-500-pe-ratio

Interesting chart. Especially that it shows that the best time ever to buy the S&P500 was in May 2009 when the PER was off the scale! This is why I don't buy this lazy sell PERs over 25 and buy those on 12-13 if you think inflation will take off nonsense. Because those companies now on PERs of 12-13 have traditionally been on PERs of 6 or 7 in more normal times i.e. higher interest rates, just as those on 25 plus have been on PERs of 10-20. If inflation takes hold and interest rates follow, everything will re-price, there will be no hiding place. Wait for someone to call it the end of equities and then start buying again :)

And yet people openly state that cash will be a bad place to be? This doesn't make sense to me: why would you be happy to face a 40-50% loss to your capital in a situation where cash is only losing 4% of it's purchasing power per year and cash interest rates are rising? I must be really thick!! I'll just have to content myself that I'm in the same wrong camp as Warren Buffett then...

All the best, Si

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Re: Time to get cautious?

#449494

Postby Urbandreamer » October 12th, 2021, 11:38 am

simoan wrote:And yet people openly state that cash will be a bad place to be? This doesn't make sense to me: why would you be happy to face a 40-50% loss to your capital in a situation where cash is only losing 4% of it's purchasing power per year and cash interest rates are rising? I must be really thick!! I'll just have to content myself that I'm in the same wrong camp as Warren Buffett then...

All the best, Si


Well as someone who argued against cash I feel that I have to respond.

Taking your last point first:
It would seem that Mr Buffet argues that you should actually invest during periods of inflation.
https://www.startribune.com/warren-buff ... 600069973/
Either in solid companies or inflation linked government bonds.
NOT, no definately NOT traditional bonds.
"Bonds are not the place to be these days,"

As for losing 40% capital when cash is only losing 4%, many experianced this when cash was losing less than 2% in 2020. Surely that argument is that equity investments should never be made.

I confess that a preference for the certainty of losing money rather than a risk of gain or loss doesn't make sense to me.

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Re: Time to get cautious?

#449501

Postby simoan » October 12th, 2021, 12:05 pm

Urbandreamer wrote:
simoan wrote:And yet people openly state that cash will be a bad place to be? This doesn't make sense to me: why would you be happy to face a 40-50% loss to your capital in a situation where cash is only losing 4% of it's purchasing power per year and cash interest rates are rising? I must be really thick!! I'll just have to content myself that I'm in the same wrong camp as Warren Buffett then...

All the best, Si


Well as someone who argued against cash I feel that I have to respond.

Taking your last point first:
It would seem that Mr Buffet argues that you should actually invest during periods of inflation.
https://www.startribune.com/warren-buff ... 600069973/
Either in solid companies or inflation linked government bonds.
NOT, no definately NOT traditional bonds.
"Bonds are not the place to be these days,"

As for losing 40% capital when cash is only losing 4%, many experianced this when cash was losing less than 2% in 2020. Surely that argument is that equity investments should never be made.

I confess that a preference for the certainty of losing money rather than a risk of gain or loss doesn't make sense to me.

My point is that cash is fungible. I didn't say it should never be invested, it provides optionality as Buffett correctly points out. This idea that you are losing out by holding cash is a dogma that is driven by the investment industry in its own self-interest i.e. they make no money if you hold cash in a zero interest rate environment and not actively investing. Most people have never invested in an environment of high inflation and so are merely re-iterating this rhetoric they have had pushed down their throats by their brokers and lazy economic commentators in the media.

If the alternative to cash is to invest money in equities regardless of the short term outlook and valuations, purely because of fear of inflation, then that makes little sense either. I read just now that the top 5 constituents account for 24% of the S&P500 index. I think we all know which companies they are and what valuations they are on, and that lack of breadth within such a major index is a dangerous situation IMHO.

This is not the toss of a coin. If you feel inflation and interest rates will rise then the odds are heavily stacked towards a significant pull back in equity valuations. This is about risk/reward and IMHO cash is not the worst place to be if you feel this is the case. Far better than to keep pumping money into the market regardless in the presence of such uncertainty.

All the best, Si

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Re: Time to get cautious?

#449503

Postby absolutezero » October 12th, 2021, 12:18 pm

monabri wrote:Is there some risk level that we ( Lemons) understand or are concerned about that the market hasn't already priced in?

The politics of interest rates rising by even small amounts need to be considered....what effect would that have on the housing market ( I've sold out of Taylor Wimpey as I can see margin erosion from labour & material cost increases and pressure on affordability from any inflationary increases). Which is more likely, the BoE jacking up interest rates by 1% or in a series of smaller increments ( say 4 x 0.25%).


The 'consensus' I have seen reported is an increase of 0.15% by the end of this year.
I think that was from Gloomberg.

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Re: Time to get cautious?

#449510

Postby dealtn » October 12th, 2021, 12:31 pm

absolutezero wrote:
monabri wrote:Is there some risk level that we ( Lemons) understand or are concerned about that the market hasn't already priced in?

The politics of interest rates rising by even small amounts need to be considered....what effect would that have on the housing market ( I've sold out of Taylor Wimpey as I can see margin erosion from labour & material cost increases and pressure on affordability from any inflationary increases). Which is more likely, the BoE jacking up interest rates by 1% or in a series of smaller increments ( say 4 x 0.25%).


The 'consensus' I have seen reported is an increase of 0.15% by the end of this year.
I think that was from Gloomberg.


I think the interest rate cycle is extremely unlikely to last 6 weeks or so though. Quite possible the first hike won't have come by then.

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Re: Time to get cautious?

#449515

Postby absolutezero » October 12th, 2021, 12:57 pm

dealtn wrote:
absolutezero wrote:
monabri wrote:Is there some risk level that we ( Lemons) understand or are concerned about that the market hasn't already priced in?

The politics of interest rates rising by even small amounts need to be considered....what effect would that have on the housing market ( I've sold out of Taylor Wimpey as I can see margin erosion from labour & material cost increases and pressure on affordability from any inflationary increases). Which is more likely, the BoE jacking up interest rates by 1% or in a series of smaller increments ( say 4 x 0.25%).


The 'consensus' I have seen reported is an increase of 0.15% by the end of this year.
I think that was from Gloomberg.


I think the interest rate cycle is extremely unlikely to last 6 weeks or so though. Quite possible the first hike won't have come by then.

https://www.bloomberg.com/news/articles/2021-10-10/boe-officials-double-down-on-signals-of-an-imminent-rate-hike
https://www.bloomberg.com/news/articles/2021-10-11/pound-bears-are-doubling-down-as-rate-bets-drive-growth-worries


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