simoan wrote:I think we need to consider that most equities, and just about all equities at the quality end of the spectrum, have been repriced to give lower future returns in a world where the risk free rate is 0-1%. It is not only the future performance of Fundsmith that will be affected by this. The good news is that the pricing power of the type of companies held within Fundsmith should be less exposed than most should inflation become a problem.
I genuinely can't make my mind up how best to act going forward, so I am currently sitting on my hands. There are very few good companies on reasonable ratings and some cyclical companies have recovered to their pre-Covid level as if the return to normal levels of profitability is already baked in.
Fair points, and I can't add much to that, Si.
Instead, off on a bit of a tangent here that's not
entirely OT, honestly...
I think the events of the past year - including and in particular the policy responses triggered - have created an unusually wide dispersion of possible future outcomes for economies, markets and asset prices. I can see valid arguments for a whole range of outcomes, some polar opposites. For me at least, that's not an environment in which to make strong conviction bets.
Absent strong convictions, an approach of having exposure to "everything" - backing all horses - via some take on the theoretical Market Portfolio, seems a reasonable option. You may not shoot out the lights, but nor are you that likely to suffer a catastrophe.
Avoiding catastrophes can prove very effective as it allows compounding to do its magic over long periods of time, the essence of "get rich slowly", particularly if you can keep your costs low. Interestingly, this is how high quality businesses themselves (the "quality factor" stuff favoured by Terry Smith's funds, for example) operate, and explains how some of these businesses have not only survived for so long but thrived and become such profitable machines.
For quite some time I ran mainly trend-following strategies, which was very effective for me but also hard work and very time consuming; having had my fill, for the past decade I've largely followed my own variant of the market portfolio, tilted certain ways to form what I hope can survive - if not always thrive - "all weather" that may blow in from time to time.
An advantage of investing like this is that it avoids much decision making. Investors themselves are often the weakest link in their own investment plans, so limiting their (your/our) involvement can be beneficial. Decision making becomes particularly hard and error prone during periods of market stress - having a portfolio that requires little in the way of decisions from you can therefore be especially useful during those difficult times.
When your role is confined wholly/largely to monitoring not "doing", with the market at a distance and more abstract, your amygdala is less likely to perceive it as a threat triggering autonomic nervous system responses that you later regret. "If you can keep your head when all about you are losing theirs" etc. As mentioned above, avoiding big mistakes is very beneficial, and a lot easier to do over the long term than to keep throwing bullseyes.
As discussed on this thread, it seems highly unlikely that quality factor portfolios such as Fundsmith Equity can deliver investment returns over the coming decade similar to those in the past decade. Stock analysis can be excellent, companies can perform well, but the returns that an investor experiences during their holding period depends on more than that so might be disappointing. For example, returns over a given period are strongly influenced by initial and terminal valuations; the multiple expansion tailwind of this past decade will eventually reverse and become a headwind. The longer your holding period, the less you may be concerned with initial valuations, but unless you're running a perpetual endowment fund then your time horizon will be finite and multiple expansion/contraction will play a material role in the returns you get.
Despite this potential headwind, quality factor portfolios do have a useful attribute: I think they're easier than some other approaches to "believe in". That is, even if you hold such a portfolio during an unfavourable period when returns prove disappointing, I think that the knowledge of "holding quality" can make it easier to look to the longer term beyond any despondent period and avoid abandoning the strategy; investors often tend to bale at the worst time - that's how market bottoms are formed - just as something is about to begin performing again. "Gotta have faith", sang George Michael