Exasperated observers -– probably those who have made the wrong bet — often claim that markets are incapable of absorbing more than one important thing at a time. Well, inflation was so last Wednesday. Now it’s all about the earnings. The macro guys hand the baton to the micro. Top down to bottom up, allowing the stock pickers to take the spotlight.
For Terry Smith, one of the City of London’s most high profile fund managers, equity investment is straightforward: “Buy good companies, don’t overpay, do nothing”. It’s a mantra that has encouraged some to describe the star fund manager as Britain’s Warren Buffett – a sobriquet that has made his flagship Fundsmith Equity fund, worth some $27 billion and with 74% exposure to the U.S., particularly attractive to retail investors. And it’s this stoic approach which Smith says is all the more important during the current troubled times, when investors may be encouraged to bail out of good companies just because their share prices are struggling.
“In inflationary periods, an acronym which is sometimes used to describe the investment options is TINA — There Is No Alternative,” writes Smith in his latest letter to investors. “It refers to the concept that equities will be the least poorly performing sector in such conditions because of the ability of at least some companies to continue to grow revenues in real terms and generate real returns on capital above the rate of inflation.” Bonds with fixed income are not now the place to be, he says. Real estate might offer some safety but offers poor liquidity and high trading costs. Commodities have done well of late, but he is wary that they offer no inherent return, with no interest coupon, dividends, or profits reinvested. “Investing in them is pure Greater Fool Theory — you can only make money by selling them to someone willing to pay more than you did. I have no confidence in my ability to accomplish that. All of which may point to the fact that There …