What is the future for those of us sitting in the cheap seats?
Douglas Chadwick, Founder and Chairman of Saltydog Investor asks what next for markets and explains how he’s looking forward to investing in the Age of Magic in the future
At the time I pen this article President Trump has been ‘in control’ of the largest economy on the planet for over a year. During that time he has signed more than seventy bills into law, most of which were routine and ceremonial in content with a dozen on the subject of space, science and veteran rights. He has been prevented from spending heavily on infrastructure, failed to repeal the Obama Care Bill, and more recently his actions seem likely to lead to a future tariff war.
‘All logic would seem to say that we are heading for a period of extreme volatility and possibly a major correction’
On the positive front he has managed to lower capital gains tax, which in theory and practice will mean more jobs and more tax money as off-shore companies are repatriated back into America. Although this may lead to inflation, and rising interest rates, the average working American will experience better job security and a higher take-home pay. For them, what is there not to like? Mr Trump would seem to be sowing the seeds for a second term of office.
During this period the Dow Jones Index rose from below 21,000 in virtually a straight line to above 26,000, a rise of nearly 25%. Then last month, out of the blue, it experienced its largest ever one day fall of 10% and the question is where to next? All logic would seem to say that we are heading for a period of extreme volatility and possibly a major correction, and where the Dow Jones goes, the rest of the world`s markets by and large will follow.
When we look at the twenty-five year graph of the FTSE100, we can see that for a variety of reasons these corrections do occur. Between 2000 and 2003 there was the bursting of the dotcom bubble, and then in 2008/9 it was the financial crisis. More recently, in 2011, there was the Eurozone crisis and in 2015 it was a panic over China`s growth. We have just experienced another minor roller which might or might not be the precursor of a damaging investment tsunami.
At Saltydog Investor we are confirmed momentum investors using weekly fund and sector performance numbers to assist in our investment decisions. This means there must be a trend to be followed or otherwise we should be sitting with our portfolio in cash.
‘In investing, patience is your most powerful weapon’
It was Jesse Livermore who said ‘The desire for constant action irrespective of underlying conditions is responsible for many trader`s losses.’ In a similar fashion Warren Buffet stated that ‘In investing, patience is your most powerful weapon.’ The experience of these two very successful investors must be worth listening to.
What now for the markets?
Well, we are all in the same boat, and like you we are bombarded by commentary about Cape Numbers (performance index) and VIX numbers (volatility) and articles written by readers of chicken bones, all telling us that we should be able to tell what is going to happen next.
Well we cannot, and nor can they! The only thing we do know that in the past when there have been falls, the recovery time varies from a few weeks to over twelve months and that is a fact. So now is the time to take precautions and reduce your exposure to the markets, or you stay invested where you are and see what happens.
You pays your money and takes your choice, quite literally! For myself I would prefer to give up on a gain to avoid a major loss. At the moment I have my lifejacket on, but I am not yet in the lifeboat!
In our demonstration portfolios we have reduced our exposure to the equity markets and increased the level of cash that we are holding. Our Ocean Liner portfolio, which was launched at the end of 2013, is now nearly 50% in cash.
Looking to the future when what is going to happen with the markets has happened, I am looking forward to investing into the Age of Magic. Five great revolutions have defined the progress of mankind……The Stone Age….. The Bronze Age…..The Iron Age…..The Industrial Revolution…..and recently The Information Revolution.
Now we have Robotics and Artificial Intelligence which will be the sixth revolution to take mankind forward or to its doom! Perhaps this era would be better named the Age of Magic.
‘I have my lifejacket on, but I am not yet in the lifeboat!’
We may not understand how Derren Brown appears to be able to levitate and walk on water, but we do know that it is achieved by misinformation and trickery and so we can rest easy. This is not the case with the advances in technology, such as medicine, robotics, quantum-computing, nano and artificial intelligence sciences. As these are increasingly more complex, they are rapidly becoming more akin to magic for the bulk of the population. Technology is developing faster than education can instruct. Those that can keep up, the whizz kids of today, will become the controlling wizards of tomorrow.
I have been struggling to find those companies and funds that are immersed in the ‘magic’ technologies of the future. It turns out that many of these businesses are getting their development and expansion money by giving up their equity to the likes of FaceBook, Amazon, Alphabet and Microsoft. So by default I am already invested in the ‘magic’ via the technology funds I already hold. Maybe this new equity ownership will be sufficient to fight off the argument of over-valuation and bubbles in these older established information companies. If there is any truth in that, then perhaps today’s technology funds will continue to deliver the goods.
In the meantime Polar Capital has launched a unit trust called Polar Capital Automation and Artificial Intelligence, Smith and Williamson have their own fund, Artificial Intelligence, and Picton have Picton Robotics. Apparently these funds aim to hold forty to fifty businesses all directly working in this world of magic. When the markets settle down these will be funds which I will have a close look at for the future.
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