Quotidian Investments Monthly Commentary – February 2022
In our monthly report for January we made some rather pointed comments about equity market-makers in the USA and questioned the integrity of a number of them. For any readers who may have thought that we were suffering from a fit of paranoia and thereby being unduly unkind to that (less than) straightforward body of individuals and the investment banking organisation they represent, it was interesting to listen to an announcement from the Securities Exchange Commission (the USA’s financial regulators) on 15th February.
The SEC announced that it intended to investigate the actions of Goldman Sachs, Morgan Stanley (and other market makers yet to be specifically named) in connection with giving prior warning to ‘favoured clients’ in advance of their placement of vast ‘block trades’ and the consequential severe markdown in equity prices (particularly in the tech-heavy Nasdaq market) which began on the first trading day of the year and has continued to dog US markets ever since. Clearly we weren’t alone in recognising a fairly blatant and obvious example of market manipulation.
The SEC’s eventual findings will make interesting reading although, if any supporting evidence does come to light and guilt is proven then it will probably only result in eye-watering fines being imposed rather than a much more robust and effective regulatory regime being established. Until then, just another quiet day for the unscrupulous to earn a dollar in Wall Street whilst the concept of utmost good faith continues to be ignored.
Much of this month’s report had already been written by the time that Vlad the Invader made his uninvited and unwelcome intrusion into Ukraine. As you would have seen, the immediate effect from the financial perspective was to send already-nervous and twitchy global equity markets in to a tailspin. We thought long and hard as to whether to include investment performance figures in this month’s report and, in the end, whilst we saw little virtue in providing numbers that are clearly based on entirely false markets, we decided to include them with the following caveat:
As you can imagine, following the massive across the board falls in equity markets all around the world the figures as they currently stand are meaningless and not to be taken seriously. History clearly indicates that, after the dust has settled and the knees stop jerking, market prices will rebound within the following three months to reflect their more normal relationship with valid and authentic economics.
As Theodore Roosevelt said at a time when the USA acted as the world’s policeman: the needful in order to get one’s enemies to listen and obey was to speak softly but carry a big stick. This dictum has worked for much of the past 70 years or so (with the exceptions of the lightweight past Presidents Carter, Clinton and Obama). Sadly, however, times have changed and the present incumbent Joe ‘The Wimpey Bar Kid’ Biden struggles to speak with any fluency, conviction or authority and instead of a big stick he gives the strong impression of holding just a damp squib.
However, no doubt the world’s brighter, stronger and more compelling leaders together with NATO will waste very little time in making special arrangements to encourage the velocity of what (in his eyes no doubt) would be Vlad’s premature evacuation from Ukraine. In the meantime, the militant wing of the Green Party (ably supported by its massed battalions of woke keyboard warriors) have written in the strongest possible terms to Mr Putin to criticise his uncontrolled carbon footprint and demand a full explanation of the unthinking impact he has caused to global warming.
On 28th February 2022 the FTSE100 index closed the month at 7458.25 (a fall of -0.08% in the month of February itself) and it therefore now stands at up +1.00% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 28th February shows a markdown of -7.68% for the month and it thus follows that the Fund’s year to date figure closed the month at -17.97%.
Of course, no-one likes to see their portfolio go down (even just in ‘on-paper’ value) but, as you all understand, one of the fundamental truths of investing in equity markets is that at least once a year (and sometimes more frequently than that) share valuations will go through a period of correction before moving higher again. We attached historical data onto last month’s report to illustrate and validate that fact.
As you also already know, a correction (particularly affecting US markets) this year was instigated by market makers and began on the first trading day of 2022; it is still ongoing as I write. This most recent markdown in global equity prices was initially generated by deliberately exaggerating inflation fears, then compounded by purposefully misinterpreting the US Federal Reserve’s suggested monetary tightening stance and latterly those anxieties now being further exacerbated by the Russia / Ukraine conflict.
However, in my opinion, these issues have been nothing more than flimsy reasons or excuses used by market-makers to weaponize fear in order to justify excessive markdowns as a short-term means of cooling down what is still a de facto long-term bull market. Their aim is simply to frighten unwary investors into selling at ridiculously low prices in order that the market-makers themselves can ultimately profit from the needless panic they’ve created.
With that in mind, if one considers the reality of long-term equity market investment two obvious thoughts stand out:
It is somewhat naïve to expect that equity markets will always be on an uptrend and, conversely, it is equally unnecessary and unwise to think that a correction or downward valuation in stock prices represents a real financial loss. In fact, it is a relatively brief paper revaluation downwards only and not a lasting phenomenon. The current market situation should, with just a little rationality, lead one to conclude that this is but a short, synthetic interlude and it’s only a matter of time (armed with the courage to grit one’s teeth) before positivity returns. Indeed, it presents a buying opportunity not a mandate to sell.
Consequently, it should also not matter what range of correction or downward valuation your portfolio is currently going through as long as it is broadly in line with what global markets trends are doing generally. The only reason to fret would be if your portfolio was invested in ‘fairy stories’ (ie. those organisations whose equity valuations are based on hope rather than economic reality and are held together with string and sealing wax. In other words, those companies which do not have a past history of strong and sound performance and have no clear pathway to future profitability either should be avoided.
Rest assured that that Quotidian’s portfolio does not contain any such fly-by-night companies; it comprises only solid, durable outfits with a clear-cut and demonstrable history of reliable and superior performance and which can be depended on to sustain consistently above average performance in the foreseeable future.
To add additional substance to that point it is worth noting that the first quarter reporting season saw financial results being issued by all 18 of Quotidian’s current individual portfolio holdings and, of those, 16 of them declared sales and profit figures that exceeded analysts’ expectation (a number of them well in advance of the anticipated numbers) and only 2 fell marginally short. These successes must and will be reflected in share prices when, in due course common-sense returns.
Let me conclude by looking at what we can expect from to the Federal Reserve when it comes to raising interest rates and/or tightening money supply in March. Short-term we will clearly see increases in interest rates all over the world and equity markets may well remain volatile as a result. However, the gross over-reaction from market makers in anticipating and then exaggerating these interest rate moves is likely to mean that this fit of the vapours will probably be not as dramatic as is currently being priced in.
It might also help to reassure you that my commentary is not based just on empty rhetoric. The genesis of what is now the Quotidian Fund saw the Richards family as its first and only investors. From those humble beginnings and thirty-five years later, the Fund has now grown to its current standing by attracting a much larger number of investors who have come to us almost entirely by recommendation from existing clients. We, ourselves, still remain the second-largest investors in the Fund. Thus, whatever is happening to ever-evolving equity valuations and investment performance is happening percentage-wise exactly the same to our own monies as it is to yours.
Courage mes braves.