This a transcript of David Kuo's podcast with David Stevenson.
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David:
This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today we are delighted to welcome David Stevenson, the adventurous investor in the FT at the weekend. Welcome, David.
DavidS:
Hello there.
David:
That's not your only job, is it, David?
DavidS:
Oh yes, no, unfortunately I also get dragged in to do a column for Investment Week, which is the big trade journal, where I'm the licensed annoying one, the contrarian, and I do lots of stuff for the IC, the Investors Chronicle, and my SIPP gets flashed over the IC every month, and loads of other stuff, lots of articles annoying the industry.
David:
That's actually where I remember you from, from the Investors Chronicle, and I am completely addicted to the stuff that you actually write on that. But the thing that's perplexed me really is, your investing strategy – now, can you describe your investing strategy for the benefit of our listeners?
DavidS:
Well (a), I suppose, I put it out to publication every month, so that you can have a good look at it, and have a good laugh, I do; (b), I suppose my SIPP is only one part of a wider variety of funds that I run, so the SIPP is the visible bit, and probably the most cautious bit, but I also have got monthly savings plans, there's loads of investment trusts, I'm a big investment trust person, I've got accounts where I invest in a monthly basis with ETF, so when people see the SIPP, the SIPP is only one part of what I invest in. And the third thing I'd say is, I don't have one particular strategy, and I think actually good investors don't have one particular strategy, they mix and match strategies depending on the market.
David:
Maybe you should relabel yourself as the "chameleon investor"?
DavidS:
And a sort of change of colour – an investor for all seasons!
David:
Yes, so I mean, going back – how important do you think it is to have an investing strategy?
DavidS:
Or strategies?
David:
Or strategies.
DavidS:
I think the thing is to work through whatever your strategies are and be consistent, but be flexible, so it's no good, for instance, let's take a good example: value investing over the last couple of years has been a dreadful strategy, if you'd have basically gone long on a lot of devalue stocks, you'd have been murdered, basically, so value investing doesn't always work; value investing, I think, could work brilliantly, and has been working brilliantly in the last few months, and I think work very well in the next few years.
In volatile markets, for instance, you might want to have a strategy that favours income or dividends over anything else; in a bull market, for instance, you might begin to slightly shift your focus to slightly more growth-orientated stocks, but be cautious about how you do it. The point is, it's to understand where the market is, and to evolve your strategy.
Now, that's radical thinking for some academics who think you can just buy and hold, stick a bunch of money in shares, a particular style of share, and stick with it through five, ten, 20, 30 years, and I'm not knocking that, I think for most investors who haven't got the energy, the time or the disposition to research the market and research stocks, that is a good strategy, but I think for those of us who take an active interest in the market, we maybe fooled or beguiled by our own judgement and wisdom into attempting to understand how the market's moving.
David:
Now the thing is, in an earlier podcast we had Stephen Bland, who is probably, as far as I'm concerned on the Motley Fool site, one of the biggest proponents of value investing. Now, he will shoot me if I don't sort of try and defend his corner. Now, the whole point about value investing, he said, you need to be patient, don't you?
DavidS:
Yes, absolutely, yes.
David:
And the thing is, he says, you know, if you haven't got that kind of patience, then you really shouldn't be in value investing, it may take years for the value to be outed.
DavidS:
Absolutely, and I think that point is is, that you could even be consistent with value and have it as a small part of your portfolio, so I tend to try and have about 40 to 50% of my portfolio orientated, I don't know whether it'll succeed, towards value stocks, but then mix and match other things in. I think the point is that, particular styles or strategies of investment and shares go in and out, and you've got to be aware that, although value investing, if you're persistent, can succeed, you have to always sit there and question what happens if value ain't going to work in the future?
And what happens if the well-observed phenomena that value does work (and I agree, I think it does), what happens if, and lots and lots of other people have worked that one out, and there are many people smarter than both you and I who pay millions and millions of pounds to run hedge funds to run value strategies – what happens if by their actions they have effectively ironed out the kink in markets, and so therefore that thing that was called value no longer exists. Now, I don't think that's true, but you have to be aware that that may be true, and if your entire strategy is built on one simple observable phenomena, which is that by and large buying cheap stocks is a pretty good idea of the long term, if that strategy doesn't work, you're stuffed.
David:
But that is why value investing is so difficult, because you are trawling through the entire market looking for one particular share that you believe is …
DavidS:
Well, a collection of shares, but yes.
David:
But in some cases, it may only be one?
DavidS:
One or two, yes.
David:
One or two shares that has been mispriced by the market in some way.
DavidS:
Although there is an interesting – because that's where of course, because all of these things are about schools of belief, and different people have different views, you talk to somebody like Rob Arnott, who's a very famous American financial analyst who runs a series of indices based on value investing, and he will say, actually you shouldn't be picking one or two shares, that you should be weighting the basket of shares that you hold towards their, he calls it their economic footprint, but what he's actually trying to say is, value, which is, you weight the basket of shares you hold towards the cheaper stocks, and so even within the great school that is value investing, there are many many different views about how you should do stuff, so the individual stock pickers who go out there, and I'm probably closer to that group, who spend a lot of time looking through stuff, I spend a lot of time looking at closed end funds, I'm a big fan of investment trusts and funds, and I will look at the discounts' NAV and I will look at the management, look at where I think the value is, and spend a lot of time, and I might only buy two or three of them – that's very different from the fundamental indexers who go off to use fundamentals to buy a basket of shares, but they're all value investors.
David:
Now, the thing that I remember you for, and I still do remember you for, is managing your own pension fund – you have this SIPPs column in the Investors Chronicle. Now, how easy is it for the private investor to manage his or her own pension funds through a SIPPs?
DavidS:
The nice and easy way is to say that everybody could do it, the truth of the matter is, I'm not too sure it is the case. (a), I think I wrote in the FT only a couple of weekends ago, that it depends on the amount you're going to put in your SIPP, because it's cost, SIPPs are costly, you have to pay for them somehow or other, and if frankly you're not going to put in more than about £50,000, unless you're with a very low-cost provider who's willing to effectively subsidise cost, it's not worth doing a SIPP, because frankly the costs will just make it pointless.
David:
So what should these people do then? – just give it to a pension company to look after?
DavidS:
Well I suppose arguably they should go and talk to their financial advisor, and take pot luck whether or not they get a financial advisor who cares about investment. Actually I think we underestimate, I mean I used to have a stakeholder pension and a good stakeholder pension that invests in index tracking funds is no bad thing, if you get a cheap stakeholder pension that puts its money in index tracking, the FTSE-All, American MSC World, and emerging markets there's nothing wrong with that, there is nothing wrong with that for people who can't be bothered to spend the time to research the markets, and I think that's the broader point here, which is if you are going to be self-directed as a SIPP investor, Self-Invested Personal Pension plan, so it's self-invested, self-directed, then you've got to have a good idea of what you're going to do and be willing to stick with it, and be willing to do the research and to always do the research and constantly be alert to what's going on out there, because unless you're going to use your SIPP, and some people do use it as a repository where they stick loads of ETFs in, and just go with it, and that is a strategy, and I'm not knocking that, and I think for many investors that is quite a good idea, but most investors don't do that, most investors go, well I have a self-invested personal pension plan, and I'll stack it full of individual stocks, and I'll go around stock picking, and I would simply argue that that is a dangerous strategy unless you know what you are doing, and the behaviour of the economics suggests to us that most people don't know what they're doing.
David:
It sounds to me as though you're a big fan of exchange-traded funds, or trackers?
DavidS:
Yeah, I am.
David:
But how do you reconcile that with the fact …
DavidS:
Value.
David:
… well not only value, but with stock picking at the same time?
DavidS:
Absolutely, and I do reconcile it, because I think, I adopt an approach which is common in institutional circles, which is the core satellite approach, which is that I will try and have a core which is basically, I'm not trying to outguess the market, because I fundamentally don't know and arguably don't care really, to be truthful, in the core, and then I'll have a satellite where I will build value and other things. I am interested in more adventurous global ideas, I do think that a judicious investment in, I don't know, things like frontier markets or commodities well managed, properly done, is a good idea, it's about diversification, another very prevalent idea. So a core satellite approach can have a core which is index tracker, you're fundamentally taking no view about picking individual shares in the market, and a satellite where I might take a variety of different approaches, including devaluing.
David:
Did I hear you say just a few minutes ago that you don't believe you can time the market? – is that what you just said?
DavidS:
Well, here is the kind of irony …
David:
Because people are looking at you to time the market – that's why they buy your magazine?
DavidS:
I suppose it depends how you use the word "time", and here comes the crux of it, because I fall into line with people like James Montier, and some of the value boys, he's an analyst who was at SocGen, he's now at GMO, and James and quite a few other people maintained that you can, what I would call, strategically time the market, and all that simply means is, you can say overall the market's toppy, and I am going to scale back my exposure and be careful, and you could use very simple measures which is, a complex term used which is called cyclically adjusted P/E, which is basically you iron out the PE ratio of the market over a ten year period, and when that is basically very toppy, ie, one standard deviation above its average, the market's expensive, and by and large most times, pretty soon after that happens, the market starts to fall.
Now that is extremely different from using technical analysis, and saying at the moment my Fibonacci charts, or whatever it is, say that the markets are, you know, and you'll go in and out of the market and I hold, look, Dominic Picarda, who does a lot of TA analysis, is very good at it, and sure, if you're very good at it, you can do it, I don't know one end of a Fibonacci from another end, and I'm not very good at technical analysis, and I think that I would judge my interventions into the market very very carefully, and there might be one or two big moves over two, three years, and I suppose my position at the moment is, I am cautious at the moment on the market, because like quite a few other bears, I think that the recovery that is being talked about, the green shoots, are very tenuous, very precarious, and although I've increased my equity exposure, and I am slowly increasing it towards value opportunities, so in a sense one bit of the timing equation has said, OK, you must start to invest in the market, but I'm extremely reluctant to go 100% equity invested, because I don't trust this market.
David:
OK, so if the market were, in your view, looking exceedingly toppy, would you then short the market?
DavidS:
Yes.
David:
That is part of your strategy therefore?
DavidS:
And there I do fall into the market timing track - absolutely, I'll accept, at that point I would be called a much more classic market timer, but I would only argue that actually traditional value investors, I mean Ben Graham, who's the doyenne of value investors, he was a very aggressive shorter, admittedly of individual stocks, he's very aggressive short term, when he's basically said, if something is ridiculously over-priced, short it, and I think I'd simply take that analysis – when you think an overall market is ridiculously over-priced, there is nothing to be lost by shorting it – but, what you shouldn't do, well I don't do, sorry, if you're a great TA guy you can do it, but I'm not – you shouldn't be sitting around shorting it week in, week out, move in, move out, move in, move out, because you're on a hiding to nothing, you'll get killed.
David:
So what are your views about income investing then? – are you a fan of income investing? – do you see income investors like myself as being a bit of a wimp?
DavidS:
No, not at all, and in fact I've got a very heavy bias towards income investing at the moment, and the reason for that is, it goes back to my view about markets, is that I think we're heading into a very volatile, very choppy market over the next two or three years, because I think the green shoots will be extinguished quite quickly in the face of interest rate rises into tax rises, and the kind of long-term deleveraging that has to happen, which means that the developed world markets are going to have very choppy sailing, so they'll shoot ahead, they'll stall, then they could fall rapidly, then they could rise again but they could fall rapidly, and Tim Bond at BarCap puts it very nicely, which is he says, he's one of their big asset allocation gurus, and he says that you should be getting used to, if you look at it as a graph of signals, it's lots of very big choppy signals going up and down, and you've got to be very careful about how you play that kind of market, and actually one of the few ways of playing that market, unless you're a market timer, in the traditional sense of the word you'll get into something when there's a rally, and get out, and I'm not that kind of investor; one of the ways of doing that is to go income investing, because if you get that dividend pay cheque through year in, year out …
David:
You don't really care, do you?
DavidS:
You don't care, you're riding the dividend wave, and actually I think that's produced some fixed income as well, so I've been buying some fixed income stocks where I think the yield …
David:
What – you're talking about bonds, are you?
DavidS:
Well actually, I've been buying a lot of preference and perpetual subordinated bonds and PIBS issued by building societies.
David:
Is that quite easy for private investors to do?
DavidS:
Not quite easy, it's easy, it's not a doddle.
David:
Can you do those through ETFs as well?
DavidS:
No, in fact I've been quietly lobbying in the background for somebody to get a collection together of prefs in one ETF or fund or something so that you could buy them, because at the moment you are forced to individually pick prefs and PSBs, and be very very careful, even within that argument there are shades of grey, and what I mean there is that I'm very interested in the high end yields, the high end yields at the moment, where I think that you could take a view on the credit risk, and so I'll be honest, what I've been buying, I've been buying Lloyds Bank prefs, fundamentally because I believe that the Government will not destroy the equity in Lloyds, I think it's in the Government's interests to create equity in Lloyds, so they can sell it, and if they're going to create equity they're hardly going to destroy the prefs, because they're the next in line in terms of who gets a claim on assets, and so what I personally think, with 13 – 16% yields, I think that's not a bad bet, because I think you'll get your money back.
I don't necessarily think that's true for all building societies, because I think it's a very strong case to think that, as this recession grinds on, and as the mortgage book and the commercial book takes bigger and bigger debts, that actually more building societies will be in trouble, and they'll be rescues of more building societies – we've seen it already, and I don't think that building societies paradoxically are that safe, but I do think that the very very big banks, with their bank debts and their hybrid debt with prefs, are safer than other things. So I'm not saying I'd bet the bank, so to speak, on them, but I'm starting to nibble in, getting a 13, 14% yield here, buying utilities, by buying utilities – I think they're undervalued at the moment.
David:
Because Nationwide is looking increasingly more like a vacuum cleaner at the moment.
DavidS:
Yes, exactly.
David:
They're just going round hoovering up all the small building societies.
DavidS:
And arguably that's at the lower … I mean I've been looking at Nationwide PIBS and prefs and PSBs at 11, 10.5% yields. Actually I think that's at the lower range, because I don't think it's rewarding me with as much – I want to be rewarded for the risk I'm taking by investing in this stuff, and frankly, if I could get long-term ten year gilts at 4%, 4.5, and I think it'll be 5% by the time we've finished with this, I want a lot more than 5% to reward me for the risk of investing in this stuff, so 10% is about the minimum, I'm looking for stuff that's 12 or 13% where I think the credit risk is decent.
David:
So one final question before we end, and that is, outside of the UK, and certainly Europe and America – which countries do you think investors should be focusing on to try and get some of the best returns at the moment?
DavidS:
I mean I do buy the emerging market story in aggregate.
David:
You don't think China will drag the rest of the western world out of recession?
DavidS:
I'm very very ambivalent on China, and I've just got an article coming in the IC effectively slating all those who think China is going to be the great white hope.
David:
But the savings ratio is China is enormous, it's about 50% savings ratio?
DavidS:
So the bad debt provision's enormous as well, those guys are sitting on vast vast losses, so they need to save a lot to cover those losses. What I'd say is, I'm wary for most investors of taking an individual pick on countries, although even I can see …
David:
China's a big country.
DavidS:
… exactly, even I can see China, and to a lesser degree India, are, it's difficult not to take a national bet, I accept that.
David:
Name me one country that's got GDP growth of over 5% at the moment, anywhere in the world?
David:
Yeah, but (a), if we believe the stats, which I don't, and I'm not the only one who doesn't, and (b), 5% ain't enough for China, with its demographic growth and its movement of people into the urban areas, it has to run at 6% to be able to effectively, for what we mean by real growth, and at 8% it's only just covering it, and I look at other things – I mean, I accept China as a growth story, I think you'd be ducking your head in the sand if you don't accept that, but I don't think it's a straightforward equation to say, China's a great growth story, therefore its shares or equities are a great growth story, because Chinese shares are, even the ones listed on the west, are riddled with corruption insider track, collapses in the company, delistings – it's a horrible business, and even the stuff that's mainland listed because of the classes, you don't get full ownership rights, and therefore I don't think it's a straightforward read through from saying, economic growth, which I don't doubt, long term, of course, I accept that, but to saying the equities will inevitably do well – I think equities in China are effectively a kind of option on Chinese growth, and frankly, that's saying you might want to invest in an ETF to invest in China or an actively managed fund, I accept some logic there; but my broader point is, in aggregate emerging markets, in aggregate, are undisputably the place where growth is going to be over the next ten to 20 years, and I think some allocation – I personally would maintain that active has some value in emerging markets, because I think you've got to be very careful with emerging markets, but I would say some allocations to emerging markets, and probably beefed up allocations to emerging markets, is sensible, even for cautious investors.
David:
As someone who is half Chinese myself, I am actually very defensive on China!
DavidS:
I'm a bit of a China bear, unfortunately! You've got the wrong person here.
David:
I'm a China bull! Well, thank you very much for coming in today, David.
DavidS:
Pleasure, thank you David.
David:
I think it's been absolutely enlightening, and I think – what's your final piece of advice for private investors out there, at the moment? – apart from just keep your fingers crossed and just hope everything's going to be OK?
DavidS:
Well, I actually, oddly enough, think that when we look back at this next five to ten years, from the vantage point of hopefully my retirement with my SIPP having done well, which is a bit of a gamble, we will look back and think actually these could have been some of the best markets we've had for 10 to 20 years. I genuinely think that we're at the moment, we're overwhelmed by worries about the economy and worries about debt, and I'm not underestimating them for one minute, but I do think oddly enough some of the foundations are being laid, globalisation, the inevitable shift to emerging markets, the new infrastructure that has to be built in emerging markets, the growth of domestic consumption markets in emerging markets, and also the new carbon light economy – we have no choice, we have to re-engineer and retool, we don't have a choice, and oddly enough this huge splurge of money that's going to have to be spent over 10, 20 years could be a fascinating time to be an equity investor, because all of that stuff is risky, and it will require risky assets, and equities are the risky asset of choice, so I think we'll look back at this over the next 20, 30 years, and think, this was a great time to invest, but do not think it's a slam dunk over the next two or three years, do not think, hey, the market's really beaten up, that's it – only one way is up, because I think we're into a choppy, volatile market, and I think, unless you're a brave investor who's willing to take calls on stuff, I personally would sit it out, I would invest in dividend stocks, I'd look at income, look at getting some stability in your investment returns, be very cagey – unless you're willing to be brave.
David:
That's wonderful, well thank you very much for coming in today, this is probably a good time to actually read my quote for the day, because I have this quote that I think sums up the podcast, and I found one today from Mickey Rooney, of all people. Mickey Rooney says, "You always pass failure on your way to success" – I mean that kind of sums it up, doesn't it? – that we are going to have a lot of failure before we're going to get success again?
DavidS:
Yes, absolutely, yes.
David:
OK, so this has been MoneyTalk, he has been David Stevenson, I am David Kuo, and if you have a comment about today's show, you can post it on the MoneyTalk blog, which you can find on the front page of fool.co.uk. Now, if you want to email me directly, you can do so at moneytalk@fool.co.uk.
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