Buffett vs Woodford: Who's Winning On Tesco Plc?

Oh dear - more Woodford worship - I really dont understand this adulation - unless there is some sort of tie up between Woodford and the Fool to promote his funds? I have no problem with that but it would be better if you were open about it if there was.

It just looks like advertising to me.

Woodford didn't sell out of the banks - he hasn't held them since before the banks imploded in 2008.

I think he is wise to remain cautious of the financials; there is much trouble ahead and the share prices of financials are pricing ni much better times than the economies of the world are likely to see.

Once the market's current euphoria, overconfidence, price-chasing and QEterinty wears off, I think the reality of economic fundamentals will kick-in and Woodford's cautious stance in defensive/non-cyclical will be vindicated.

How could we know that Lloyds would bottom at 24p?

In 2008, I can recall investors piling into Northern Rock.
£8....."time to buy, lads!".........£6...."time to buy more bargains; look how rich we can get when they recover"..........£4 "the bottom must be close"......£2........£0.

How can we put a value on banks, when so much of their assets and reserves could be wiped out at the stroke of a Eurocrat's pen?

Woody, Buffett - and myself - focus particularly on the "knowns". With banks and insurers there are too many unknowns both now and many years into the future.

I'd rather "miss out" and buy something which is more transparent, predictable and resilient. I can then make a thorough assessment of what to realistically expect from the company (e.g. a high level of confidence in a 5% yield growing at 6%, as a pension substitute).
I can then decide what I think the company is really worth based on the facts.

Different investors have different styles - like the hare and the tortoise.
Once a portfolio gets to a certain size, or if it has a certain investment objective (such as income) then it may not be desirable to drive it like a formula one race car with the thrill and risk involved in such a style.

I haven't had direct shareholdings in banks since well before the 2007-9 crash and can't see me doing so any time soon.
But it didn't stop my defensively-biased, low-Beta portfolio's net asset value doubling in the last four years and quadrupling in the last eight years.

".....The world goes on, banks have always made money in the long run, people have consumed, manufacturers make things, etc. It strikes me you can only scare people for so long, eventually they decide to simply get on with their lives....."

But look at how much of the last forty years was an economic growth illusion based on borrowing. For the last few years - and for many years to come - the borrowing must be repaid before we can start to spend and borrow our way to riches again.

If debt is not repaid, it must be defaulted (which hits the banks).

If not defaulted it must be devalued (the inflation and rising interest rates would hurt bonds in both nominal and real terms, which form a large part of the "assets" of financials).

As things stand, consumers are maxed-out on debt, under pressure from the rising cost of living from the QE fallout, with little in the way of wage growth while cheap foreign workers are on the scene.
Governments are also maxed out on debt. Once government spending rises above about 35% of economic activity (many Western nations are well above this), and once debt:GDP approaches 90%, economic growth becomes almost impossible.
Japan led the way since 1989/90 and is still a very economically depressed nation.

But we're smarter than the Japanese, aren't we?
Not from what I can see.
The UK - even with "austerity" - is on course to see debt:GDP touch 90% of GDP (the likely point of no return) early in the next parliament.
So we have a choice: go past the point of no return in the next parliament (a point where the debt is so great that it cannot realistically ever be repaid) or we must see eye-watering government spending cuts which will plunge us into a deep recession as the gravy train is cut off to all those who have become addicted to money handouts from the government.

The US and European situations aren't much different.

I think we'll either follow Japan's two-lost-decades example, or we'll follow the inflationary example of the 1970's. Neither bodes well for financials due to their sensitivity to economic activity and to interest rates and bond yields.

The Western nations have manoeuvred themselves into "a perfect corner" where all options are very unpleasant, and they get more unpleasant (bordering on disastrous) the longer our leaders continue to kick cans down the road and delay taking their pick which poision they'd prefer.

Businesses can't grow if consumers are struggling with their debt load.
Japan showed how consumers de-leveraged, and in an attempt to prevent the recessionary effects, the Japanese government spent money and ran up huge debts.
So a consumer debt problem became a government debt problem, and the economy still is far from its greatness of the late 1980's.

Take a look at the Japanese Nikkei stock index.

I don't think the negative bias seen in the Nikkei (where it currently sits at barely more than a quarter of its 1989 peak) will happen here, but I think we still have at least several years of "multi-dip" recession ahead, and the FTSE, S&P and other major stock indices will remain volatile and trapped between the highs and lows of the last 15 years (i.e. FTSE 3500-6500). Corporate profits will be sluggish. Earnings multiples attributed to companies will be lowered to take the persistent lack of growth into account.

As Woody has recently been saying: "Growth will be hard to come by".

It isn't the end of the economic world.

It's just the hangover from the biggest and wildest party we're likely to see in our lifetime.

Last time was the 1970's
The time before that was the 1930's

On both occasions, it took a long time for recovery to truly take hold.

The Dow took 16 years (1982) to decisively break its 1966 peak.

The Dow Jones stock index took 27 years (1956) to decisively break its 1929 super-bubble peak. Maybe knock several years off that if WW2 hadn't occurred.

So with government and consumer debt levels greater than either of the two previous "once in four-decade" events, and a large welfare system drawing lots of resources from what little productive economy remains, I struggle to see why this time will be any quicker or easier.

I remain convinced that the 2009-13 rally is currently making a significant topping pattern, with much lower prices at some point in the next couple of years.

Gold is the place to be for the next year or two.

If the early 1980's occurred 14-16 years after the original stockmarket peak of 1966, then perhaps the greater slump is yet to come.
This time around, due to desperate government attempts to defy the economic cycle, everything is a slow-motion crisis, rather than the faster crisis unfolding of the 1930's and 1970's.

Governments haven't done much about the deficits nor their accumulated debt. In most cases their financial positions are deteriorating towards insolvency.
If they don't get stop the deficits and debt-accumulation, we'll follow the same "lost decades" path as Japan.

Or we can try to print our way out and repeat the 1970's experience of high inflation which crushed equity valuations (FT30 was over 20x P/E in the early 1970's, and plummeted over 75% in two years to 4x P/E and 13% dividend yield in the mid-1970's).
Bonds and equities got hit as inflation pushed interest rates higher made equities, dividends and bond yields look unattractive compared to "cash in the bank".

If the government make hard cutbacks to balance the budget (like the PIIGS) we go into a deep recession as those who depend on the government have to cut back.

All routes are painful. The longer we leave it, the more time we waste going nowhere and the greater and more painful the eventual adjustment.

So we might like to think positive (many people like to be optimists as it gives them hope), but the cold reality is that "growth will be hard to come by".
As Woody points out:

"........We expect further downgrades to forecasts of those companies more sensitive to the economic cycle, as the impact of the on-going crisis in Europe, a slowdown in US growth and persistent reduction in borrowing across the western world continue to limit the pace of global economic growth. However, we maintain our view that there is a population of stocks that can grow consistently through this difficult period – we believe companies that have been delivering growth since the 2008 banking crisis will be able to continue to do so, and we do not believe that they are currently valued for that ability......"

http://www.invescoperpetual.co.uk/site/ip/pdf/3303126_EN_GB-ip-inc-fnd-fctsht.pdf

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