Accused of profiteering during the boom of the past decade, homebuilders are now under the cosh for much the same reason even as prices come off the boil.

Skyrocketing mortgage rates have crushed affordability for home purchasers and sent what had been robust house price growth into reverse.

In August, house prices fell at the fastest rate for 14 years, according to Halifax.

Industry insiders also point to the end of the government’s Help to Buy scheme for first-time buyers and the dropping of its 300,000 new homes a year target as throwing even more grit into the gears of the sector.

And of course inflation has run rampant.

Higher costs crimp margins from the other end. Homebuilders have had to pay up for scarce post-pandemic labour and building materials.

The result of these factors has been a spate of profit warnings – though the clever market long ago anticipated that and marked down the shares in advance.

Riders on the storm

The good news for anyone who bought homebuilders when they looked cheap a year ago is that the shares have mostly held steady in 2023.

As I wrote at the end of 2022 when trouble was obviously brewing for the sector:

“…the homebuilders’ finances look pretty strong, with net cash in many cases.

Builders will certainly be hit by a protracted slowdown. They’ve already suffered from inflated input costs, and selling homes for less will further squeeze margins.

Declining sales will pressure the bottom line, while book values could be impaired as land banks are written down.

Yet house builders’ shares have already declined sharply in anticipation of all that. Remember the market always looks forward!

If you think the slowdown will be limited to a year or two, certain builders might even be a buy.”

Homebuilder shares had declined inexorably during 2022, as it became clear that rates would go higher and stay there for longer than anyone had expected.

However, since then the market seems to have recognised the financial discipline that guides the builders these days.

Investors can see the listed builders have both the leadership and the financial wherewithal to ride out at least a moderate storm.

That’s in sharp contrast to the crisis years of 2007 to 2010, when mountains of debt and the threat of going bust loomed large.

Down market

The trouble is that one of the levers the firms have pulled to batten down the hatches is to build fewer new homes.

And this – predictably enough – has stoked ire among the pundit classes

According to figures from RBC Capital Markets as quoted by the Evening Standard earlier this month, the builders will deliver 18,485 fewer homes this year.

Now, as investors we can see why they’d choose to cut production targets in the current climate.

If there’s less demand for a product and at the same time it’s more expensive to make it, why not ease up until better conditions return?

That’s Capitalism 101, at least for a commodity market like homebuilding.

On the other hand, home ownership and affordability is a hot potato in the UK.

Returning to that reduction in housing completions cited by RBC, it equates to a whopping 27% decline in total annual output.

In a country where millions of first-time buyers are paying over a third of their take-home pay on rent – more than 50% in London, according to some estimates – delivering fewer homes is a bad look even at the best of times.

Yet these are far from the best of times. Rents rose over the past year at the fastest pace since ONS records began in 2006!

And rightly or wrongly, a majority of people aspire to own their own homes.

Thus the idea that the makers of those potential homes are going to squat on their land bank until prices go back up is hard to stomach.

Some even accuse the homebuilders of constraining supply in order to keep prices firm and hasten a return of house price growth.

Don’t bank on it

While I have sympathy for those who find house prices ridiculously out of reach, I don’t blame the homebuilders for their plight.

To me it’s mostly about interest rates and the willingness of banks to lend, as well as the tax treatment of property investors and maybe rapid demographic change.

I don’t think builders could stand in the way of these forces even if they wanted to.

There are around 500,000 to 700,000 housing plots in property developers’ land banks, depending on which estimate you believe.

That sounds a lot – and it is, I suppose – but compare it with the 26.4 million dwellings already existing in the UK and it doesn’t seem so big.

True, we all know supply and demand works at the margin to affect prices.

So yes, if somehow the builders could release 500,000 homes onto the market next year, then prices would probably plummet.

But perhaps only half of the land bank actually has planning permission – with a good chunk of the remaining plots basically on the books in the hope that local authorities will make a strategic shift that could unlock them.

Moreover, homebuilders can’t go from boom to bust without having a pipeline of plots in reserve to smooth operations and earnings. Nobody would invest in them!

Finally – and to state the obvious – they aren’t just knocking up loft extensions.

The big listed builders must work with public agencies to ensure that other critical infrastructure will be ready for new homes, for example.

Even in the best circumstances it takes years to move plots through planning. Throw in a few NIMBYs and you could be looking at five to ten years.

Those same authorities also look for a smooth delivery of homes over time, again for obvious reasons given the knock-on for schools, hospitals, and the local branch of Costa. The government’s National Planning Policy Framework even requires them to identify and maintain multi-year pipelines of deliverable land.

And all this is not to touch upon the acute skills shortages in the building sector.

In short, homebuilders couldn’t start to lay foundations across their entire land banks tomorrow even if they wanted to.

Together but estranged

The close relationship between local government and the planning pipeline brings into focus what’s for me a thornier issue with home building in the UK.

Because the fact is that homebuilding – and of course house prices – are hugely important to voters, and thus to politicians.

Many people say we need to build more houses. But few voters want their own homes decline in value – let alone to wake to find a massive new town being developed on the green patch nearby where they walk their dog every Sunday.

Maybe that’s one reason why the state – in this case local authorities – hasn’t been into volume homebuilding since they threw up the last of the big council projects in the 1970s.

Instead, government tries to influence the sector via eye-catching packages like its Help To Buy schemes and other measures that stoked demand.

Critics long ago pointed out these probably do more to plump up the price of new homes than they do to promote more homebuilding.

And even as they’ve benefited from these government schemes, homebuilders typically paid out big dividends – some £16bn over the past 18 years, according to recent number-crunching by academics at Sheffield Hallam University.

Shaky foundations

You don’t need to be Karl Marx to wonder whether government would have been better off focusing its efforts towards directly building more affordable Local Authority homes, if it really wanted to help homebuyers on moderate incomes.

Yet a cynic might note this would put politicians under the same scrutiny that the homebuilders face when they break ground on new estates, among many other issues.

Which is perhaps how we’ve ended up with a situation where homebuilders are impugned for being far better run than they were 15 years ago – and where good cash management and shareholder-friendly dividend policies are put under the microscope by academic researchers.

Not that any of this would stop me investing in homebuilders, at the right price.

But if you don’t like your companies to be kicked around as a political football now and then, you’d better look elsewhere!

The post Homebuilders under fire again appeared first on The Motley Fool UK.

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Some investors will blame anyone but themselves for their stock picks gone wrong.

In a way it’s understandable. It’s very human for a start.

But also the dirty secret of investing is there’s a lot of randomness involved. Good luck and bad luck.

And some people find the role of luck hard to accept.

I believe the best investors are those who tilt the odds in their favour sufficiently to enjoy more winners than losers.

To envious onlookers, though, they may just seem outrageously fortunate.

In contrast, the worst investors see certainty everywhere – and then tend to look for villains when their shares inexplicably go south.

Market manipulators! Central bankers! Short sellers! Lying company managers!

That last one is a particular bugbear of mine.

I don’t mean the lying managers – though I’m hardly a cheerleader for them – but rather investors who expect too much precision from managers in the first place.

Falling short of earnings expectations or entering a recession with a weaker-than-ideal balance sheet is not damning proof of deceitful management.

Predictably pointless

Missing earnings guidance also infuriates the analysts who cover companies and issue buy and sell ratings.

So very often a big earnings miss will see the share price tank the next day.

The cry goes out: “Management lied to us three months ago when they said they saw orders ticking up! Now we can’t trust a word they say.”

Yes, occasionally executives do outright lie.

Fraud happens.

But far more often the miss is down to excessive optimism, poor judgement, the normal ups and downs of business, or just a company’s own bad luck.

Yet so allergic are investors to earnings misses, firms strive to smooth their returns and issue low-bar targets. Then they can aim to always slightly beat expectations.

It’s a ridiculous game that has nothing to do with actually running a business.

Moreover this ruse doesn’t really work anymore.

Surprises will always happen – yet investors are now so used to being spoon-fed soft targets that I’d argue they go even crazier today than they would if they’d always been given it straight.

Mystic mugs

Anyone who has studied business for a long time – or even better run one – knows that s…tuff happens.

Projects overrun. Products miss the mark. Warehouses get snarled because two key employees freakishly got ill at the same time. Something burns down or explodes.

Or maybe the external environment changes. Interest rates rise, or the weather is awful. There’s very little company executives can do about that.

Meanwhile even the best-paid economists have a dire track record of predicting economic upsets. Luckily for them, their salary is not dependent upon a share price that’s quoted daily on the stock market.

Yet despite the long-demonstrated difficulty of making accurate economic forecasts, some investors still expect their managers to be both excellent stewards of a business and at the same time economic clairvoyants.

That’s totally unrealistic.

All good disciples of Foolish investing know short-term prediction is a mug’s game. It’s also not important, in our opinion, compared to focussing on the big picture – growing sales, profits, and share prices over the long-term.

If you must look for managers who can see into the future, at least look for those who can see ten years ahead. Not those who – apparently – have a strong hunch about next month.

Great expectations

Ultimately, investors railing against companies that miss their earnings expectations are expecting executives to do their job for them.

That’s because in theory everything that is already agreed upon and known –forecasts for sales and profits, the launch of a new product, the economic backdrop, interest rates – is already in the price when you buy.

If you want to beat the market, you need to perceive something different.

For a very few – think George Soros – this might be a big macro-economic event.

Perhaps you’re skilled at reading political runes and foresaw Russia’s invasion of Ukraine? Or you’re especially in tune with the global economy, and you were confident interest rates would go higher than most people believed?

Do this repeatedly then you will end up rich. But I’ve never seen it.

Most of us have no chance at beating the market based on macro-economic guesses. Expert fund managers and their staffs of PhDs running billions watch macro indicators like hawks. The chances you will see what they’re missing are slim.

When it comes to individual stock picking, however, I believe we might just see something different.

Perhaps we’re extra confident about the growth of a particular market – electric vehicles a decade ago, say, or artificial intelligence a couple of years ago.

Or maybe we judge that a particular company has stumbled into a huge opportunity that even its management haven’t yet grasped.

Rollouts of new consumer products or services can be especially fruitful here.

Or maybe we see the opposite?

A restaurant chain that has lost its buzz with the in-crowd perhaps, or a company making a product that still dominates an area you judge has little room left to grow â€“ but executives who’ve spent their working lives in a sector can’t see it.

I’d argue big energy companies were in that latter spot 20 years ago, incidentally.

See different

In these cases, you may have a perspective that is not shared by the market. It might affect the next earnings report, or the balance sheet in a decade.

Either way, if you’re right about your non-consensus view then you might be seeing something that is not currently baked into the share price.

That is our opportunity.

Legendary hedge fund manager Michael Steinhardt coined a term for this.

Variant perception, Steinhardt called it.

What do you see that others do not? What do you anticipate that even the company’s managers are missing?

For Foolish individual investors, I’d argue our most durable advantage – a long time horizon – is itself a form of variant perception.

When you’re thinking about how a company will develop over the next 10-20 years and the market is fretting about the next six months, then you’re automatically seeing things differently. And that, Fools, is where the profits are.

The post What do you know that the company doesn’t? appeared first on The Motley Fool UK.

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We all thought the cockroach was the most indestructible thing on Earth.

Turns out it’s the Nasdaq 100.

When the US index renowned for its high growth and technology stocks plunged 33% in 2022, the obituary writers went into overdrive.

The easy money era was over, they crowed. And with it had died the euphoria for disruptive innovation companies, software as a service, price-to-sales ratios through the roof, and price-to-earnings ratios through the floor.

Value was back! Commodities were king! Dividends were to die for!

Yeah… about all that.

As you were, lads

The Nasdaq didn’t get the memo. It’s surged 39% so far in 2023.

We’ll have to see if this rally is a continuation of tech’s previous decade-long secular bull run or just a dead cat bounce (albeit off a trampoline…)

But one early lesson might be that in an era of ever-faster technological change, you write off the best firms driving those breakthroughs at your peril.

True, all that has really lifted tech share prices this year is valuation multiples expanding as investors have gotten less gloomy about the prospects for inflation, interest rates, and the global economy.

Yet by the same token this is simply the flip-side of the ratings compression that previously drove down the shares of good companies in the crash.

The volatility has been about investor perception, in other words. As for the actual businesses, the best have mostly kept chugging along and posting great results.

The leaders – Alphabet, Amazon, Microsoft, Tesla – didn’t really miss a beat.

Scotland the brave

You might think this should all be music to the ears of shareholders in the UK’s largest investment trust, Scottish Mortgage.

The incongruously-named collective fund from Baillie Gifford is a classic way for adventurous British investors to get exposure to technology – a sector conspicuously absent from London Stock Exchange.

And Scottish Mortgage certainly took its lumps in 2022 with the Nasdaq.

The trust’s shares fell 46%, thanks to a one-two punch of portfolios declining with the market and then, as investor sentiment soured, the gap that opened between the trust’s share price and the value of its holdings (its net asset value, or NAV).

Yet despite the strong recovery in US growth index in 2023, there’s no little relief for Scottish Mortgage. As I write it’s still down year to date!

Pretty frustrating if you were the sort of chump – me, for instance – who bought Scottish Mortgage anticipating a renewed appetite for growth stocks.

I felt the market had been going through one of those phases where it tosses out the baby with the bathwater. And having lived through the Dotcom boom and bust, I saw the post-Covid mania as less deranged. Frothy, sure, but the tech sector was now led by trillion dollar companies doing hundreds of billions in sales. It wasn’t all fantasy metrics this time.

Admittedly Scottish Mortgage favours the more up-and-coming firms that are still – hopefully – growing their way to dominance. The trust doesn’t own so much in the way of those cash-cows that now dominate the Nasdaq.

Still, that strategy had been enough to multiply Scottish Mortgage’s share price 13-fold in the decade to November 2021. A return that trounced not only the market, but almost all its rivals.

So I hoped for a big uplift when sentiment changed and tech rallied again.

Where’s my recovery?

As things have turned out though, I currently feel the same way about my Scottish Mortgage shares as when the sporty boys were picking teams at school and I was left with the shrinking pool of no-hopers.

While the Nasdaq has been flying, its gains – and also those of the much broader S&P 500 index – have been in large part driven by those few tech giants.

Scottish Mortgage, as I said, mostly sold out of such firms long ago to recycle its capital into newer business with theoretically better growth prospects.

It’s not all gloom: Scottish Mortgage’s NAV is actually up nearly 8% year-to-date.

But that pales against Apple (up 56%, year-to-date) or Microsoft (up 48%).

Scottish Mortgage does own Amazon (58% ahead) and Tesla (up 169%). But that’s not been enough to overcome the deadweight of the trust’s less-favoured – or downright disliked – holdings.

Which brings me to the second reason for Scottish Mortgage’s relative weakness – its substantial investments in private unlisted companies.

The market hates private companies right now – and they represent about 30% of Scottish Mortgage’s book.

Private equity and venture capital trusts have been hammered. Most trade at huge discounts. Scottish Mortgage is being heavily discounted too, on account of the unlisted holdings in its portfolio.

Indeed that’s the third problem. Not only did the trust’s discount to NAV not narrow with 2023’s gains – it has actually doubled! As I write the discount is 20%. In theory you can get £1 worth of Scottish Mortgage’s portfolio for just 80p.

Seems a bargain? I agree, which is why I own the stock. But that’s a minority view.

Finally, the strength of the pound in 2023 hasn’t helped. A strong pound reduces the value of overseas holdings to UK investors when converted back into sterling.

A mere 2% of Scottish Mortgage’s assets are British, so recent currency strength has been a major headwind.

Spaced out

All of the above could also be said of Scottish Mortgage’s closest stablemate – the Baillie Gifford US Growth Trust.

I know because – alas – I hold that one too.

It’s a similar story: huge gains prior to the market correction, a large stash of unlisted assets, investor love turning to disgust as represented by a thumping 20%+ discount, and finally the exchange rate acting as a headwind in 2023.

Will this disdain last forever?

I doubt it.

Growth stocks always get hit the most in bear markets. But those vast mega-cap technology firms leading this year’s charge only got to that size by growing there.

Giving up on them during temporary reversals would have been ruinous.

Of course, there’s survivorship bias at play – plenty of would-be giants floundered in their wake – but the quality of Baillie Gifford’s unlisted firms is pretty striking.

Staff at Elon Musk’s SpaceX would surely be astonished to hear its (unlisted) shares are being effectively warded away with a bargepole on the London market, for instance, given the space exploration firm just hit a record valuation $150bn.

Yet as of the last count, more than 3% of Scottish Mortgage’s portfolio – and over 6% of the US Growth Trust’s – were in SpaceX shares. The holdings are implicitly being marked down by investors in London (as reflected by the big discounts) even as investors scramble to get their hands on SpaceX shares in the US!

Most of the trusts’ other unlisted holdings – such as payment processor Stripe – also seem attractive to me.

Even better – for the majority of its holdings in private companies, Bailie Gifford secured preference shares. These offer extra downside protections.

Incidentally, back in the US Cathie Woods’ infamous ARK Innovation ETF – which lost more than two-thirds of its value in 2022 – has rallied roughly 60% in 2023.

That contrasting gain is another a hint as to how a growing discount to NAV and the shunning of unlisted equities have held back Baillie Gifford’s tech trusts lately.

Oh Flower of Scotland

I agree the markets got over-heated in 2021. The mania for the likes of the ARK ETF was palpable. We needed a reset.

And as I’ve conceded, only time will tell if the 2023 Nasdaq recovery has legs.

But no bull market can advance forever largely on the back of half-a-dozen winners. If 2023’s rally is set to go the distance, then more of the momentum will eventually come from the riskier and more exciting growth stocks. Investors will also rediscover their appetite for the most exciting unlisted opportunities.

When that happens, Baillie Gifford’s heroes turned villains will be lauded again.

The post Don’t bail On Baillie Gifford’s technology trusts appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet, Amazon.com, Apple, Microsoft, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

You know what they say: the first trillion dollars is the hardest.
 
No wait! They say it’s the first million dollars that’s hardest.
 
MILLION.
 
My apologies, but after looking at Apple’s business for a bit, your brain inflates every number it sees.
 
The statistics are mind-boggling.
 
Last year Apple boasted:
 
•  $394 billion in revenues;
•  232 million iPhones sold;
•  1.3 billion iPhones in active use;
•  88 million subscribers to Apple Music.
 
If Apple were a country, then its revenues as a proxy for GDP would place it in the top 30 nations – somewhere between Norway and the UAE!

A world-conquering company

Incidentally, you may see Apple’s market cap compared to a country’s GDP.

But that’s gilding the lily.

It’s true that having just regained its $3 trillion market capitalisation, Apple’s valuation is now on a par with the UK’s total annual economic output.

But that’s to mistakingly compare stocks with flows. 

Apple’s $3 trillion market cap is the value that investors put on owning its cashflows.

We simply don’t know what investors would pay to own the equivalent economic output of the UK.

Certainly the value of the UK stock market – which only includes a fraction of UK businesses – is no such thing.

But if you do hanker for a bit of national masochism, then this comparison provides it. 

Because Apple’s market cap is now greater than the value of the whole UK stock market!

Yes, even if you owned and sold every last share of Shell, BP, HSBC, GSK, Unilever, and all the other firms listed in London, then you still wouldn’t have enough money to buy up Apple.

I warned you that the UK stock market was becoming a backwater.

 But this is just ridiculous.

Growth supplements

Indeed, maybe it is ridiculous? Rather than feeding our national inferiority complex, perhaps we should consider that Apple might just be overvalued?
 
True, a lot of people have ended up looking foolish after making that call.

And Apple is now the biggest holding of Warren Buffett’s Berkshire Hathaway.
 
Betting against both Apple and Buffett would be… brave.
 
Nevertheless, with Apple having tripled in market cap since 2018, you wonder how the world’s largest company could grow similarly for another next five years?
 
Then again, perhaps it needn’t do so to satisfy shareholders. Thanks to buybacks and dividends, Apple stock has delivered a roughly 300% return over that period.
 
The difference between the market cap growth (200%) and shareholder return (300%) is thanks to smart capital allocation by management.
 
In theory Apple could continue to return its prodigious cashflows to shareholders like this and be a profitable investment, even if it is bumping up against the law of ginormous numbers with its $3 trillion valuation.

Only the paranoid survive

Can Apple management and its shareholders rest easy then?

I wouldn’t recommend it.

Like rust, technology – and capitalism – never sleeps.

Firstly, Apple is not being valued as a no-growth company. It’s on a P/E ratio of over 30. Its market cap would not be $3 trillion unless investors judged revenues and profits will continue to expand for years to come. 
 
Moreover, everything we’ve seen during the past few decades makes it hard to imagine we’ll still be tapping away on apps on iPhones in 20 years’ time.
 
And if somehow we are?
 
Then for all the vaunted ‘locking in’ of its users, I don’t think Apple will still be earning the fat margins it enjoys today. Another two decades without a big platform shift would be enough time for rivals to compete away its profits.
 
Of course, as stewards of a company behind a good share of those technology revolutions since the 1970s, I’m sure Apple management is aware of these risks. 
 
They’ll know Apple needs to keep inventing the future to ensure its place in it. 

Which brings me to the recently unveiled Vision Pro – Apple’s first attempt since the iPhone to fundamentally transform how we interact with technology.

Open your eyes

Six weeks on from its unveiling – but still six months from launch – the verdict on Apple’s $3,499 Vision Pro ‘mixed reality’ headset is… mixed.

Sceptics carp the social cost of wearing what look like over-sized ski goggles is too high relative to the experiences on offer – be they virtual or augmented reality.
 
Worse, along with a high cost in social embarrassment, comes that gasp-inducing actual dollar cost, too.
 
You can augment your car, crib, or clothing with a lot of real reality for $3,499.
 
The other side sees Apple’s headset as a game-changer in Silicon Valley’s long trek to make fully immersive experiences about more than flight sims and porn.
 
For these Vision Pro visionaries, the headset’s inward-facing iris scanner and handset-free control system – as well as the innovative software to come from Apple’s army of software developers – renders comparisons with duds such as Google’s Glass and Meta’s Quest moot.
 

I can’t keep my eyes off of you

Personally, I believe both sides are right.

The thing is they are thinking on different timescales.

Of course “give it more time” is an excuse that’s been trotted out for virtual reality-style devices for at least three decades.

However if the demos are to believed, then the Vision Pro – which Apple calls a ‘spatial computer’ rather than a VR headset – already looks ready for primetime. 
 
We’re all spending more time in front of screens and inside computer-mediated realities every day, whether it be with Zoom, games, or viral hits on TikTok.
 
And it’s inevitable we’ll keep looking for ways to better integrate our physical and digital worlds more seamlessly.

The snag with the Vision Pro is the price and that eternally goofy-looking hardware. Not that you wouldn’t want to own one.
 
Regarding the price, I always like to ask people who say they’ve no use for an innovative but expensive new gadget whether they’d think the same way if it cost half, a quarter – or even a tenth as much?
 
This usually reveals price shock is really the objection – not the product. 
 
And that’s handy, because the march of technological progress has shown us new categories get vastly cheaper between early adoption and the mass-market.
 
I’m sure spatial computers – or whatever we call them – will be no different. Many people would love a Vision Pro at $499.

As for wearing a headset and gurning around your living room like a drunken robot from, well, 1984 – of course nobody buys a $3,499 headset to do that.

I can see for miles

Computer hardware enables software, and software enables experiences.

That’s what people buy – and use – these devices for.

Until the killer software arrives, the devices always look expensive and silly.

Consider smartphones. Almost nobody wanted to stare at screen the size of a few postage stamps until the iPhone arrived.

I should know – I’d co-founded a mobile games related start-up in 2005 and only the very nerdy (I’m allowed to say that, I was one) were interested before Apple got involved.

In fact it’s hard to remember how different things were 15 years ago.

One day I raced into the office to blurt out to my team that I’d seen no fewer than three people using iPhones in my tube carriage!

Nowadays, not being fixated on a screen during the commute would be a novelty.
 
There are myriad examples like this in tech history.
 
My dad worked in IT from the late 1960s yet he couldn’t see why he’d ever need a personal email in the early 1990s, whereas I already had one as a student.
 
It really never ends.

Provided we get the right software and experiences, I’m confident putting on a clunky headset will one day be as normal as doom-scrolling on your sofa is today.

I can see clearly now

Of course, none of this makes the Vision Pro a certain glimpse of the future. 

Execution risk abounds.

But for $3 trillion Apple, the existential risk of not finding a bridge to tomorrow is far greater than the relatively modest R&D cost of trying out something new.

The first million-strong production run of the Vision Pro isn’t about profit for Apple.
 
It’s about trying to learn what needs to be done in order to keep that valuation in the trillions for many more years to come.

The post Apple and its $3 trillion vision appeared first on The Motley Fool UK.

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If Artificial Intelligence is set to wipe out journalists’ livelihoods, then the hacks are making hay while the sun shines. Because I must have read a hundred articles predicting journalism’s demise since OpenAI released its AI chatbot, ChatGPT.

And while it’s seemingly still obligatory to have the robot wordsmith knock out a few paragraphs of any article about AI as a wheeze, for the most part it continues to be journalists writing these pieces – and so far predicting the demise of their gainful employment rather more than they’re actually losing their jobs.

Yet I do understand the fear-mongering. ChatGPT has also put the willies up me, as somebody who mostly makes a living by stringing sentences together.

My designer friends were similarly freaked out by the recent Adobe Photoshop demo. This simultaneously wowed them with the power of its generative AI tools – while implicitly showing a bright six-year old could now do most of their day job.

From accountants to lawyers, actuaries to quants, white-collar workers of the world are united in fretting that AI is about to do for brain-work what word processors did for the typing pool.

Buy buy AI

To be honest, predicting how or even whether AI will press the reset on human civilisation is a bit above my pay grade.

But I do know that if everything is going to be turned upside down by brains-on-demand, then as an investor I need to own a piece of it.

That’s easier said than done, if you mean to beat the market too.

As always there will losers as well as winners from any upending of the world order. Picking between them – without overpaying for the no-brainers – will be the hard part.

Also, let’s face it “If you can’t beat ‘em, buy ‘em” is not a conclusion that demands an AI super-intelligence to reach.

That’s why there’s already an AI investing frenzy underway. A mania that has arguably inflated the most accessible plays on AI to bubbly levels in short order.

For instance, US fab-less chip designer Nvidia became the fifth most highly valued company in the world last week after it forecast barnstorming sales pinned entirely on AI-related demand for its processors, as tech giants scramble to expand the data centres required to ‘train’ ChatGPT-style AI language models.

Management lifted expectations for next quarter’s revenues by 52% to $11 billion. That’s the kind of jump you expect to see with a small cap finding its feet. Not a 30-year old veteran of a half-dozen previous tech cycles like Nvidia.

Giddy traders sent Nvidia’s shares up 24% in a day – enough to lift its market cap by more than $180bn to over $960bn.

For context, Nvidia’s erstwhile rival and former chip titan Intel’s market cap is a mere $120bn.

You could say nVidia’s shares by rose one-and-a-half Intels… 

A high price for hope

Does that kind of rise – and a near $1-trillion market cap – seem right to you?

On the one hand, we shouldn’t anchor to Intel’s erstwhile position in the tech ecosystem. The sector abounds with the almost-forgotten giants of yesteryear.

Yet Intel’s trailing 12-month sales are still more than double that of Nvidia’s.

Absolutely, Intel is not growing at more than 50% quarter-over-quarter. But how sure are you that will continue for long at Nvidia?

You’d better be very sure if you own the stock, given Nvidia is trading at a nearly 40-times price-to-sales ratio.

Sky-high ratings like that were last seen sported by the most fashionable cloud tech players in 2021 – shortly before they crashed to earth in 2022. And I’d respectfully suggest Nvidia’s business is fundamentally less attractive, more cyclical, and less scalable than software-as-a-service.

Don’t get me wrong, it’s hard to think of a more impressive company right now than Nvidia. Nor one more immediately exposed to the growth of AI.

But I’m sure everyone thinks the same thing. Hence it’s pretty likely that most of its future growth is already in the price.

Tech bubble: 3.0

There’s more to this hype cycle than Nvidia. Step back a bit, and you can make the case AI mania is the chief driver of the advance of the US market in 2023.

The S&P 500’s rise year-to-date is largely due to gains from Nvidia and the other tech behemoths: Apple, Microsoft, Alphabet, Meta, and Amazon. (Amazon is officially a consumer stock but tends to trade on the fortunes of its lucrative Cloud business).

Subtract their gains away, and the US market is flat to down in 2023.

Do all these companies deserve to lumped into the AI basket, as investors seem to be doing? I understand the logic – huge data centres, various software opportunities, vast existing customer bases – but count me a sceptic.

Unfortunately for my hairline, I’ve been paying attention through multiple tech revolutions over the past few decades.

And I’d observe that the winners of one are seldom the most dominant companies in the next.

• The video game colossus of the 1970s, Atari, is nowhere today.
• Apple didn’t win the desktop computer war of the 1980s.
• Microsoft was an also-ran for most of the Internet boom in the 1990s – yet many younger Fools probably haven’t heard of the upstarts like AOL and Netscape who outshone it back then.
• Nokia doesn’t make the smartphones we use today. Nor does Blackberry.

The list goes on.

Of course, a few companies do endure or even go on to greater things.

Apple and Microsoft came back bigger and better than ever, eventually, though it was a close-run thing for the iPhone maker. Amazon too.

But they’re the exceptions. It’s as likely the names we will bandy about when we talk about AI in 20 years are today two-person teams renting space from WeWork.

Perhaps the best justification then for investing in the tech behemoths is more the billions that their own venture capital arms have invested into AI start-ups (OpenAI was backed by Microsoft, for example) rather than their existing core operations.

Billions ventured not much gained

The pure-play venture capitalists certainly understand that the future will very likely belong to the new, so they too have poured billions into AI – even in the face of a crash in valuations for other disruptive technology startups.

In fact, 2022 alone saw 3,198 AI startups receive $52.1 billion in funding in 3,396 separate deals, according to the GlobalData Financial Deals Database.

Indeed, I heard one Silicon Valley VC describe this as the best of times if you’re raising money for an AI outfit, but the worst of times for any other kind of firm.

And I find it hard to believe all this money is being invested any more soberly than I think day traders have carefully calculated Nvidia’s likely earnings in a decade.

What’s more, Venture Capital’s love affair with AI goes back to at least 2012, says Deutsche Bank. Its analysts counted more than 175,000 patent entries for artificial intelligence applications made since that year.

Even ‘Modern’ AI – large language models – are a five-old ‘overnight sensation’, yet investors are suddenly as euphoric as if we’d just invented transistors.

Computer says no

Arriving late is a great way to get a quick hit of the buzz of a party in full-swing.

The danger is all the tasty canapés have been eaten, the bubbly was downed hours ago, and you’re left swigging watered-down punch that nobody else wants.

I fear the same could be true of those bidding up the most obvious AI plays today.

At the least it might serve us well to think about investment opportunities further along the AI value chain.

Meta and Alphabet made trillions out of the Internet, not the nuts-and-bolts makers like Qualcomm. You could say the same about Apple and smartphones.

Perhaps the firms that stand to benefit the most from AI are not the ones who create or enable AI technology, but rather the many more that will streamline production and boost profitability through AI’s gradual deployment?

Of course, one way they could do that is by firing – or hiring fewer – expensive, salary-crazy and sleep-demanding humans, by replacing them with AI.

On reflection, maybe the existential questions facing investors and wider society are not so different after all.

The post Are we betting intelligently on our artificially brainy future? appeared first on The Motley Fool UK.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Qualcomm. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Indeed, when I completed the computer game precursor to The Last of Us in 2013, it felt like pure escapism.

But after a global pandemic, lockdowns and emergency vaccinations, war in Europe, and the febrile politics of recent years, disaster seems closer to home.

There seem to be worries wherever you look – from a potential nuclear escalation with Russia to conflicts over Taiwan to ChatGPT growing a mind of its own.

Maybe this existential gloom is stoking my fears for the London Stock Exchange.

London under siege

In more than 20 years as an investor, I’ve seen the LSE survive many challenges.

The wealth-destroying crash of the early 2000s. AIM-listed companies that turned out to be frauds. The vote to take the UK – and hence The City – out of the EU. Lousy returns for the FTSE 100 for decades. Not to mention the financial crisis of 2007 to 2009.

The LSE has soldiered through it all.

However, the reality is most things end not with a mushroom cloud of instant annihilation – but rather a whimpering slow decline. And it’s hard to overlook the drip drip drip of bad news torturing the LSE.

• The Paris Bourse has overtaken the London Stock Exchange in terms of size.
• The European Commission wants the €1.5trn euro clearing market to be entirely moved from London to the continent by summer 2025.
• Leading chip designer ARM is to float in New York, despite UK government lobbying and ARM’s base being in Cambridge.
• FTSE 100 building supplier CRH is also moving its main listing to New York.
• A slew of UK small and mid cap companies have been acquired in the past 18 months – arguably on the cheap – thanks to depressed valuations in London and the weakness of the pound.
• At the same time, London is suffering an IPO drought. The total number of new listings is sharply down since 2021. And there’s been no blockbuster flotations to compare to the listing of Porsche on the Frankfurt market last September.
• This evaporation of deal flow has caused key players in London’s ecosystem to merge or be acquired. Cenkos and FinnCap consolidated forces in March, while Deutsche Bank acquired boutique investment bank Numis in April.

Sure, nearly all stock markets have struggled since the roaring bull market of 2021 gave way to a global bear market in 2022.

But it’s the UK market that seems to be at risk of losing the critical mass that long gave London an outsized position on the global stage.

The UK stock market made up more than 9% of the global capitalisation in 1999.

Today, that figure is barely 4%.

Survivalist mentality

At this dark hour in a zombie flick, our hero would abseil in through the only open window, guns blazing and generally showing the undead horde who’s boss.

I can’t give you Pedro Pascal with a shotgun.

But how about UK Prime Minister Rishi Sunak armed with the realisation that business – and in the UK, financial services in particular – is the goose that lays the golden eggs?

Without getting deeply into the politics, the UK government appears to have woken up to the damage done to Britain’s financial reputation in recent years – which hit a low point with the run on the pound and the bond market mayhem following the 2022 Mini Budget.

Since the subsequent change in administration, chancellor Jeremy Hunt has reassured markets and brought down interest rates, and the pound has rallied – hopefully encouraging international capital to put more money to work here.

We’ve also had the Edinburgh Reforms unveiled by Hunt in late 2022. While not exactly the ‘Big Bang 2.0’ some hoped for, this laundry list of technocratic tweaks to the laws governing financial services in the UK might deliver a shot in the arm.

Finally, February brought the Windsor Framework. By resolving issues in Northern Ireland, this deal opens up the potential for better trading relations with the EU, which can only be good for UK PLC.

Gunning for Britain

Of course, many of those setbacks I mentioned – from ARM choosing to list in the US to all those UK firms getting gobbled up by overseas predators – happened following these more positive developments.

So the LSE is certainly not out of the woods yet.

But it’s also important to acknowledge that much of what ails the LSE is going on elsewhere, too.

IPOs are down globally, and investor sentiment is terrible. Indices everywhere have been flirting with bear market territory for more than a year.

And the trend towards companies remaining private – and for private equity and venture capital to subsequently capture more of the growth of the best new companies – was only briefly interrupted in the US by a ‘SPAC’ boom, which ended with 80-90% price declines for shaky outfits floated on Nasdaq in 2021.

But even so, I believe the UK market is at risk of becoming just another also-ran backwater for equities, rather than punching above its weight as it did for years.

Yes, there will probably always be an LSE. There are stock exchanges in Paris, Frankfurt, Amsterdam, Milan, and in many other cities around the world too.

But London long stood head and shoulders above those continental outposts. Only New York, Tokyo, and more recently the Chinese bourses were its rivals.

Let’s hope the LSE’s greatness can be resurrected. Because it’s either that or a slowly zombifying stock exchange.

The post ‘Apocalypse Nearly’ for the London Stock Exchange appeared first on The Motley Fool UK.

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The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

If US private equity giant Blackstone was a social media influencer, then we’d have to say its move to acquire UK-listed Industrials Reit went viral earlier this month.

Pundits and fund managers emerged in droves to cheer the deal, seeing the swoop as an endorsement of value in the beaten-up commercial property sector.

And investors metaphorically smashed the like button, too. UK real estate investment trusts and ETFs are trading well above the lows of March.

Though perhaps that isn’t saying much.

In many cases, the prices of commercial property related shares are still down year-to-date – and this after 2022 had already put the boot in.

Still, in property you make your money when you buy, not when you sell. A low purchase price implies higher rental yields and bigger capital gains in the future.

So, is this the time to look for other bricks-and-mortar bargains before they are all bid up by the big boys?

Playing property fast and loose

Blackstone agreed to pay 168p per share for Industrials Reit, valuing the target at £511m.

More excitingly, that 168p was a 42% premium to Industrials’ price before Blackstone showed its hand.

Nice gains if you can get them. Apply such an uplift across the UK’s depressed property sector, and there would appear to be abundant upside for buyers today.

However, I’d suggest Industrials Reit is in some ways a special case. It owns unusual assets compared to other listed funds invested in the UK real estate.

Typically, UK REITs that offer exposure to ‘industrial’ assets – think warehouses and factories rather than iron foundries â€“ are ‘big box’ players. Their portfolios heave with big logistics hubs rented out to the likes of Amazon and Tesco.

Picture all those huge warehouses you see by the sides of motorways these days.

Whereas, Industrials Reit owns Multi-Let Industrial estates (hence its ticker ‘MLI’). These estates are a hodgepodge, let across several dozen tenants, each of whom rents a usually fairly modest-sized space as a workshop, warehouse, garage, or similar, and sometimes coming with their own kitchens and toilets.

The economics of this business is very different to that of the big box REITs.

Crucially, Industrials signs fairly short leases. According to its 2022 annual report, Industrials’ average lease is around four years – and it turns over about 25% of its existing leases every year.

In contrast, deals signed by the logistics giants often run for over a decade.

Now, shorter leases mean Industrials needs to work harder to keep its estates occupied. Tenants are freer to shop around, or to up and leave.

But the upside in inflationary times like today is that Industrials can raise rents more rapidly as new tenants come in, which keeps its rent roll growing nicely.

Fast turnover also makes Industrials more responsive to market conditions.

For example, Amazon threw cold water on the logistics sector last year when it admitted it had taken on too much warehouse space. That began a de-rating for the likes of Tritax Big Box, which had expanded rapidly during the pandemic.

In contrast, Industrials’ tenant mix is more diverse to begin with â€“ and it is also less vulnerable to shifts in demand. Online retail retrenching? No worries, it can sign-up more niche engineers benefiting from post-Brexit ‘re-shoring’, for instance.

For property – hardly the fastest-moving sector – this makes Industrials positively racy.

A platform for growth

The secret sauce for Industrials, therefore, is in managing the comings and goings of hundreds of tenants while collecting rent from the incumbents – and doing everything else a landlord usually does – to keep vacancies low and the cash flowing in.

Industrials Reit calls its operations a ‘platform’, accordingly.

The platform label has been trendy in recent years. To over-simplify, it implies the business is a sort of operating system that can be copied-and-pasted across an expanding asset base, where profits are mostly driven by how well the assets are managed by the platform – rather than by fine-tuning the assets themselves.

Compare that with, say, British Land, the illustrious old-line REIT that makes a big fuss about the quality of its prime mixed-use campuses in places like Paddington Basin in London. No doubt British Land sometimes drops the word ‘platform’ into presentations to analysts. But its earnings power is really about how attractive the office and retail spaces it develops subsequently prove with its blue-chip clients.

It’s easy to see why for a firm like Blackstone, the platform operations offered by Industrials are more attractive than buying up a traditional Reit like British Land.

In theory, Blackstone has acquired a system that can consolidate and manage more industrial estates in a relatively predictable fashion – with Blackstone putting extra capital in at the top and enjoying a rising rental cashflow as its output. As long as Industrials Reit can continue what it’s doing, it should be a matter of step-and-repeat to expand the business, without the development risk of traditional real estate – nor the existential risks confronting the sector thanks to the shift to home working and online retail.

Still a buyer’s market

All very compelling – but of course, the smart thing would have been to identify the appeal of Industrials Reit before Blackstone made its move.

That’s especially true because I don’t think there’s anything else quite like it that you can invest in now to gain pure exposure to the MLI space.

For sure, some of the large REITs and other funds own mixed-use industrial estates. But even a company like the fairly diverse £10bn industrials bellwether Segro is mostly a bet on big box logistics and warehouses for retail.

For this reason, I don’t believe Blackstone’s move really offers much of a read across to sector as a whole â€“ or at least not in the obvious sense. The near-term outlook for real estate writ large still depends mostly on the direction of interest rates, and on how post-Covid working and shopping habits finally settle.

However, a contrarian might say this tells us it is actually the time to dig for value in those big box and/or office-heavy REITs.

Because such real estate really does look cheap. Sticking with Segro, the firm just put out a very encouraging trading update that implied property valuations have begun to stabilise – even as it sees plenty of potential for growth in rental income.

Segro trades at around a 20% discount to net assets. Yet the same inflationary forces that have proved a headwind to real estate for the past 18 months should ultimately bolster property valuations – not least because inflation makes it more expensive to build or replace warehouses and other physical assets.

Blackstone has bought what is working today with Industrials Reit. But another key to winning with property investment is to buy what will be popular tomorrow.

The post Is property built on a strong platform? appeared first on The Motley Fool UK.

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Investing literature is full of old adages that make becoming the next Warren Buffett sound about as difficult as brushing your teeth.

Indeed, the catchiest have become clichés.

And so you’ll hear the same phrases trotted out time and again on social media – especially by pundits during moments of crisis in the markets.

Yet pay attention and you’ll notice that most of these supposedly obvious investing truths are 100% contradicted by another one that’s just as popular!

Here are three bits of head-to-head wisdom where you might be tempted to toss a coin instead for guidance.

 #1: “Run your winners” versus “You’ll never go broke taking a profit”

You buy a share, and it rises 50% in three months.

Nice going slugger! But what do you do now?

On the one hand, you could recompute the fundamentals of the business to see how the valuation stands at the higher price, versus the progress in its operations.

Or perhaps you could focus on that progress. Is your investing thesis coming to fruition? Is the price rise warranted by superior newsflow from the company?

Alternatively, you could turn to your Little Book of Investing Clichés, which reminds you that – allegedly – you’ll never go broke taking a profit.

So you go to sell, but then you remember skim-reading an earlier entry – one that urged you to run your winners!

It’s quite the dilemma.

Obviously I don’t believe either mantra should guide your next move.

It’s true running your winners is often a good idea. One infamous study found just 4% of all US stocks delivered all the long-term gains that saw equity investing beat buying US bonds. So you would have wanted to hold those rare huge winners as they multiplied over and over again, just to keep up with the market.

In contrast, selling anything that goes up could be a terrible strategy. Because we all buy stocks that go down too, and if you keep cutting the gains from the ones that go up while holding the losers, then your portfolio could go backwards.

Then again, you might argue that 96% of companies in that study didn’t deliver those all-important gains over the long term.

With those stocks, you might have done better to snatch whatever profit they delivered when you could and then move on, looking for the multi-baggers.

Oh well, nobody said investing was easy. Except perhaps the person who compiled the Little Book of Investing Clichés.

 #2: “Sell in May and go away” versus “Time in the market is more important than timing the market”

Curiously, the old rhyme “Sell in May and go away, come back on St Leger’s Day” has some validity.

Over the very long term, the stock market does tend to be deliver higher returns between November to April, compared to May to October.

But before you shut down your share portfolio for the summer, I’ve caveats!

Firstly, while this so-called seasonal effect has been found to generally hold in both the US and UK market when looking at the historical record, that’s not a guarantee it will hold in the future. Nor that it will apply in any particular year.

You could easily liquidate your stocks and miss out on a sizzling summer market.

Secondly, the stock market actually tends to go up over both six-month periods.

Yes, it has tended to do better in the cooler months, but there’s no need to sell up in May, given that often you’ll see gains in the months running up to October, too.

Hence, I much prefer the second aphorism, despite the data backing up the first.

Rather than fretting with trading your portfolio based on nursery rhymes and the calendar, focus on buying and holding good stocks – or an index fund – for the long term. Add new money when you can, invest steadily over the years.

And let time and compound work their magic.

You’ll have lower trading costs, you won’t miss out on rallies – and you’ll have a more peaceful life.

#3: “Don’t look for the needle in the haystack. Just buy the haystack!” versus “If you really know businesses, you probably shouldn’t own more than six of them”

To mix things up, my last example doesn’t pitch two snappy catchphrases against each other. Rather, it’s a head-to-head from two widely quoted investing legends.

The first comes from John Bogle. It’s a call to invest in the stock market tracker funds that – as the founder of Vanguard – Mr Bogle did so much to popularise.

The second quote is from Warren Buffett. As one of the world’s richest people who got that way entirely on the back of investing, maybe you should listen?

It’s another tricky one.

The data suggests most people will fail to beat the market over the long term. That favours John Bogle’s index fund investing.

Yet, we would never have even heard of Warren Buffett if he’d invested in index funds, had they even been available when he started.

Buffett is living proof of the potential power of picking stocks.

Yet these two market mavens aren’t really at loggerheads. Note that Buffett is saying that those who “really know businesses” are the ones who should own just half a dozen companies.

Given that Buffett’s instructions in the event of his death is the money left to his wife, Astrid, should go into index funds, I’d say he and Bogle are really on the same page.

If you’re ready to dig deeply into businesses and to make investing your passion – and you’re prepared to risk doing worse than the stock market in the quest to do better – then Buffett has shown us one way to get there.

But most of us should probably put at least some of our money into Bogle’s beloved index funds all the same. Because when you already own a chunk of the haystack, it’s less risky to then go hunting for a needle.

Come to think of it… maybe diversification works just as well with investing aphorisms as it does for stock portfolios!

The post When investing clichés go to war appeared first on The Motley Fool UK.

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The FTSE 100 index recently hit the 8,000 points level – at around the same time as I hit my fiftieth birthday.

One of these events was a portentous milestone awaited for years that told me a lot about my likely future investing returns.

And the other was the FTSE 100 hitting the 8,000 points level.

Oh I hear your objections.

The financial media has been full of excited talk about the importance of the UK’s index of 100 leading companies achieving this latest record high.

At the least FTSE 8,000 is ‘psychologically important’, we’re told.

Meanwhile, my own anniversary barely got a mention!

Well more (small ‘f’) fool them.

Because unless you spend your time spread betting the stock market indices (you shouldn’t) or you write about investing for a living (pros and cons), then the FTSE 100 hitting 8,000 is about as important as anything you can divine from the leftovers of a KFC Bargain Bucket.

Here’s one we did earlier

Let’s detour to recall the sad history of the now-forgotten – yet also supposedly ‘psychologically important’ – FTSE 7,000 milestone.

Market commentators wrung many years of punditry out of FTSE 7,000. But if any Foolish investor made a penny by paying attention, then it was only through luck.

You see, the FTSE 100 hit 6,930 at the top of the late 1990s stock market bubble.

And as you can imagine, being just a whisker from 7,000 caused great excitement at the height of that bull market.

But the Dotcom crash put paid to any such exuberance. This slump took the UK benchmark all the way below 4,000 by early 2003.

The UK benchmark eventually rallied and by 2007 it neared 7,000 once more.

Until we ran into the Global Financial Crisis and it jumped back into the deep-end.

In fact, it wasn’t until December 2015 that the FTSE 100 finally recovered and tacked on the 70 measly points required to take it over 7,000…

…at which point it seemed to look around, get vertigo, and crash back below 6,000.

By 2016 we were back above 7,000. Until the Covid crash meant we weren’t.

All told as recently as early 2021 the FTSE 100 was again at the same level it had first hit 21 years ago!

Tell me again how index levels are a key signal of market momentum or some similar superstition?

Once more with feeling

At this point it’s traditional to bring dividends into the picture.

You see, the FTSE is a price index not a total return index. The relatively chunky dividends paid out by UK blue chips don’t add one jot to its advance.

Indeed, all things equal, dividends actually act as a slight drag on index gains.

And yet dividends really do matter.

When the FTSE 100 broke through its 1999 high for the – I don’t know, I lost count – time in early 2019 and pushed on – once again – to the oh-so-important 7,000 level, it had gone nowhere in price terms for two decades, but it had roughly doubled the money of even the most hapless investor who had bought at late ‘90s peak, so long as they’d reinvested their dividends.

Hence, I’d argue the exclusion from the FTSE 100 index of the returns from dividends is a big reason to pay it scant attention.

Another reason is that indices are regularly reshuffled. Today’s FTSE 100 has different constituents to the 1999 incarnation. Companies fade, are taken over, or grow to a size where they muscle another one out of the index.

So while the level of the FTSE 100 index tells us something, it doesn’t really tell us how the top 100 UK companies have fared over the years.

It doesn’t even tell us much about the UK economy.

At least three-quarters of FTSE 100 earnings are generated overseas. So a weak pound is far more of a force-multiplier than a robust GDP figure for multinationals like BP, Shell, and AstraZeneca that make up such a large part of the FTSE 100.

If anything, a strong UK economy is bad for FTSE 100 earnings, should robust GDP growth encourage a strengthening of the pound.

Diving beneath the index level

Some say the resilience of the FTSE 100 index last year – when, for once, we led the global indices – underwrites the importance of the advance to 8,000.

Doesn’t it show the FTSE 100’s time has come, they argue? And won’t this momentum continue?

Well it might. But if it does, it will be because of factors that really drive stock market returns. Not because of phantom animal spirits supposedly invigorated by our little corner of the investing landscape hitting an arbitrary 8,000 points.

The reason the FTSE 100 did well in 2022 has nothing to do with information contained in its price level and everything to do with its constituents.

The FTSE 100 is notoriously light on technology firms and high-growth stocks – areas of the market that were pummelled by rising rates in 2022.

Our leading index is weighted to cyclical firms – especially commodity producers – and old economy value-style outfits. Both did well last year.

Finally, since the EU Referendum in 2016 the UK market has been somewhat shunned by international investors. This has led to a derating of the UK’s biggest shares, even beyond their value stock underpinnings.

Which in turn meant that there wasn’t so much air to be let out of the UK balloon when asset prices everywhere popped last year.

Shrinking time horizons, broader investing horizons

One powerful tendency in markets is mean reversion. And there is plenty of precedent for the historically stretched valuation of racy growth stocks versus dowdy value shares to continue to reverse over the next few years – at least so long as interest rates continue to normalise and inflation doesn’t turn to deflation.

Should this reversion continue, the FTSE 100 will probably continue to do well.

But such future gains won’t have been magicked out of breaching the 8,000 level.

In contrast, as I said me turning 50 tells me something about my investing future.

The sad fact is I haven’t got so many years left ahead of me, and at some point, I will need to begin to drawdown my portfolio rather than continue to build it.

I don’t see a hurry – Warren Buffett is still stock-picking at 92 – but my shrinking time horizon is at least a reminder that I should stay diversified to maximise my chances of a prosperous old age.

Because one thing I cannot afford to do is to go all-in on the FTSE 100 at 8,000, only to see the UK benchmark flounder for another two decades!

P.S. As I write the FTSE 100 is already back below 8,000. Here we go again?

The post The psychologically unimportant FTSE 8,000 level appeared first on The Motley Fool UK.

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My local cinema recently held a special screening of Rashomon, the acclaimed period drama from Japanese director Akira Kurosawa.

If you missed it first time around – very probable, given Rashomon debuted in 1950 â€“ then the plot is simple enough.

A samurai is found dead in the forest. Only a few pieces of evidence remain. As various witnesses tell the police what happened, each paints a different picture of events – invariably one putting themselves in the best light.

Some stories change, too, revealing their narrators to be liars, or at least self-interested.

The acting is great and the cinematography is striking for its time.

But it’s the psychological aspect of offering multiple perspectives on the same event that captures the imagination – and that inspired later movies such as Quentin Tarantino’s Reservoir Dogs.

Why am I talking about this?

Well, I believe 90 minutes spent watching Rashomon with a box of popcorn won’t just buff up your cineaste credentials. Seeing the world through a mindset trained by Akira Kurosawa’s movie can improve your skills as an investor, too.

That’s because there are similarly many ways to look at any potential investment.

Two sides to every story

Most of us start off as pretty naive investors. We think investing is easier than it is.

For example, perhaps we read about Warren Buffett and value investing, and then we screen for lowly-rated shares. We crow about being greedy when others are fearful, and we load up on beaten-up companies.

That can work, of course. But the chances are that many of the shares we buy will continue to go south. It turns out the market wasn’t as dumb as our superficial reading of value investing implied. Lots of companies are cheap for good reason.

There really was another side to the story.

More recently, most new investors probably got started as growth or technology investors, thanks to the long tech boom that ended with the bubbly post-pandemic boom for profitless ‘disruptive’ start-ups.

With these ‘blue sky’ shares, the story always sounds exciting and the potential unlimited – while a share graph flying up and to the right makes them easy to buy.

But if you did dabble in this end of the market in 2021, then pretty much every stock you bought is probably deeply underwater by now.

In some cases, the prices were unreasonably frothy – too high to justify almost any realistic growth rate.

In many others, sky-high growth moderated once the lockdown conditions of the pandemic abated, anyway.

And so again there were at least a couple of lenses through which you might have viewed these companies, to try to distinguish the rare winners from the also-rans.

When the plot twists

I’m not making a case here for either value or growth investing – or for any of the permutations in-between.

I’m just saying that understanding the other side to both philosophies – shares can be justifiably cheap, and even great growth stories can be too expensive – is a good first step towards seeing a potential investment from multiple angles.

Ideally, you want to be able to tell several competing stories about a company before you pick the one that resonates most with you.

But at the very least you should be able to give a strong bear argument for any investment that you’re bullish about.

Remember: whenever you buy a share that you’re keen on, someone must be selling it to you.

What do they see that you don’t?

Sometimes it may just come down to different investing styles or time horizons.

But often you hear opposing – and contradictory – stories, and you must choose.

For instance, until recently AIM-listed WANdisco (LSE: WAND) was enticing a lot of growth investors thanks to a string of big-ticket contract wins announcements.

It appeared the company was finally achieving breakthrough success with large telecoms suppliers and other large customers.

But trading in WANdisco shares was suspended this month after management revealed it had uncovered “potentially fraudulent irregularities” of significant size to lead to “material uncertainty” over WANdisco’s future as a going concern.

In other words, the same orders that were attracting so much buzz just a few weeks ago might turn out to have been more or less fictitious!

That is a plot reversal worthy of Rashomon’s alternative narratives.

Or consider shares in banks.

As interest rates have risen over the past year, banks were tipped as rare beneficiaries, thanks to the subsequent margin-boosting improvement in the rates they lent money out at versus what they paid depositors in interest.

This story was compelling – right up until we started to see bank runs at some very sizeable US lenders, due to fears about the damage those same interest rate rises have had on the value of assets on many banks’ balance sheets. Oops!

We might yet see something similar with UK banks, if the rise in mortgage rates since 2021 sparks a house price crash, causing banks to take big writedowns.

Again – two contrasting perspectives on the same story.

Hunting for happily ever after

Rashomon ends with the two main characters finding a baby behind a wall. The first is chastised by the other, who assumes he’s about to rob the child. But really, he plans to take the baby home to be cared with his other children.

It’s an ambiguous conclusion even for the movie – let alone for an investing piece looking for parallels for stock pickers.

Perhaps we can see it as a reminder that all human stories begin with a clean slate? And similarly, that you always come to a new stock without preconceptions?

In contrast, the downside of seeing every side of the argument about a share you know well is decision paralysis.

When the bull and bear arguments look equally reasonable, it’s pretty much a coin flip to choose between them.

No matter! There’s no law that says you have to decide when it comes to any particular share. If it’s too close to call, then maybe the opportunity is not for you. Put it in Warren Buffett’s ‘too hard’ pile. Then, move on until you find a company whose story you can really believe in enough to put your money behind.

The post What a 73-year-old Japanese cinema classic reminds us about investing appeared first on The Motley Fool UK.

More reading

• How you can use Warren Buffett’s golden rules to start building wealth at 50
• How to try and turn £1,000 into £10,000+ with penny stocks
• Should I buy FTSE 100 shares today, or wait for the next stock market crash?
• After a 77% rally, the BAE share price looks bloated. How should investors react?
• How much do I need in a Stocks and Shares ISA to earn £1,000 a month?