Dear Fellow Investors and Friends
If you’re new here, thanks for signing up!
Today is Thursday, the 26th of October, 2023. It is the 299th day of the year, 66 days remain.
On this day in 1958, Pan-American Airways made the first commercial flight of the Boeing 707 from New York City to Paris. This flight started an era of cheap, mass international travel, benefitting consumers tremendously. Like most new technologies, the companies providing the product did not benefit as much. Have you ever even heard of Pan-American Airways?
Quote of the day
“Salads don’t win scrums.”
Retshegofaditswe “Ox” Nche
Over the past few weeks, the Rugby World Cup has offered up a few surprises. New Zealand held firm for 38 phases in the final 5 minutes against Ireland. South Africa beat France by a point in front of a hostile home crowd. South Africa beat England by a point after being down and out as late as the 70th minute. Retshegofaditswe seemingly single-handedly destroyed the English scrum – not once, not twice, but four times.
I can’t go through it again on Saturday. Maybe my brother is the smart one in our family – he avoided all the stress of the quarter and semi-finals by going to bed before kick-off.
It feels like markets are throwing up just as many surprises. I alluded to this last week – I believe we are in for a long period of structurally increasing interest rates in developed markets. And almost nobody – and I mean nobody – managing money today has done so in such an environment. Surprises should be expected.
In developed markets, declining interest rates have been the norm for the last 40-odd years; in emerging markets, it’s been more mixed, but we have still benefitted from this favourable tailwind. This backdrop has made a vast cohort of financial intermediaries very wealthy – whether they deserved it or not. And to be honest, many probably didn’t. Luck – in the form of ad valorem fees levied on incremental value accretion through the simple mechanism of present valuing future cash flows with increasingly lower interest rates – played a much larger role than skill.
We professional investors need to ask ourselves: did our fees increase because we created value – higher future cash flows – or because the present value of unchanged future cash flows increased?
We’ve been enjoying the healthy salad of growth stocks sprinkled with a nice bouquet of bonds, roughly in a 60/40 proportion. This recipe has made us lean and trim, if a bit low on muscle power. We’ve never much had to fight the market for returns; we could enjoy the ride down the interest rate slide.
That ride is over, and we need to fight the headwinds of increasingly higher interest rates. To do so, we must change our diet to face the future confidently. We must throw that 60/40 dressed salad out the window and bulk up with more nutrients. And changing one’s diet is hard, especially one that has worked so well for us for so long.
But it’s time.
You have to ask yourself, what would Ox do?
A much more diversified diet is what Ox would do: more whole foods and less processed foods and sauces. And less salad.
So, add nutrients in the form of hard assets. Add nutrients in the form of long-dated, high-yielding emerging market bonds. Add nutrients in the form of short-dated US$ assets. Or, as Jeffrey Gundlach says – more T-Bill and Chill. And have much less of that rich sauce of developed market equities and bonds.
We will have to work hard to preserve wealth – let alone grow it – over the next 20 years or so. It’s time to change our diet to get into shape for the hard work ahead.