The two above symptoms (a rising market value of the largest listed public companies, and desultory yields on risk-free assets) are very much linked. There may be some debate as to the underlying cause of such symptoms. In my view, four major forces all play a part, namely: (i) ageing populations in more developed countries; (ii) deflationary forces from a plentiful supply of new labour in emerging markets; (iii) deflationary forces from increasingly efficient supply chains; and (iv) Central Banks largesse in the form of major asset purchase programs providing a consistent source of price-agnostic demand for new government debt issuance.
The issue with trying to forecast what the overall stock market will do next based on changing macroeconomic forces, however, is that you need to be correct on three fronts to profit from any forecasts. First you need to be correct in your forecasts (note that many trained economists have been predicting that interest rates will rise for the past 10 years, and have been wrong for the same length of time as a result). Then you need to select the right instrument to translate your forecasts into an investment decision. Finally you need to be correct in your timing, as being right 'eventually' may lead to large interim losses or, more likely, even larger foregone profits from waiting for the predicted storm to arrive.
And so, whatever the stock market may do next (my prediction, as ever, is that it will fluctuate), the various markets of stocks should still provide decent risk-reward or price-value situations for the savvy investor to take up.
This brings to mind Buffett's excellent advice on seeking out fairly priced compounders, which is as follows: "Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now."
At present such trends as cloud computing and mainstream consumer tech adoption provide tailwinds to businesses that are market leaders in such areas - areas which mark a likely permanent shift in economic activity with related winners and losers. Microsoft and Apple come to mind as winners here. Not coincidentally they are the top two companies in the US by market capitalisation at present, with Apple briefly being valued at over $3tn and Microsoft at $2.6tn within the past week. The questions (for a potential investor to answer) here are twofold. Are their earnings expected to be materially higher five, 10 and 20 years from now and are current valuations what can be regarded as rational prices.
There is no inherent reason that Apple can't keep its earnings rising (from c.$95bn a year at present), but it will have to contend with a shift to the next major computing platform - whatever that may be - constant competition from hardware and software providers and other various business risks that will crop up over time. Microsoft, similarly, could go on compounding earnings (from c.$70bn at present), whilst contending with the deflationary forces that new entrants to cloud computing could bring to pricing models over time. Still, for now, both seem well positioned and arguable cheap (versus Treasuries!). At over 30x current earnings, however, there remains a risk that even if profits increase at a good clip, multiple compression could bring about a lower return than earnings growth over time.
Back to my own little portfolio and returns. 2021 brought a return to form, of sorts, with a 16.8% return following three low return prior years. This was well behind that of the S&P and even behind the FTSE 100's 18.0% total return for the year. I currently hold six stocks and whilst I think all have decent risk-reward or price-value relationships, I feel I can do better by digging a bit harder. I haven't yet succumbed to sitting on obvious compounders and accepting that 10% is a reasonable return (even though I know it is perfectly reasonable), as I still feel 20% is possible with a bit of work.
At the end of the year, the portfolio looked as below, with the following stocks and portfolio positions:
Stock.............Price Paid....Current Price....% Value
Plus500.............£8.10............£13.61................28%
Berkshire...........£160..............£221.................28%
Vistry.................£8.61............£11.84...............15%
Facebook...........£232..............£249.................12%
WPP..................£8.09............£11.20.................8%
Naked Wines.....£6.37.............£6.51..................8%
Here's hoping for a few new ideas to add compounder names that can be purchased at reasonable prices for the year ahead.
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