"One abiding impression I take away from this year is that of conventional wisdom unravelling"by Andy Davis / December 10, 2015 / Leave a comment
Published in January 2016 issue of Prospect Magazine
Sometime between Christmas and New Year I always sneak an hour or so at my desk to work out how my efforts have turned out over the previous 12 months, and to think about the lessons I should try to remember for the year ahead. With the end of 2015 in sight, it’s already obvious that the imminent reckoning is going to be pretty uncomfortable.
I deliberately restrict myself to relatively few holdings because I don’t have enough time to keep up with the news from a large number of companies. Perhaps, if I ever get to retire, this will change, but for now needs must. Having a concentrated portfolio cuts both ways. When things are going reasonably well, it makes my kind of investing manageable in the time I can give it and means that I have a large exposure to prices that are rising. When, as this year, things are much more mixed it means that losses hit you hard and the pain of them is keenly felt. The particularly painful story recently has been the hit I took on one large and longstanding holding that fell victim to something I’ve observed from a safer distance numerous times during 2015: the swift and brutal reaction of share prices—even among the largest companies—to relatively small pieces of disappointing corporate news.
With the benefit of hindsight, I suspect a range of factors have been at play this year that conspired to make setbacks like these larger and more frequent. It’s been a nervy year for investors, with a general feeling that trading conditions for a lot of companies remain a bit of a slog. Confidence in 2015 has been brittle—hence the big falls after minor setbacks—and scandals like the one that hit Volkswagen in September were a stern reminder of how hard it is ever to know what is really going on inside the companies we invest in.
One abiding impression I take away from this year is that of conventional wisdom unravelling as the wind changes direction. Among the ideas that have crumbled in 2015 are that China will remain the dynamo that can offset weak growth across the rest of the world economy; and the more general notion that reasonably robust growth in emerging markets (much of which depended directly or indirectly on Chinese demand) can be safely taken for granted. The most obvious victims of this reverse are the major mining and oil companies that make up such a large proportion of the UK’s FTSE 100 Index. They have been particularly hard hit by the realisation that if Chinese growth—and especially its construction boom—is slowing down, there will be far less demand for the materials they spend billions extracting from the earth. These companies have borrowed gargantuan sums to build mines and drill wells. Once they have finished slimming down and shedding debt, the current down-cycle will eventually turn, but there is not much sign of that yet and the wait could be a good bit longer.