In his very good book on investing, Margin of Safety, Seth Klarman tells the story of a California speculative mania – in sardines. The fish had disappeared from their usual waters off Monterey, the shortage pushed up prices, and before long there was an enthusiastic trade under way in tinned sardines. The “you-can’t-go-wrong-with-sardines” story spread; prices soared.
Then one day a buyer (a hungry and clearly exceptionally price-insensitive one) decided to open a can and eat a sardine or two. He was fairly instantly unwell – and complained to his supplier. Why would you open the can?, asked the seller. “These are not eating sardines, they are trading sardines.”
It is useful shorthand for when you are dividing the speculative from the real – and particularly useful in today’s markets. Everything that is falling is a trading sardine – a share in a company that is not yet profitable; that is a little profitable but horribly overpriced; or is profitable but not able or willing to pay you a dividend. Most of the things that are rising (or at least not falling) are the opposite.
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Peleton? Trading sardine. Bitcoin? Trading sardine. Any Spac at all? Trading sardine (and down on average 50% this year). Shell? Eating sardine. Glencore? Eating sardine. You get the idea. Bubbles form when we value trading over eating – and when, as Calderwood Capital’s Dylan Grice puts it, the “more stupid an investment is, the more it goes up”. They die when something prompts the market to decide to value eating over trading.
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In recent years we have consistently suggested that readers shift from trading sardines to eating sardines – reasonably easily done by selling Nasdaq-listed stocks (or US stocks in general) and buying UK-listed ones (which have long traded at an undeserved 40% discount to US stocks).
If you did so, or at the very least rebalanced your investment trust portfolio to cut your overweighting to Scottish Mortgage (down 50% this year I’m afraid), things won’t look so bad. The FTSE 100 is flat year to date – something of a triumph given that the Nasdaq is down 25% and the S&P 500 down 18% and a vindication of the view that value does out in the end.
So what next? There is no shortage of things to worry about. There is the awful prospect of famine, the increasingly obvious inability of the world’s central banks to accept their mistakes, ongoing inflation, and the threat of recession in the US and China.
A bear market, veteran investor Howard Marks told the (fantastic) Money Mind Hypothesis symposium in Edinburgh this week, is not anything to do with numbers (it is usually defined as a 20% fall in prices). It is a “state of mind”. And given the state of mind of this market – note that fund managers are so scared they are holding more cash than at any point in the past 20 years – “I think it has further to go”.
You can wait that out in cash (no shame there). But if you feel the need to invest through this part of the cycle, there are possibilities in real estate albeit not in residential property; one particular socially-responsible fund; an eccentric mix of maritime services and hedge funds; and of course in the food, fuel and defence stocks that are benefiting from the new interest in non-toxic sardine investing.
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