'Buy the Umbrella' - Issue #21
Hi there!
Here is your latest dose of “Buy the Umbrella”, a short list of interesting things I’ve been reading and thinking about during the week.
Quotes
"Money's greatest intrinsic value, and this can't be overstated, is it's ability to give you control over your time."
— Morgan Housel
"Beware the investment activity that produces applause; the great moves are usually greeted with yawns."
— Warren Buffett
Charts
Prices of used cars, less than 12 months old, exceed showroom prices
Used car prices have risen significantly since the onset of the pandemic due to supply chain challenges within the automotive sector. For example, in the U.K., used car prices have rise over 30% in the last 12 months. Approximately 21% of used cars, aged up to 12 months, are more expensive than a brand-new equivalent car. Similar price gains are being experienced in the U.S. according to the CarGurus Index.
Prices appear to have begun to stabilise as supply chain issues are slowly being worked out; however, we are yet to see signs of a major reversal to prior trends lines.
U.K.'s inflation rate hit a 30-year high of 6.2% in February
The Office for Budget Responsibility (OBR) forecasts the biggest fall in U.K. living standards since Office for National Statistics records began in 1956-57. The OBR expects inflation to average 7.4% this year.
Meanwhile, household energy bills are expected to increase by a further £830 a year from October as the so-called 'energy crisis' continues.
In response, the British government announced plans to delivery nuclear power stations at "warp speed". Prime minister Boris Johnson wants atomic power to provide at least 25% of the U.K.'s electricity generation by 2050, up from approximately 16% today. This implies a significant expansion in nuclear generating capacity as demand for electricity is expected to double by the middle of the century.
Articles
Alibaba upsizes share buyback by two-thirds to record $25 billion
In BTU issue #20, we highlighted the poor performance of Chinese equities since February 2021 with many companies now trading at relatively attractive valuations. Alibaba's management seems to agree, adding another $10 billion to its $15 billion share buyback program.
Alibaba Group’s Deputy Chief Financial Officer Toby Xu commented that “the upsized share buyback underscores our confidence in Alibaba’s long-term, sustainable growth potential and value creation".
Bill Miller's market perspective
The former Chairman and CIO of Legg Mason (an asset manager recently acquired by Franklin Templeton) who now runs his own firm Miller Value, wrote a short piece on equity markets that is worth a read.
Miller reminds investors that despite endless opinions in today's papers about the direction of the Ukraine war, inflation, oil prices and central bank policy, these are ultimately guesses.
No-one can predict:
How long the war in Ukraine will last, nor what its outcome will be
How high inflation will go, nor when it will begin to subside
If oil prices will stay over $100, double from here or begin to decline
How many times the Federal Reserve will raise rates, nor what impact, if any, reducing its balance sheet will have on the economy
So what do we know?
"What we do know is that the stock market operates as a real-time information processing entity that continuously incorporates the changing beliefs about the future into today’s prices. The value of all the companies in the market reflects investors’ collective expectations of the future of the key macro and micro economic variables".
"As investors assess the probabilities of different outcomes, they are confronting a regime change in the economy, in capital markets, and in geo-politics that most have not seen in their professional lifetimes".
Until next time...
Thank you for reading this week’s issue. If you found it interesting, please consider sharing it with a like-minded friend or family member.
If you have any questions or feedback, please feel free to reach out!
Have a great week.
Why ‘Buy the Umbrella’?
Individuals, many of whom also run businesses and governments, tend to not think of the downside when the present is stable, and the future is looking positive (usually when we feel most in control).
Just because it is currently sunny, does not mean it will never rain. If we are not prepared, once it does begin to rain, we will end up running around looking for an umbrella in the middle of a storm, when they tend to be in short supply. We therefore need to buy the umbrella before it rains.
At the same time, we cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid, as this too works against us over the long-term.
Having the right mindset in advance is critical. The challenge is getting the right balance between being optimistic about the future and being able to not only withstand future crises, but in fact grow stronger due to the opportunities they tend to present. It is not enough just to be conservative. One needs to be willing to put our cash to work when others feel least comfortable doing it. To do that with confidence, we need to have a foundational understanding of history, business, markets and human psychology.
Our mission at BTU is to learn as much about the world as possible, and in doing so, to try to find investment opportunities with favourable risk/reward characteristics. These should, over the long term, help build sustainable wealth.