Fireplace with a lit fire
Investment insights

The spirits of Christmas

James Horniman, Partner

After a successful year for technology stocks, James Horniman has clearly been thinking too much about the fundamentals of stock selection.

James Horniman, Partner and Portfolio Manager, James Hambro & Partners

James Horniman, Portfolio Manager

Maybe it was reading A Christmas Carol to the children before bedtime or having too much Stilton for supper. To my surprise, I was being woken from my sleep by an ethereal chap looking remarkably like Benjamin Graham, wearing a smart three-piece suit – a white pocket handkerchief rising from his breast pocket. The legendary author of “The Intelligent Investor” was pulling back the heavy velvet curtains on the four poster to reveal my old office on Broadgate.

The spirit of crashed markets past

The calendar on the wall read March 10, 2000. An image of the Nasdaq index sitting at a record 5,132 was displayed in bright orange letters on a bulky computer monitor at my desk. On a muted TV on top of a nearby gun-metal filing cabinet commentators appeared to be discussing the merits of a merger between AOL and Time Warner and a much thumbed investment magazine on the desk next to me was breathlessly proclaiming the inexorable rise of “dot-com” stocks under the headline “New economy – new paradigm”.

“I am the spirit of crashed markets past,” boomed Graham suddenly, making me jump. ‘‘My family lost all their savings in the Bank Panic of 1907. I lost most of my investments in the Wall Street crash. Tomorrow, the dot-com bubble will begin to burst. We learn more from our mistakes than our successes and the best mistakes to learn from belong to other people. Watch and learn!”

He pointed me to the screen. “Buy on arithmetic my boy, not optimism! The Nasdaq index of 3,000 US stocks is on a valuation of 175 times earnings – two thirds of its value is tied up in inflated technology shares. Hundreds of technology start-ups are going public despite having never made a profit. Most will be bust in a few weeks. Some of them genuinely do have the technology and expertise to exploit and shape the digital economy. The wise technology investor waits to see which will emerge from the pack, which have strong management. Watch these four.” He slipped me a piece of paper. In beautiful fountain pen ink were the words: Amazon, Apple, Microsoft and Google.

The spirit of markets present

Graham turned, replaced his hat and walked towards the fireplace. There was a gentle cough behind me. “I’m the spirit of markets present.” I turned to find an elderly man standing next to my desk at the JH&P office. He was wearing an incongruous pair of beach shorts and a smile. “It’s only when the tide goes out that you discover who’s been swimming naked,” he drawled by way of explanation. It could only be one person.

“Mr Buffett?” I gasped. The FT was open at an article on Bitcoin. The spirit was just shaking his head. “Huge intrinsic value? Pah! A mirage, a joke,” he muttered. He pointed to the FT and an article questioning whether the large rise in technology stock valuations through 2017 was justified or merely a bubble.

He said: “The Nasdaq is at an all-time high – it’s risen 25pc in 2017 alone on strong technology performance. Check out valuations though ­– 32 times earnings, compared with 175 times in 2000.”

I replied: “It’s not the same. There is exuberance but in some cases it’s justified. Many of the household technology names have billions of dollars of free cash on their balance sheets, they’ve made the crucial market breakthrough and are long-term disrupters, forging the new digital landscape. There are obviously some technology stocks that make us nervous though – who wouldn’t be anxious with companies coming to the market never having made a profit, being valued at billions and with shares ten times oversubscribed. It’s a familiar calling card of the dot-com boom. But we feel the earnings of the companies we like justify their valuation.”

The spirit patted me on the shoulder. The scene faded to darkness as I heard him say: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”

Ghostly visions of the future

The final part of my dream saw me pulling up at the house in the back of my driverless car with the Christmas shopping. As I struggled into the kitchen worrying about turkey timings, I shouted in panic: “When’s the Amazon drone dropping off that bird?” A voice replied: “I’m Alexa, the spirit of Christmas future. Your Norfolk Black is currently flying over Basingstoke!”

On my iPhone XX the financial news feeds started to come through – charts dancing in 3D. It was Christmas 2028. An interesting article outlined the failure of wages to grow or inflation to get a meaningful foothold in the wake of the ending of quantitative easing. It explained how the digital economy had globalised the workforce, driving down skilled labour costs while automation had decimated roles for unskilled workers and fund managers. I began to feel quite queasy.

Back from the future

I was being violently shaken. “Daddy, Father Christmas has been.” I woke up and the children were on the bed already opening Christmas stockings, complaining about how long it had taken to wake me. “You just kept muttering ‘It’s always about the fundamentals’ Daddy!” they said.

“Stilton?” said my incredulous wife after I tried to explain the dream. “You had too many whiskies while you were putting up the decorations. You’d better go and put the turkey on.”

Happy Christmas!

James Horniman

The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Past performance is not a reliable indicator of future results. You should not rely on the advice of ghosts past, present or future. The suitability of any recommendations arising from Stilton-induced visions will depend on your individual circumstances.

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