Value insights: Shall we talk about Twitter?
The on/off Twitter buyout is a curious twist on the (post?) modern valuation theory that, in today’s markets, “things are valuable not based on their cashflows but on their proximity to Elon Musk”.
In Joseph Conrad’s 1902 classic short novel ‘Typhoon’, Captain MacWhirr is unprepared for the storm that lies ahead, having never experienced such severe conditions at sea. Reading and knowing about violent storms is one thing; living through them is another. As Conrad writes, MacWhirr ‘had never been given a glimpse of immeasurable strength and of immoderate wrath, the wrath that passes exhausted but never appeased – the wrath and fury of the passionate sea. He knew it existed, as we know that crime and abominations exist; he had heard of it as a peaceable citizen in a town hears of battles, famines, and floods, and yet knows nothing of what these things mean’.
There is a relevant parallel for participants in financial markets: the difference between experiencing a prolonged market downturn, and merely hypothesising about what one would do in such a scenario. Prolonged in this context means a ‘proper’ bear market that drags on for many months, or even years. The characteristics of such downturns, and the consequent investor behaviour, can be very different to those of sudden-but-short market dips. As City veteran Richard Buxton recently opined, “bear markets are far worse than panicked collapses. In the latter, you don’t have time to change your portfolio but you have immediate opportunities to add to positions at ludicrously cheap levels”. In contrast, “in grinding bear markets you have to be positioned to minimise losses, survive and try to identify the moment to buy some very depressed stocks towards the end for the upturn”.
This is one area, then, where experience may count for something. While many current market participants will have been through the ‘panicked collapse’ of early 2020 as the full scale of the COVID pandemic became apparent, fewer investors or funds include a grinding bear market in their track records. But Ninety One’s Value funds can! With our Global Value strategy’s 2007 inception pre-dating the Global Financial Crisis, and our UK Value strategy’s track record extending all the way back to 1988, we can certainly say that the funds have lived through a few storms.
While investors can hypothesise about the trading actions they would take in a bear market, the portfolio positioning they would adopt, and the behaviours they would employ, we can say from experience that the reality can prove to be far different to theory. In an actual bear market, liquidity can dry up, confronting investors with difficult questions about what they must sell before they buy anything, if indeed they have the stomach to buy anything at all. Despite the psychological and technical barriers, our portfolios took advantage of both of the more recent bear markets (early 2020 and the Global Financial Crisis in 2008/2009) to invest in securities at extremely attractive valuations.
As for the protagonist of ‘Typhoon’, ultimately, through a combination of luck and judgement, Captain MacWhirr and his ship survived the great sea storm, highlighting that even the inexperienced can face such challenges and live to fight another day. Were he to face another typhoon, though, you would imagine his harrowing experiences of the wrath and fury of the sea would leave him better prepared next time around. As he concludes, ‘there are things you find nothing about in books’.
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