The Limpopo dispatches: the black magic of markets.

Edition Number I, February 2015

By Robert Sutherland Smith.

In his debut piece for SpreadBetMagazine, Robert Sutherland Smith imparts a few words of wisdom regarding his investment approach. A City veteran with a career stretching all the way back to 1967, Robert’s experience encompasses fund management (including a directorship at County Bank Investment Services), stock broking analysis and advisory, and investment research (notably as head of Quartz Capital Partners, a pan European investment bank).

I have been invited to write for SpreadBetMagazine, to which I shall contribute my thoughts and observations on the political economy and markets, as well as the occasional individual assessment of blue chip companies. So with much pleasure, I pick up my pen (in reality stabbing fingers at the keyboard of my new PC) to introduce myself and my joyfully simple philosophy of market life.

Fortunately, I am not employed by a broker or investment bank to shift stock, to earn enough commission or facilitate a jobber’s turn – a term that tells you that I am in fact a survivor from top-hat discount-house times – to help each and every day to open the doors and keep the lights on in some large office block in the Square Mile.

Rather, I shall offer you my individual, detached and personal thoughts and ideas about markets and shares as they occur to me, with an eye wandering along the market’s shore line in the hope of finding something of value washed up by the tide. So I am not in the business of telling you to buy or sell shares but rather giving you my opinions to feed into the stream of professional advice you may or should be getting elsewhere.

I like to think of myself as a second opinion, informed market impressionist; a kind of Van Gogh of share assessment – but one, I hasten to add, who has retained both ears. Knowing when to ‘cut’ is important but in my judgement should not extend to ears. It is fine to be eyeless in Gaza but never earless in Lombard Street. I might add that John Milton, who penned the poetic tragedy Samson Agonistes, once lived in the City of London when it was famous for puritan ethics. Those days are long gone.

The idea of calling this contribution of mine the ‘The Limpopo dispatches’ came from a re-reading of Rudyard Kipling’s ‘Just So Stories’, a wonderful comic explanation of how certain things came to be what they are. The story of how the elephant got its trunk is a kind of analogy for equity investing: the search for knowledge; asking the right questions; innocently being misled by a basking crocodile – to be found in all markets – and eventually finding the right conclusion by serendipity.

If you want an enjoyable read, my first investment advice is to consider investing in a copy of the ‘Just so Stories’ of the late Mr. Rudyard Kipling of the late British Empire (paperback editions available in good bookshops which are usually a browsing pleasure to visit). In the story of how the elephant got its trunk, he introduces the reader to the “green and greasy Limpopo River” surrounded by “fever trees”, which is about as good a metaphor for equity markets as you might imagine – particularly since it has a cunning old crocodile in it.

Moreover, the Hampstead Ponds, where I sometimes swim on warm summer evenings, can look green, reminding one of the Limpopo with the imagined sound of the drumming of revolting native tribes amidst the deep greenery along their banks. In reality it is probably the based beat of north London denizens with solar powered ghetto blasters frightening the bats.

As for blue chips as my investment object of choice, that arises from my passion for familiar and well trodden paths rather than hacking my way into the Limpopo jungle thicket of small company analysis – a bit like Drake looking for Eldorado in the jungles of South America. That is a lonesome adventure – a bit like long distance running at night. In the blue chip markets one is playing with the big boys and trying to work out what games they may be playing from time to time. A really top institutional broker – or “supply side” investment banker as they tend to say these days – is one who can get an investing institution into a stock at the top and out at that bottom. That is the way it has always been and must be if equity markets are to function. The concept of the good “stuffing broker” is an old and venerable one.   

The basic rule about markets is that there are no rules.

Rather, there are rules but they do not work all the time – leaving one with the highly subjective task of trying to work out when to apply a rule and when to refrain. It is not actually a rule of the equity market that one should always sell in May and go away until St. Leger’s. It was not true last May simply because we were hopefully in the presence of the long awaited recovery of the US economy and no one in their right senses wanted to be absent whilst that was going on. 

It is also important to understand the games that financial institutions play.

Big funds, particularly pension funds, are in the business of making relative returns. Unlike the private investor it doesn’t matter to them if they lose money in absolute terms so long as they do not perform relatively badly against other managers. What they aim to do is to be in the best performing stock in a sector not so much to be in the best sectors, which is generally the aim and interest of private investors who want absolute rather than relative returns. To do that, a big fund might sell some very cheap-looking shares. That can be to the advantage of the private investor.

Similarly, market makers, or jobbers as I prefer to call them, are not looking to make large percentage capital gains in blue chip shares but rather to move stock in volume, on the hopeful basis of making a slender return on volume transactions. Investment banks generally don’t care what investors do, providing they sell and buy in sufficient volume and liquidity.  

It is these discontinuities in the markets which make it possible for private investors to buy shares cheaply in theory if not always in practice. With those realities understood, I hope to find good and poor value shares, adding valuation fundamentals to share price chart technicalities with a dash of experience – always of course, bearing in mind that rules in markets are always optional.