We don’t need another “hero”

The world is littered with failed wannabe Nostradamuses.

Charlie Chaplin remarking that movies are a fad, Decca Records predicting “The Beatles have no future in show business” in 1962 – or Alan Shearer predicting England would win the World Cup (albeit only once we’d already made the semis). The finance world sports plenty of eggy faces too. Famously, economists have predicted nine of the last five recessions. Certain strategists have made careers out of being perma-bears, to the point where they have become caricatures of themselves. Many have consistently predicted the end of the world for almost a decade now – all the while the S&P 500 has rallied nearly 150%. For the record, perma-bulls are no better, except they get away with it because they’ve been right for 10 years!

Of course, it is easier to make these big, bold predictions when sat safely on the sell-side. Better to grab the headlines and raise your profile. It’s much harder when you are actually running other people’s money! The oil price is a great illustration of this. In January 2016 investment banks were falling over themselves to call the price of oil ever lower (I think the winner was Standard Chartered at $10 a barrel). Many of these same banks had called it ever higher in 2008...

For those managing money, predicting the future is a dangerous game – even if you’re right. The late Tony Dye infamously believed late-90s markets were overvalued and the soaring tech sector a bubble. He sold up and sat on a pile of cash, significantly underperforming from 1996 to the day he was sacked … in early 2000, just days before the market crashed.

A more recent example is a current UK hedge fund manager who has lost his clients nearly 50% over the last three years betting on a China collapse. He may well eventually be right, but he will need to generate 100% returns just to get his clients back to breakeven (not to mention the opportunity cost – world equities returned more than 50% over the same period). The same fund manager was previously lauded as a hero for having made significant positive returns in 2008. Several others made names for themselves in the great financial crisis. One big US hedge fund manager made significant gains betting the US housing market would collapse, but has seen many of his hedge funds experience significant losses over the last few years. Big bets on gold were a particular source of pain. 

So what does the future hold? Well perhaps the most overused phrase of the last 12 months has been ‘late cycle’. Every man and his dog will tell you this is where we are currently. But what does this really mean? A recession six months out? Three years out? Timing is everything. It admittedly does not feel like the time to go ‘all in’ on equities – given the potential for trade wars and potential monetary policy error – but we continue to find attractive equities we want to own at sensible prices. We are comfortable owning these companies on a medium to long-term time horizon, and we will continue to do so while building up a basket of hedges to help protect the downside. Sensible stewardship, not betting the house.

And so despite Shearer’s predictions, England sadly crashed out of the World Cup last week. Possibly the best chance they will have to reach a World Cup final for many years to come. If the English team were a stock, the only sensible thing to do ahead of the Croatia game was to short it. Ultimately, a low-quality stock that was over-owned, over-hyped and priced for perfection.

Much will be written of England’s “heroes” over the coming weeks, and while I have enjoyed the optimism and the lift it has given the country, it’s time for a healthy dose of reality. England (ranked 12^th in the World) beat Tunisia (21^st), Panama (55^th) and Sweden (24^th) and went out to Croatia (20^th). Yes you can only beat what is in front of you, but perhaps you will forgive me if I hold back on the plaudits.

There are plenty of heroes in the UK, but typically they are not found in football – or finance.