Market Update 23rd September

All aboard Noah’s ark

Let’s start with a statement of the obvious. Market participants generally have a clear preference for the bull to prevail over the bear. It’s the same story in the battle of the birds. All else being equal, almost everyone prefers a doveish policy to a hawkish one.

That was most recently seen by the market reaction to US rates coming down by 50bps last week. It’s easy to see why. There is a wealth of evidence that shows previous easings have been greeted by rallies in the equity market. And with good reason too. Cutting rates simultaneously lowers discount rates (which is good for valuation models) and stimulates consumer spending growth. That said, I’m obliged to say this time it could be different. Markets have a nasty way of not allowing themselves to be predictable in the short term, especially with the presidential election around the corner.

The markets animalistic terms are of course useful, but they have limitations. For starters, they generally lack permanence. While it is possible to be a long-term bull (which I am, of course) really the idea of being a bull, bear, dove or hawk is a point-in-time opinion linked to short-term markets conditions. But perhaps most tellingly, these labels are useful for conveying what one thinks, but little about how one thinks.

To address this, we are better off asking ourselves whether we’re a hedgehog or a fox. Let me explain.

In 1953, Isiah Berlin, influenced by ancient Greek thinking, assigned these labels to the two thought processes he identified. Naturally, one’s mind is drawn to a certain conclusion. But thinking as a hedgehog has nothing to do with adopting a defensive strategy. It is more attached to the idea that they know something very well, and generally stick to it. Hedgehogs have their methods, and they trust them through thick and thin.

Thinking as a fox is arguably closer to the definition your mind initially jumped to. It involves some mental agility and dexterity. A fox is, according to Berlin, someone who is adept at digesting new information and using that to formulate new ideas and opinions.

In life, there are times when you want to be a hedgehog, and there are times when you want to be a fox. That is especially true with investing.

For example, it is important for an investor to have set ideas. Being bullish about equity markets long term should be a fundamental hedgehog belief… Which is a sentence that I never thought I would write. Similarly, fund managers should have a central thesis and stick to it. Whether income, growth value or sector specific, they all have a sphere of competence, and are best served staying within it.

As time goes on, one needs to become foxier. A fund manager or individual investor infatuated with a particular stock or story will be vulnerable to being blinkered when conditions turn.

The practicalities of all of this look a lot like how we think about investing at Hawksmoor. In particular on the direct equities side of things, which just so happens to be my individual ‘sphere of competence’.

The erinaceous guiding principle here is that high quality companies, ie those with excellent track records of value-accretive capital allocation, high margins and outstanding products, are most appropriate for our clients. After identifying such businesses, we engage with management, compile research and regularly monitor both performance and wider conditions to ensure that our list of recommended investments is up to date and appropriate.

We will not get everything right all the time, but we hope that this simple strategy can add value for clients over time.

George Salmon – Senior Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.