- Christian Armbruester
Neil Woodford And The Philosopher’s Stone
It’s amazing that by the mere mention of the name, an entire story can now stand on its own. The person that was Neil Woodford is now a famous, brand like, alter reality that is all associated with the recent events that have made headlines around the world. So, what could there possibly be to say, when everyone has talked this story to death? Well for one, I told you so and our avid readers will remember that we questioned the merits of the strategy from the outset (Why You Should Never Invest in Equity Income Strategies, February 2018). But we don’t wish to gloat, and we don’t judge, so let us try and cut to the point of all of this.
Picking stocks is messy. It’s not that we can’t find good stocks. There are more than 47,000 globally listed companies that we can analyse, and we can easily get access to public information on any stock including specialised research, pricing data and company specific news. Thanks to technology, we can also run various analytics on charts to see the behaviour of one stock versus another or even measure the correlation to various benchmarks or market averages. In short, picking good stocks isn’t the problem. The issue is, that when you pick one company over the other, you are also taking a view on all the ones that you don’t pick, which is a tall order and that’s just for starters.
The hardest thing of all, is knowing when to get in and when to get out. The premise is easy, buy low and sell high, but the reality is that we will never get that right, and today’s low could be tomorrow’s high and vice versa. Stocks move up and down, sometimes by very little and sometimes by a lot. Say you picked the perfect stock and bought in August 2008, then you would have lost 50% of your money over the course of the next 12 months. What do you do then? Do you buy more or sell all, because it could all go to zero and that’s what everybody was thinking at the time, otherwise things wouldn’t have been down 50% in the first place. That’s called “market risk” and it makes up a very large part of the returns of any stock we pick.
And then there are the currencies, and this is a risk that is most often overlooked when buying stocks in the global marketplace. Most companies that are traded on market exchanges are fairly large in size. That is because it is very expensive to get a listing (and how investment banks make so much money, amongst other things). Large companies tend to have international customers and that means there is exposure to the movement of one currency over another. Say you wanted to buy Vodafone in Sterling on the UK stock exchange. How much of the company’s revenues are in other currencies and how much has the company hedged? If you have ever seen stocks moving more than others when the currency moves, it is because some stocks are more exposed than others. Should we hedge that risk, and by how much and what of the cost?
All of this adds up to one very obvious conclusion: picking stocks is a very random affair and that makes it very difficult to articulate and quantify the value. Neil Woodford gave it a valiant effort to be a market wizard, and good for him. But we prefer not to pay someone to get lucky, as we can do that ourselves. By simply buying some cheap index funds, we can get our exposure to stocks and all the good things that come from that, including growth and dividends. And with the money we save from not paying Neil, we can go and buy some lottery tickets. I reckon that would give us much better odds for financial success, and we might just get lucky.