Meet Grant Williams

In last week’s post, we said that we would soon be bringing you some thoughts from industry leaders we consider to be the best and the brightest. First up…

Meet Grant Williams.

Grant is the editor of the popular and widely read free weekly newsletter, Things That Make You Go Hmmm… featuring his unique views on history, macroeconomic affairs, and global markets.

Grant has 28 years of experience trading Asian, Australian, European, and US markets.  Today, he is a portfolio and strategy advisor at Vulpes Investment Management in Singapore. Grant has been writing Things That Make You Go Hmmm… since 2009.

Grant recently gave a video interview where he was asked to give his 2013 year in review, as well as some thoughts about what 2014 might bring.  Below is a summary transcript of that interview.  It’s well worth the read.

Q:  Let’s talk about 2013:  What worked, and what didn’t work?

It’s been a heck of a year, I mean a heck of a year.  I think a lot of us who have been in this business for a long time haven’t seen anything quite like this.  It’s been very, very challenging.  On the face of it, everything looks great, the markets are going up and they continue to go up, which is great, but underneath the surface there are some very concerning things happening that present investors with a really difficult choice.  Do you invest on fundamentals?  Do you invest in things based on valuations and metrics that have stood the test of time for hundreds of years?  Or do you simply look at this new paradigm of freshly printed money cascading down on markets, ignore what you know, ignore what you’ve learned, hold your nose and just jump in and buy stocks because they’re going up?

It’s a difficult choice for people.  I mean look, my approach is very much the former.  It’s very much a bottom up, fundamental approach where we look for long term values.  And that’s getting harder and harder to find in these markets.  We do a lot of digging and a lot of looking to find investments that we think will provide good returns over a longer time frame.  We’re not looking for the quick gains because they’re very tough to find and the risk side to that potential reward profile is pretty awful sometimes.  So we look for companies that have good businesses in good sectors that perform well.  And we evaluate them over the long term.  Now along the way you’re going to get some that go well and provide strong returns quickly, and you’re also going to have ones that under-perform.  We’ve certainly had a couple of those this year.  So it’s difficult to do.

But what I really don’t want to do, and what I want to stay away form is this mentality of, “just jump in and buy because everyone else is buying.”  That’s how bubbles end.  That’s how ‘87 ended, that’s how ‘99 ended, and that’s how the housing market blew off the top in 2007.  So we continue to look for value and it’s getting more and more challenging to find value as markets disconnect further from fundamental valuations.

Q:  What macro themes are informing your investment decisions right now?

Well there’s one.  Let’s face it: there’s one macro theme and that’s QE.  Period.  And what QE does is it corrupts every other price signal that you might look at.  It’s a very dangerous thing.  Right now, it’s providing the markets with liquidity and stimulus and it all looks great.  But this ocean of freshly printed money is not having the effect on the underlying economy that it was designed to have.  So what you’re doing is just pumping the patient full of drugs (and I know this metaphor is becoming way overused) and the dosage keeps having to be increased to numb the pain, and eventually the patient is going to reject the medicine.  And when that happens, we could all be in for a world of hurt.  So the clues are all there.  The professional investors are all worried; they do this for a living.  The amateur investors, the guys at home that watch CNBC and read the headlines, they see that everything is going up are jumping in.  That’s a very dangerous thing and it always happens at turning points in the markets.

Professionals are always the ones that can put aside emotion and buy stuff when everybody else wants to sell it, and they certainly will sell things when everybody else wants to buy it.  How bad has it gotten?  We are now seeing some very experienced fund managers capitulate.  These guys have been bearish for a long while, and they’ve now thrown the towel in and said “it’s going to keep going up, so I’m buying it.”  And that to me is a terrifying sign because some of the most disciplined investors in the world are losing that discipline and have decided to just chase the crowd.

So back to your question, I think QE is absolutely the overarching factor affecting all investments right now.  Beyond that, we have to look at currencies.  We have to look at the relative strengths and weaknesses of these currencies and the desperate need for all the major currencies to have a weaker currency than their peers… which obviously can’t happen.  The Euro is way too strong for Europe, that’s going to be a real problem for them.  They’re staring deflation in the face and they don’t have the cohesion or the mandate to do what the US and Japan and the UK have done.  So they’re going to have to find a way to weaken that currency.  Then we have other countries like Australia whose currency is getting moved around by the actions of the others who are resorting to some extraordinary jawboning of these markets to try and get their currency lower when they’re really running low on bullets.  So that’s a significant problem.

Q: With all that in mind… are there any sectors that you really like or dislike?

The retail sector makes me nervous.  Particularly the high-end, retail luxury brands… they make me nervous.

I think there is value in technology.  Tech is the one thing that feels to me like we are actually in a bull market.  But having said that, there are already some very high priced stocks within that sector that are trading on the kind of valuations we haven’t’ seen since 1999.

There’s some fascinating stuff going on in biotech… particularly in the UK.  Real estate feels a little played out to me at the moment unless your actually on the ground buying properties at the right prices.  As far as banks, I wouldn’t touch those.  They terrify me frankly, they really do.  And of course the one we haven’t’ spoken about yet is gold mining.

It’s been a terrible year for gold stocks, make no bones about it.  The whole sector has performed horribly, and the trade in gold this entire year has been a bad one.  But again, this speaks to the fundamental premise of my investing strategy.  I’m not investing on a 12 month basis.  I’m looking at these things over the long term.  And if something I own is performing badly, I check, and I re-check my logic.  Anyone that’s read anything that I’ve written will know that I’m very bullish on gold over the long term… and I have been for a number of years.  This is going to be the first down year that we’ve seen in the last 13.  So big picture, gold has performed very well, and it’s had a bad year this year.  Simple as that.

Going forward, the metrics in place that make me want to own gold are still there.  Fist and foremost, we go back to this quantitative easing, this irrepressible urge to print more money to solve problems.  We’re also seeing a lot of physical gold move into very strong hands in Asia.  China is a huge buyer as everybody knows, India is the same way.  Vietnam, Cambodia, and other places like that are buying lots of gold as and when they can.  So as the price comes down, you have this disconnect where the premiums expand on physical gold as people want to take delivery, but the paper gold that trades on the COMEX is depressed.

So for me, this is exactly what my investing strategy is all about.  You look for something that offers fundamental value, and if you can buy it when everyone else is selling it, that just improves your entry price.  Was I too early with some of the gold miners?  In hind sight, yes.  Has the investment case for holding them changed?  I don’t think so in the longer term.  It’s been a painful year for anyone buying gold mining stocks and holding them.  But the macro case and the thesis for owning them, I think, hasn’t gotten any weaker.  In fact, it’s gotten stronger.  The dynamics of the gold market are such that it trades in a rather strange fashion.  What we’ve seen is weakness in paper and strength in physical.  And it’s that strength in physical of a finite commodity that ultimately will win the day.  So I’m still bullish on gold and on gold miners.  I think when the physical metal turns around; the stocks will perform well too.

Believe me; I check the rational and the logic of those positions every day.  I mean gold mining stocks are back at lows we haven’t seen since the depths of 2008.  And from that point they went up over 300% so I like our chances here.  Gold miners offer you leveraged exposure to the price of the metal.  If you believe that gold is going up, and you’re buying gold as an investment, then I think some of that allocation should to go mining stocks for that extra gear you get.  On the other hand, if you’re buying gold because you want the safety of the metal, they you just buy and hold the metal… simple as that.

Q:  What else are you looking at?

Well we’ve tried to broaden and diversify the portfolio as much as we can.  But it’s now always easy.  All of the momentum rotates continually into hot sectors… so everybody is chasing the same thing at the same time.  For us we do a lot of digging around and try to have as well balanced of an approach as possible.  We’ve got energy, technology, gold mining stocks, real estate in holding companies, as well as some international exposure.

Q:  What should investors be aware of heading into 2014? Whatat advice would you give an individual investor right now?

The first thing that you need to do is you have to understand what your aspirations are for this portfolio.  And if you’re looking to protect wealth over the long term, you have to invest accordingly.  If you’re looking for speculative returns, then that’s fine.  Buy some of those speculative stocks that might provide you with stellar returns quickly.  What I try to do as a money manager is be very steady.

We want to actively buy what we think are solid investments that we think are going to do well over the medium to long term.  We’re looking for well performing companies with good cash flow, good management, and good governance that we think over a period of time will perform.  So I think my advise to investors sitting at home… it really is a question of how you want to invest, what kind of return you’re looking for, and then making sure that your investment case for what you own is solid.  I spend a lot of time going through my own investment case to make sure I am buying things that I’m very comfortable to hold should they go down… which is something you have to factor in.  And overall, pay very close attention to the world at large.

Look at what’s going on, read as much as you can, and try and understand the times we are living in because they are extraordinary.  They are unprecedented and they make investing money incredibly difficult, even for professionals.  I talk to a lot of guys who have been doing this for many decades and they’re all tearing their hair out right now.  The reason is because once you insert governments and central banks into the market it really does corrupt the whole process of free markets.  And so things that seem like really good ideas may not perform, and things that you never saw coming go through the roof simply because a lot of hot money chases them.  So understand your goals, understand the profile of the payoff you’re looking for, and be patient.  Be patient, check and recheck your logic, and pay attention to the world around you.

Categorized in: Blog

This post was written by Conscient Capital