Back to basics

  • Author : Martyn Gowar
  • Date : January 2009
Martyn Gowar TEP is a Consultant to Penningtons LLP

L ast month I stuck my neck out to wonder whether the present economic difficulties are really as bad as the press have painted them. I still stand by what I wrote, but I do despair that the barrage of bad news in the media has gone beyond simply disturbing people’s confidence and has damaged it – and wounds do take a time to heal (as I have had time to reflect in recovering from a shoulder operation this last few weeks!).

One of the earliest lessons I learnt as a trainee was on my first visit to Counsel. It was on a question of a family farming partnership, and my principal came along with me. This intractable problem that seemed so unclear would test Counsel, I was sure! Mr John Knox (who later became Lord Justice Knox) started his analysis of the problem with looking at Section 1 of the Law of Property Act 1925 and then looked at Section 2 and then Section 3. By the time we had got to looking at Section 5 I felt completely deflated, although he could not have been more charming and encouraging! But it was an object lesson about starting with the fundamentals and that is what has been exercising me in looking at our clients’ aims and concerns, and then in putting together stratagems for providing what the client needs.

For the private client advisor, is the present distressing period someone else’s problem or are there lessons to learn or truths to be relearned that can underpin our approach to 2009? May I suggest a couple for your consideration?

The faster a pendulum swings one way, the faster it is likely to swing back

First, the process of ‘investment’ is to be distinguished from that of ‘speculation’. I looked up the two terms in my dictionary, and investment was defined as the putting of money into an asset with a view to making a profit, whilst speculation had the additional aspect that it recognised the realistic possibility of loss. So there is more risk and maybe more reward in a speculation, but our clients largely want a bedrock of investments and not speculations. The trouble has been that there have been too many successes and not enough losses over the past few years so that complacency has crept in. Only now is the reality of the effect of Newton’s law of gravity sinking in.

Secondly, I suggest to you that the process of investment is quintessentially a long-term one, and that our perspective for our clients should be long-term. The trouble of course is that we look short-term at performance over three months, and upwards, rather than three years and upwards. I have commented before that it seems to me that we should set out fundamental investment targets and be comfortable that, having given them proper consideration we should trust them unless there is a major change in circumstances for the client. So we need to hold our nerve about the fundamentals and to make sure that those who are also in the advisory circuit for our clients are holding their nerve too!

I suppose another way of looking at this is to draw a distinction between investing and trading. They are two separate operations, although a line of tax cases has had to distinguish operations where the edges were blurred. I pause to comment that, with the movement of capital gains tax rate from 40 per cent to 18 per cent, we may have to blow the dust off those authorities. While any client may have both investments and trading activities, at least you should know which is which!

I have commented before on the Warren Buffett analysis that investment is motivated by greed or fear. It is quite clear that greed was the driver until only a few months ago, and that now fear has replaced it with vengeance. But I am a great believer in the pendulum theory, we know that the faster a pendulum swings one way, the faster it is likely to swing back.

The trouble is that when we read bad news, we are nervous to stand up for fear of looking an idiot and say ‘there is good news!’ But there is always a balance to be struck and we must hold to that truth. Face the New Year with confidence in yourself, whatever the pundits may say.


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