It’s been that time of year for season’s greetings and good wishes for the year ahead, but it was also a time to reflect over the 2014 as it came to a close.
Certainly, 2014 had its share of twists and turns for investors; that elusive recovery and the long awaited interest rate rises just didn't materialise.
Let's look at some eventful moments that occurred during 2014 and see what we can learn from them.
After all, we are in a learning game and even Warren Buffet, the hugely successful seasoned investors is still learning from his previous cock-ups.
Investing in that grocery was a “huge mistake,” said Buffet in October.
Perhaps back then it seemed like a shrewd play, bearing in mind the doubts about the economic recovery story gaining credibility even in mainstream. So the cyclical investment strategy seemed like a smart play, the idea being to rotate away from cyclical and into defensive stocks, which tend to do better in a downward economic cycle.
Tesco is the classic defensive stock right? In theory yes but in practice no.
So the lesson here is that a defensive stock isn't always defensive. Even the most defensive company, whether it be a utility, a provider of essential services products (such as a health service), a pharmaceuticals or a grocery business, can turn out to be a disastrous investment for its shareholders if the company is managed by incompetent or shady directors. The 263 million pound black hole in tescos accounts was a classic “cooking the books” scenario.
Tesco's financial accounts in reality were not worth the paper they were printed on, giving investors anything but a true and fair view of the state of the company's health.
When it emerged that pre-tax profits slumped by 92 percent, the Chairman of Britain's largest supermarket was forced to step down.
Despite Tesco's fraudulent accounts and a criminal investigation by the Serious Fraud Office, no one has been busted for the deception, which has resulted in some investors shouldering huge losses. As they say, watch this space. Who knows, probably a few years down the line the same shady mob will re-emerge and manage some other respectable blue chip. Should that happen, it would be best for investors to steer a wide berth, unless of course, you are shorting the stock. Indeed, Lansdowne Partners, one of the UK's largest hedge funds, are laughing all the way to the bank after making tens of millions in profits out of the Tesco fiasco. As they say, one man's loss is another man's treasure. Put another way, Lansdowne Partners banked Buffets losses. No tears for Buffet, with an estimated fortune of 74 billion US dollars and continuing to surge, making him the second richest person in America. A 15 million US dollar loss, probably amounts to nothing more for him than a bruised ego.
Anyway, what can we learn from the Tesco fiasco? The true and fair view statement on those financial accounts doesn’t mean much. Yes, that may be true in some instances, but it is not always the case. Nevertheless, as an investor, just one mistake based on a dodgy set of financial accounts, even though it is not of your making, is enough to wipe you out. So it is better to be more cynical and assume that all accounts are riddled with “creative accounting” than to put your blind trust in them and regret it later.
The gang at Lansdowne reckon that Buffet should have seen the writing on the wall long ago.
So how did these wise guys spot the fiasco before herd and even the great money mastermind?
Put simply, they analysed the actions, rather than the words of the chief.
If things were so fine and dandy as the financial accounts depicted, then why was Tesco's return on capital that it was delivering to shareholders so measly? If a company is doing well, then it can afford to payout dividends. They smelt a rat, betted the other way and bagged millions.
Being cynical about the so called “expert advice” paid again in 2014.
When mainstream and the so called ‘experts’ were talking about an inevitable rate rise. I remained sceptical about the recovery and reckoned they were all jumping the gun. Indeed, it had gone from “Britain on the mend” to “warning flashing red lights on the dashboard” in just nine months.
In early 2014 the markets anticipated an earlier increase in Bank Rate and so mortgage rates were believed to have hit the bottom. Brokers were telling borrowers to hurry and lock into fixed rates while they could. For example, a borrower wanting a fixed rate mortgage over five years and with 25pc to put down would pay 3.3pc, down from 3.7pc in January 2013. As lenders and markets anticipated an increase in rates, these deals increased in price to 3.7pc by May 2014.
Now millions of mortgage borrowers are locked into uneconomic mortgage deals.
Then there was the collapsing oil price. Oil-oriented funds included Schroder Global Energy and Artemis Global Energy, both down by more than 40 percent in the past six months.
What can we learn from this?
Something that corporate controlled media will never admit. The price of the black gold is politically driven. Nevertheless, I can’t help thinking that oil is such a hated trade right now that at some point it is going to be worth owning again.
But when? Based on the fact that big oil is downscaling their capacity, that doesn't support the idea that prices are going to move north sometime soon. With the revolving doors between Washington and big oi,l the oil dons have probably been tipped off to be patient. Let the bear keep growling, meanwhile the Russian economy goes into meltdown, the debts balloon and when peoples tummy rumbles with hunger there will be a revolt, it is just a question of time. Then there is an IMF loan to the rescue and those prized oil fields up for grabs and surprise, surprise, the oil prices start moving up again, there is an element of Déjà Vu in this.
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