Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Premier Miton Diversified Fund range, looks at some of the more human elements of investing before wondering what central banks might say on interest rates in September.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Investing involves risk. The value of an investment can go down as well as up which means that you could get back less than you originally invested when you come to sell your investment. The value of your investment might not keep up with any rise in the cost of living.
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What a job I’ve got!
One of the unique benefits of working as a fund manager is the access it provides to information, but more particularly to smart, interesting people and experts in their field. We can meet with the best investment analysts and economists to seek their views, obtain data and use systems that are not generally available. This all helps our decision making, as does speaking with the management of the companies we are analysing.
Furthermore, our colleagues are doing the same thing. At Premier Miton we encourage our fund managers to think and act freely, we therefore have a group that does exactly that, but maybe I will write more about how we go about that another time. This means I work with an eclectic and thought-provoking team. At the forefront of that is Gervais Williams, our Head of Equities, one of the most experienced UK stock market investors.
Do as they do, not as I think
In conversations with Gervais recently he told me he had been looking at the concept of groupthink, how it has impacted stock markets and why it has done this. I hope Gervais doesn’t mind, but I will steal some of his words.
Groupthink is a psychological phenomenon where individuals within a group prioritise consensus over personal doubts, knowingly setting aside their own knowledge in deference to a broader group. I suppose it is like herding instinct, but in our world of investing it can lead to problems, for example when it carries on for so long that share prices of individual companies, groups of companies or other investments get driven to unsustainable levels.
Examples of this could be Tulip Mania in the 17th century, when a speculative frenzy erupted in exotic flower bulbs, creating a staggering boom and bust in their prices. The dot com bubble in stock markets of just over 20 years ago is a more recent version of this. Gervais argues that financial markets are uniquely vulnerable to Groupthink.
In these notes I have commented many times on the moves we have seen in the share prices of the giant US technology and communications companies such as Apple, Amazon, Meta Platforms (Facebook) and Tesla. Gervais thinks that the globalisation of the world economy over decades and the unprecedented economic conditions we have experienced since the global financial crisis of 2008 (exacerbated by COVID), with associated Groupthink characteristics might have built up another problem for financial markets. This creates a threat to overall market levels.
This type of thing also means that other investment areas get forgotten about, or left behind, with the UK stock market being one of those. This means opportunity within broader markets.
What do you do with a problem like NVIDIA?
NVIDIA may be one of those “bubble” companies that I referred to above. The company designs, develops and sells 3D graphic processors (semiconductors, or computer chips in old language) and related software. It is widely regarded as the biggest beneficiary (or indeed driver of) the boom in Artificial Intelligence (AI). NVIDIA’s share price got a big boost through the COVID period as people stayed at home and bought lots of computer and other electronic equipment. It then fell away as investors moved into other areas.
Then AI became the story and created a bit of frenzy. At the start of this year, NVIDIA’s share price was $146 and doubled to just over $300 in May, just ahead of the company announcing financial results, which detailed a huge surge in demand for their product, much more than anyone expected, and forecast increasing demand as well. The share price very quickly jumped to $400. Subsequently, investor demand and another set of very good results and future guidance from the company have pushed the company share price up to nearly $500.
NVIDIA company share price in pence (p)
Source: Bloomberg, data from 13.08.2018 to 01.09.2023. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.
You could think this is a case of Groupthink, firstly because everyone is just joining the crowd and buying NVIDIA. The problem with that is, when looking at forecasted revenues and profits for the company, it has actually got cheaper as the share price has risen. This is because the expected revenues have gone up in a bigger percentage than the company’s share price.
Looking at expected revenues or profits relative to a share price is one way to value a company. Secondly, you might think AI is a bubble. It might be, but it does seem that it is here to stay and will change our lives. That doesn’t mean that related company share prices will fall in the shorter term, but the longer-term picture could be more positive.
Our conundrum
Of the funds we manage that could invest in NVIDIA, we have some that did and some that didn’t. That is the decision of the fund managers who are responsible for building portfolios to meet the specific objectives of the funds they manage. The ones that did hold NVIDIA have benefitted significantly and we have been reducing the number of shares held as the share price has risen, otherwise it could become too big a proportion (and therefore increase the risk) within a specific portfolio. That all makes sense.
Then, we have the funds that did not hold NVIDIA shares. That has not been such a good decision so far this year. We have fund managers who have become convinced of the long-term prospects of AI, who have decided to start buying NVIDIA; remember even though the share price has risen a long way, their shares are cheaper now than they were at the start of the year. That makes sense as well.
Then we have fund managers who are not convinced that NVIDIA shares are worth the valuation that they currently stand on. That is a fair view as well.
One thing we cannot be accused of is Groupthink. In fact, we are a real-life example of the exact opposite. Our fund managers are building portfolios to meet the objectives of the funds they manage and have the freedom to have different opinions of the same company.
In other news
I enjoyed writing that. It made a nice change from discussing inflation and interest rates, but that’s unavoidable.
August brought about mixed economic data in most economies and the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) took the month off from meeting to discuss their respective interest rates. They each meet in September to talk about their economies and set policy. It will be a busy few days, the ECB meets on the 14th, the Fed on the 20th and the BoE on the 21st.
We will all be leaning over our computer screens to get to see how they act and talk, which will have a significant influence on the prices of bonds, company shares and other asset classes over the coming months.
I think I might be back to writing about that next month.
The last word
Everything I have alluded to above, points to actively managing your investments. If you just end up doing what everyone else does, it can be dangerous. Of course, active managers can get it wrong for periods of time, but good ones tend to get it right over the long term.
