Factsheet Commentary: December 2021

In 2021, US investors alone have poured more than $1tn into equities – more than the prior 20 years combined. In the last 18 months, more than 15m Americans downloaded trading apps, most of whom were either young or first-timers or both, chasing popular stocks based on news-flow and chatter. 

It would be futile to mention names from the 1999 dotcom era – many of the current generation of investors are highly unlikely to recognise these “old” names – so let’s take a look at a recent example: Gaotu Techedu, a Chinese education services company listed in America. In January 2021, its price crossed $140 but it now languishes at $1.80 – a 99% drop. This is what happens when fleeting popularity trumps sustainable (boring) business models. 

History has proven one common feature of bull markets is that retail investors catch on too late. To make matters worse, retail investors are now punting using call options: in the autumn of 2021, the nominal trading volume of Tesla options exploded to $240 billion a day, as much as the combined value of all other S&P 500 options. The prevailing mood is one of dangerously high optimism and dangerously low understanding. 

In fact, it so seems, the less one uses one’s brain, the greater the likelihood of a profitable trade. But that is where the good news ends. Historically, such “easiness” has indicated peaks. When sanity returns, and it always does, capital will be lost and even wiped out. We feel that caution is the need of the hour. 

While the amateur gurus proliferate on YouTube channels, professionals in the asset management industry are baffled, rattled and scratching their heads. Tesla, a very popular stock, has advanced 70% over the course of 2021 and not owning Tesla has almost guaranteed underperformance. Even worse, those fund managers who dared and shorted Tesla have been wiped out. 

So, what are we doing? 

• Firstly, we do not short stocks. It is never a good idea to stand in front of a freight train coming your way. On the other hand, while we admire Elon Musk the entrepreneur, we will not buy into overly popular stocks like Tesla at any price. 
• We are still finding opportunities in the UK. In terms of valuations, the UK market is still one of the cheapest in the world – trading at a meaningful discount to currently fashionable markets like the US and India. 
• Most importantly, we remain invested in companies run by first-rate management teams that we trust, trading at reasonable valuations. 

In both life and investing, we cannot avoid mistakes altogether but we can avoid obvious stupidity. The wise counsel of Charlie Munger helps: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” 

We wish you and your loved ones a Healthy, Happy and Prosperous New Year.

Sterling Investments Management Ltd
Lynwood House 2-4 Crofton Road,
Orpington, England, BR6 8QE

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