Monty Python and the holy grail of investing

What we believe

https://www.pricevaluepartners.com/monty-python-and-the-holy-grail-of-investing/

“I want to be one. I want to be a woman. From now on, I want you all to call me ‘Loretta’.”

• Stan (Eric Idle), Monty Python’s ‘Life of Brian’ (dir. Terry Jones, 1979).

Get your Free
financial review

The comedian Michael Palin may be one of the sweetest-natured people ever to have appeared on television. It’s a testimony to how opinionated his co-panellists are in this debate that you can practically hear him seethe.

The debate in question is from the BBC show Friday Night, Saturday Morning, broadcast on 9 November 1979, and the panellists are Michael Palin and John Cleese, versus the journalist Malcolm Muggeridge and Mervyn Stockwood, the then Bishop of Southwark. As you’ve probably guessed by now, the Pythons were there to defend their just released film Life of Brian.

Messrs Muggeridge and Stockwood gave no quarter. The show contains some of the most ill-tempered exchanges you are likely to see on a BBC programme (with the possible exception of Question Time). In his 2006 diaries, Palin writes of the bishop as follows:

“He began, with notes carefully hidden in his crotch, tucked down well out of camera range, to give a short sermon, addressed not to John or myself but to the audience. In the first three or four minutes he had brought in Nicolae Ceauşescu and Mao Tse-tung and not begun to make one point about the film. Then he began to turn to the movie. He accused us of making a mockery of the work of Mother Teresa, of being undergraduate and mentally unstable. He made these remarks with all the smug and patronising paraphernalia of the gallery-player, who believes that the audience will see he is right, because he is a bishop and we’re not.”

That said, it makes for gripping television. Our favourite exchange:

“Malcolm Muggeridge: “I started off by saying that this is such a tenth-rate film that I don’t believe that it would disturb anybody’s faith.”

Michael Palin: “Yes, I know you started with an open mind; I realise that.”

What made matters worse and caused opinions to polarise horribly was that Messrs Muggeridge and Stockwood never even saw the entire film. By all accounts they missed the (crucial) opening ten minutes, where it’s made quite clear that Brian is not a depiction of Jesus Christ but merely happens to be born in the stable next door.

From that point on, the film goes on to launch any number of broadsides against organised religion and the desperate yearning on the part of people to believe in something… anything. But the early misunderstanding accounts for some, if not all, of Muggeridge’s and Stockwood’s hostility to the Pythons. By missing this crucial sequence they also entirely missed the point.

Chances are, Life of Brian probably couldn’t be made today. If Boris Johnson can be publicly traduced as an Islamophobe for making the arguably accurate if disrespectful point that women wearing burkas look like letterboxes, we can conclude that at least some public attitudes towards religious debate have, if anything, ossified further in the four decades since Life of Brian was made.

As it is, the film only got made after George Harrison stepped in to replace EMI when their funding fell through, saying simply that it sounded like the sort of movie he’d like to see.

Whether or not you are a person of faith, the best rationale we’ve so far heard to justify either agnosticism or, more realistically, atheism is this observation by Stephen F. Roberts:

“I contend we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours.”

But as libertarians, the idea of banning either burkas or any form of religious practice that isn’t harmful to others is unconscionable to us. As long as people respect our desire to live and believe as we see fit, we respect theirs.

Which brings us to matters of economy and investment. What do we believe there?

Let’s take the economy first.

We’ve experienced, and tried to make sense of, Japan’s long post-bubble slide into a deflationary depression; the messy and protracted birth of the European Union (and sterling’s 1992 “ethnic cleansing” from the Exchange Rate Mechanism, which led in turn to our own euroscepticism); the rise of the internet; the Asian crisis of 1997/8; the Long-Term Capital Management Crisis of 1998 and the monetary authorities response thereto; the first dotcom bubble; the first dotcom crash; the rise of China; the great property and credit bubble; the great property and credit crash; and the birth of quantitative easing (QE) and zero interest rate policy (ZIRP). And more recently, the remarkable fiscal stimulus and money-printing that accompanied Covid.

Attitudes towards business remain sceptical – the direct result of the rise of crony capitalism. Adam Smith famously remarked in The Wealth of Nations that

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self interest.”

It is not intuitively obvious, but it happens to be true. The magic of the free market’s invisible hand is that it manages to distribute goods and services throughout the land to the benefit of all without any external coordination. We get our meat and our bread, and our butcher and our baker get to earn a living.

But this is not a recommendation of ruthless, exploitative capitalism. Smith also thought there should be limits to the perhaps inevitable tendency of business to migrate towards monopolistic abuse:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. […] But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.”

That said, if we do not believe that businessmen ought to be able to have unlimited power to conduct their affairs to their own advantage, we should consider whether we want government to have similar control over the economy.

As non-economists, but having tried to understand the workings of the economy throughout a long career in investment markets, those people and texts that have made most intuitive sense to us have all been from the so-called Austrian school.

If we could only recommend one text on the topic of the role of government in markets, it would be Robert Schuettinger and Eamonn Butler’s Forty Centuries of Wage and Price Controls: how NOT to fight inflation.

The clue is in the title: governments of all stripes have tried to intervene in the economy since time immemorial. Whatever effect they have had in the short term, it has always come with unintended consequences, most of which are calamitous. Perhaps politicians should be encouraged to do less, rather than more? Perhaps the optimal size of government is: the smallest possible? You can download this insightful book for free from the Mises website (an excellent resource for all things Austrian) here.

So, we believe in sound money, small government and free enterprise (subject to sensible and pragmatic but not overarching regulation). The economist Sean Corrigan offers a good and pithy world view as follows:

“There are four types of people in the world. There are entrepreneurs – who are the guys who get out of bed in the morning and say ‘How can I make money by making things better for people ?’ There are contra-preneurs – who are all the governments and bureaucrats and regulators who try to stop that happening, make it difficult or ban it. There are the con-trepreneurs.. who pretend to be doing the first thing but are just lining their own pockets, usually with government subsidies, with the help of the second group. And there are the non-trepreneurs – which is all the rest of us, who must be pretty bloody thankful every time we jump out of bed that the first lot keep doing it.”

Amen to that.

Now, to the business of investing. What do we believe there?

Whereas the best way to run an economy (or rather, to allow it to run itself, with only the lightest touch of regulation) we think is pretty clear-cut, the nature of investing in the financial markets allows for all shades of grey. There are no black and white solutions, and there never will be.

That said, as with oversight of the economy, we have our biases. In most respects they probably reflect personality. Like many investors we are loss averse and we hate to lose money (whether it’s our own or that of a client).

So one of the most profound investment observations we’ve come across is from Peter L. Bernstein’s Against the Gods, which is a brilliant history of risk. Daniel Bernoulli, a true Renaissance man and thinker, offers the following advice within it. For anyone managing money,

“The practical utility of any gain in portfolio value inversely relates to the size of the portfolio.”

In plainer English, the more you have, the less you need. More specifically, the more you have, the fewer risks you need to take in the ongoing management of that portfolio. To that end, then, here are some of our specific investment “beliefs”:

• Risk and volatility are not the same thing and never have been, whatever Harry Markowitz might say on the matter. Risk is best defined as the likelihood of a permanent loss of capital. In this regard, bonds right now are high risk across the board. And yet the regulator still regards them as “low risk” assets. Go figure.

• Asset allocation – how you divide up your investible pie – is still the most important decision you will make with regard to your portfolio. Given the impact of policies like QE and ZIRP on global financial markets, the threat of overvaluation is real. So it makes sense to go the extra mile today when it comes to portfolio diversification. Nobody should be 100% invested in any one asset class. If in doubt, diversify further.

• Absolute return investing is the only investing that counts. That doesn’t mean sheltering exclusively in cash. But it does mean being more discriminating than simply owning a cheap index tracker – especially when many markets remain close to their all time highs.

• Value investing is the best way of investing for the long term. Or perhaps we should caveat: value investing is the best way of investing for the long term provided you have the patience and discipline to stick with it during those inevitable periods of short term underperformance. The recent outperformance of “growth” stocks versus “value” stocks has been one of the longest and most extreme in financial history. Suffice to say we are extremely excited about the prospects for value now, both in an absolute sense, and especially in relation to growth.

• When it comes to selecting funds, smaller is better. Warren Buffett has famously conceded that size is an anchor to performance. This does not mean that all small funds are good, but it does mean that most big funds are automatically likely to deliver sub-par performance. The tree does not grow to the sky.

• Avoid news. As this terrific essay shows, news tends to be little more than a massive distraction, and something that diminishes our quality of life.

• Build up a small and concentrated network of investment commentators you really trust. And then stick to them like limpets.

• Don’t overtrade. Within the managed accounts service we offer to clients, the rules of thumb we use are as follows: no fund position should ever be more than roughly10% of a client’s overall portfolio, and no individual stock position should ever be more than, say, 5% of a client’s overall portfolio. For as long as positions are broadly working for us, we then won’t likely change a thing.

All things equal, a client portfolio should also incorporate at least three types of unrelated assets: value stocks; uncorrelated funds (especially systematic trend-following funds); and real assets, notably the monetary metals, gold and silver, and related investments. The latter two asset types offer a degree of portfolio insurance without necessarily sacrificing returns. At the risk of sounding like a broken record, the risks associated with bonds are now, in our view, uncomfortably high. Higher yielding defensive stocks are a far better bet, in our view, provided you can live with the inevitable volatility.

• The private investor has a number of advantages over the professional. You don’t have to justify your performance to anybody, over any time period. You can invest for the future without being held accountable to anyone else. You can buy what you want, when you want, and sit in as much cash as you want, to your heart’s content. (You also don’t have to market your portfolio to prospective investors who might be less than sympathetic.)

We remember a line we first heard at the height of the financial crisis in 2008. “There are no atheists in foxholes.” It was said in the context of bailouts for the banks. Like you, we suspect, we watched in disbelief as billions were extracted from taxpayers – billions that were almost immediately recycled into banking bonuses at the likes of Goldman Sachs, who at the time also happened to be hours away from going out of business completely. (Something remarkably similar happened in relation to Big Pharma during Covid.)

Our correspondent of the time was pointing out that in the heat of battle, it’s sometimes best not to stand on ceremony or get overly wedded to ideological purity. The banks in 2008 needed to be kept going.

Our correspondent from 2008 could have used a line from Cicero: Salus populi suprema lex – which can be translated as “The welfare of the people should be the supreme law.” Some have wilfully mistranslated the phrase as “The survival of the state should be the supreme law.” But the state and the people (let alone taxpayers) are not the same thing. We ourselves were not Keynesians before the global financial crisis. We are certainly not Keynesians now.

We all cling to certain beliefs, but some are more dangerous, and expensive, than others. After five-plus years of Covid, lockdowns and climate change hysteria, and in conclusion, we would cite another piece of Latin: Fiat justitia ruat caelum. That is to say, “Let justice be done, though the heavens fall.”

………….

As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:

Get your Free
financial review

…………

Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.