Investment Review

This review explores what we can (and can’t) infer from today’s facts about tomorrow’s markets. Our aim is to get a bit further than Pierpont Morgan: when asked to predict where the markets were heading, he replied, “They will fluctuate.” At Ruffer, we claim to be all-weather investors. In recent years, we let the side down by being overconfident of an approaching handbasket from hell. We dropped our guard; the market went up, and we went down – a mistake we seek not to repeat. The latest quarter’s out-turn should be a double encouragement to those who wonder whether we have learnt our lesson. Predictably, perhaps, we were strong in the poor markets earlier in the year – but, when the markets recovered in Q2, we continued to drive forwards. It might of course be a Swallow, but we trust it’s an Amazon.

Common sense suggests the market should be subdued. Wars and rumours of wars are not good for GDP growth. Taxes on trading activity such as tariffs reduce, in absolute terms, the amount of goods traded worldwide, and redirect money from the optimal trade channels into the brackish canals of fiscal spending. Towering over these man-made dangers is the accumulation of debt, which for years and even decades threatens a ghastliness, until, to everyone’s amazement, one day, it actually becomes one. I had a friend who was on a small boat returning from Dunkirk in 1940, pursued by an unfriendly aircraft which sprayed the craft with machine gun fire. I asked him what he was thinking about when all this happened. His answer: a determination to stay alive so he could invest in Marks & Spencer, on the basis that, if the war was lost, the investment was the least of his problems, and if it was won, it was a great entry point. Not having a Bloomberg screen, he didn’t of course know at what level it was trading – but he rightly divined it would be cheap. The point today is that, despite all the uncertainties and bad news, the market’s valuation matrices are banging on pretty much all-time highs – we live in strange times. When prices are at Looney Tune levels, the question is: “Is it me that’s crazy?”

I think to establish an answer, a different approach is required. Rather than assessing the world’s health through the discounting mechanism of the market (which ‘knows’ everything), perhaps there is a dynamic at work which is independent of that discounting mechanism. The investment universe has democratised. When I started as a stockbroker in 1972, it was the man from the Prudential and Mrs Tufton-Bufton who drove the markets; one professional, one sentimental. The federated Stock Exchange – not consolidated until 1973 – ensured local companies were supported by local families, and it was a patriotic duty to lose money by investing in War Loan. Today, there are new forces of dominance: the clever clogs who run hedge funds, the purveyors of private equity and now, since constipation has set in with PE, private credit. Wealth managers have replaced private client stockbrokers. None of these have fundamentally changed the way markets operate, except they mostly seek to derive returns from anything other than traditional equity markets and in so doing foreshadow a world where equity returns may turn out to be persistently weak. That phenomenon, when it becomes evident, will be regarded as an event which predates, not postdates, today.

When prices are at Looney Tune levels, the question is: “Is it me that’s crazy?”

On top of this, a disconnect has grown up between different generations in the West. The shorthand to this is highlighted by the segmentation, by age, into Boomers, Generation X, millennials and kiddos. It is a commonplace that the Boomers may not actually be bandits but they have made out as if they are. They pride themselves on being born before 1964. The generation behind them – the vanguard now well into middle age – are dismayed at being unable to buy the sort of houses their parents own; the cream of everything from Picassos to places in the sun seems to belong not to them, but to an older generation.

Here’s my take on it. There is plenty of wealth within the younger generations – but not nearly massive enough to emulate the generation which came before them. Many have money to invest, for sure, but it has to work quickly – successful investment demands the uplands to be sunny, and constantly benign. Those who think like this are the cadre who hold the Magnificent 7, and they trade recherché instruments which can, with a following wind, bring those who own them into Boomerland. Thus five years of making 40% a year starting with £200,000 gets you to over £1 million – and then you can throttle back a bit (even if in practice you don’t).

How will it end? Suddenly. When? Next question please.

Does this way of investing look foolish? If the cliché about pudding and eating is valid, then it’s not at all foolish. Investors have had more than a decade of this class of investment, winners experiencing enough thrills and spills to remind us that true belief is rewarded, cowardice punished, inactivity guaranteed to be a wasted opportunity. And they have firepower: retail investors put in $4.7 billion the day after President Trump announced Liberation Day this April – a day of market turmoil, which indeed proved to be a great opportunity to make money – and they took it. The US market rose by over 20% in subsequent weeks. ‘Wise’ investors see in them only the ‘the madness of crowds’. But it is wisdom which has been trampled. In a generation’s time, the score card might vindicate the wise – but you can’t eat score cards.

How will it end? Suddenly. When? Next question please. But ‘suddenly’ is a helpful roadmap: there will be no warning, so one has to leave early, as we have, and the mind which has ridden the wave is trained to avoid any such equivocation. It has always interested me that the story of America’s Great Depression in the 1930s begins with the Wall Street Crash of October 1929, when it was estimated there was record participation in the stock market. What is typically forgotten is that by April 1930, the US market had recovered quite close to 1929’s all-time high, before it re-started its precipitous fall – some of the participants had to learn their lesson twice over. The point being that there is a lesson to learn, either ahead of time, or not. ‘All-weather’ in our book is about the duality of constructing a portfolio protected against crises but looking to keep that protection embedded in a portfolio that can offer satisfactory returns in the meantime.

One of the insights of Nassim Taleb (of Black Swan fame), is that the best insurance against heart-stopping hiccoughs is what he calls ‘antifragile’ assets – investments which do well when everything is going badly. They are non-plussingly difficult to find. Lenny Lauder spotted that even in a terrible economy people still treat themselves to little luxuries like lipstick, and he thereby continued the success of Estée Lauder for another generation. The cinema chains in the 1930s prospered for the same reason, cigarette manufacturers too. But there are not many such assets, and the identification of new candidates needs a dose of contrariness even to imagine that they might exist. It is in the derivative markets that antifragility can be most clearly identified, and priced. Put options on the markets, instruments that are long of volatility, derivatives anticipating a higher yield spread on the brands of top notch businesses – all find their way into our portfolios. In the past, it was rather different – one could select cheap companies to play this role. Dairy Crest, for its cheese mountain, Thames Water for its safety (!), Howard Shuttering for its name. New conditions need new skills, and my job is to imagine a wisdom to sit alongside the other insights which combine to create market knowledge.

One last thought, on inflation. All the inflation watchers I see in action would benefit from the information set out in tomorrow’s newspaper. Some think inflation far from dead, others that we might be looking at deflation (prices going down). I’m not very interested in all of that, because it depends on guessing the unknowables: what will happen to workforce numbers, to interest rates, to currency movements, to food prices. I am more interested in what is unseeable, over the hill. Wages as a percentage of corporate costs in the US and Europe are at generational lows and, if immigration proves restrictive, that could change hard and fast. More certain, the balkanisation of traditional industries will create profitless price rises. Put simply, globalisation lowered prices and thereby lowered inflation, and a return to local production reverses that dynamic.

We began with the waves of markets: the waves of inflation are longer, slower, and more inexorable. We may yet see a brief dalliance with deflation if markets fall, but it would be misleading: I have great confidence in the eventual inflationary outcome. The deleterious impact on asset prices of being right about that will be significant, so protecting against it commands attention in our minds and in the Ruffer portfolio, distant as it may still be. To reiterate: all-weather means combining shock-resistance with satisfactory returns in the good times. We hope to continue to evidence the good behaviour shown so far in 2025.