I seem to spend a lot of time writing about politics, beliefs, and finance, for someone who should be writing a regular note about investing. Friends make fun of my tendency to create depressing commentary about failed government in our beloved nation and to stop the note with the benevolent refrain, “Happy investing.”
But conflicting all of this may sound, I would say, perhaps a little lamely, that politicians, philosophy, and finance are as important to investing as the P/E amount.
PPE and P/E may have more overlap than most folks would like.
Since PPE tends to increase significantly when the subject is democratic, I find it interesting, especially in SA. I think that’s really South Africa for you, elections, in some ways, is SA’s lingua franca. It’s the theme about which nobody has a mind.
Disappointingly, too many people in SA, I suspect, think the role of government is substantially larger than it is and, even worse, many more important than it should be. It almost seems as though people are sacrificing their futures for the State. And believe me, that is going to end seriously. They would be much wiser to concentrate on what they can do for themselves rather than the state. (Sorry, JFK).
And one of those items is to concentrate on their purchases.
On that subject, I was struck by some of the responses in BlackRock chairman Larry Fink’s 2024 yearly letter to buyers. I must admit that Fink might not be the guy you would decide if you had the option and wanted to lead the largest investment firm that has ever existed. Fink essentially means a spy or a smartass. But despite this nominative loss, Fink’s efforts as a CEO have been simply amazing.
BlackRock presently has around $10 trillion under control, which is impressive enough on its own, but to increase pepper, it’s about 30% larger than its closest rival, Vanguard.
Both businesses are relatively young; Vanguard is around 50 years older, but BlackRock was founded only just in 1988. BlackRock actually grew by consolidation, and its mergers have been amazing, especially Mercury Asset Management in 2006 and Barclays Global Traders in 2009.
Fink was there from the beginning when he became the youngest managing director of the funding firm, First Boston, at the age of 31. He is unquestionably one of the most prominent individuals in international trading, which is one of the benefits of his annual letter.
Many of the largest US corporations are owned by BlackRock owners, or 25% of them.
One peculiarity of BlackRock is that it was one of three firms to record on the same day as it went public in 1999. The media outlet owned by television host Martha Stewart and World Wrestling Entertainment’s family business, World Wrestling Entertainment. Those two businesses were much more intriguing than a dull expense business at the time. It’s different today.
Fink’s annual email is questionable, if you want to use that false expression, for two reasons: his rely on ESG trading and the related issue of climate change.
In 2019, he backed the idea of stakeholder capitalism, arguing that it wasn’t about politics and wasn’t about a social or ideological agenda. Stakeholder capitalism was about “mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper”.
A few businesses claimed that this was a sort of personal agenda, or at least there was a backlash.
I think it’s fair to say that many businesses might have been concerned about putting their business practices under the microscope if someone went down that path. Yet, it’s obvious Fink was also a bit misunderstood.
This was more of a recognition of the frequently conflicting agendas involved in running a business and how effectively managing those agendas was becoming a business differentiation.
Whatever the case, he now says he won’t use the term “ESG” because it’s been hijacked by both left and right.
Retirement investing
So this year he ventured to safer ground and spoke about retirement investing, which is of course very similar to what his own business does at the heart of the enterprise.
He begins by highlighting how crucial capital markets are in ensuring that people retire in peace and comfort. Despite all the ups and downs of the financial markets over the years, they have proven to be far more powerful than bank savings accounts or other forms of nest egg creation, such as investing in gold or money.
As I believe most investors are now aware, the extent of this difference is significant.
A return on investment of roughly 30% higher than one would be in a bank account would be from investing in a range of global stocks each year. Compounding that over a working lifetime, the difference starts to look pretty staggering.
The enormous prowess of capital markets is one of the reasons why the US is so powerful internationally: the country represents about 4% of the global population, but about 25% of the global economy.
Numerous nations have succeeded in attempting to imitate the boldness of the US capital markets, most recently in India.
Fink himself points out that one of the factors that helped the US recover from the 2008 financial crisis, for instance, was due to the relative strength of its capital markets.
Despite all of that, the US and the rest of the world may face future issues.
The most intriguing aspect of his letter, in my opinion, was fear:
He wrote, “Arguably, fear is the biggest obstacle to investing for retirement, or for anything.”
“In finance, we sometimes think of ‘fear’ as a fuzzy, emotional concept — not as a hard economic data point. But that’s what it is. Fear is just as significant and actionable as GDP.
“After all, investing (or lack thereof) is just a measure of fear because no one wants their money to sit in a stock or bond for 30 or 40 years if they are afraid the future will be worse than the present. That’s when they put their money in a bank. Or underneath the mattress.”
Consumer confidence in China has fallen to its lowest level in a generation, while household savings are at their highest level ever.
50% of young Americans in the US now wonder whether there is a purpose for life. Four in 10 Americans now say it’s “hard to have hope for the world”.
“I’ve been working in finance for almost 50 years. I’ve seen a lot of numbers.” But this one, he writes, has ever worried me more than any other data point.
And this, I suspect, brings us back to the question of PPE vs P/E. Covid and its aftermath have undoubtedly shaken everyone, but the truth is that politicians around the world have done a terrible disservice to hope over the past few years.
One way to counteract an excessive amount of fear is by demonstrating the enormous power of investing. So, never with more intent and conviction, may I just say …
Happy investing. DM