Minieconomics.com
All material distributed on this website is copyrighted by Stephen Wheeler © 2002

About the author:

I was very bearish on the general economy in 1981-3 and felt that it would be difficult for the UK to recover properly. At the same time though I was optimistic towards small companies, the electronics sector, superstore retailing and pharmaceutical companies and that helped my investment pension fund to be the top performer and increase by over 20% relative to the index. I did not however understand the high economic multipliers of these sectors and the influence of Financial Deregulation that printed the money not just for recovery, but buoyant growth and increasing house prices.

I was firstly a predictor and then one of the ‘world-ending bears’ during the 1990-3 recession, but the world recovered. I was an avid supporter of printing huge amounts of economic money but I was slow to recognise that the USA was actually printing the required money through the financial markets instead. I was a predictor of the Japanese decade-long slump.

You learn more through mistakes or getting things wrong than getting things right. It is not until you buy a share that you realise all its faults and when you sell you understand all its merits. In 1989 I was without a job and money after leaving an electronics company and I began to appreciate what was happening in the economy and realised that a big recession was imminent. I became particularly bearish on commercial property and so I devised a financial scheme whereby institutions and banks could effectively sell their properties without losing control of them and paying high levels of capital gains tax.

The proper lending basis for private sector banks

The scheme was called MALVINS that stood for Matched Assets and Liabilities through INdexed Securities. By selling a Property bond linked to a property index an institution could sell the equivalent of its property holdings in a tax efficient way and not have to suffer rent reviews etc.. Also the main problem with the property market is that if you want to buy then the property involves too much investigation and negotiation and may be the wrong size and not marketable when you want to sell. The property bond on the other hand could be bought and sold in any amount in the market on an ‘as and when’ basis. I took this idea to investment bankers BZW who then copied it and brought out a version of it two years later!

I felt that this concept could be also be used for developing gold mines and oil wells, or even wheat fields, in that any debt could be linked to the respective commodity prices and that would take out the main risk of development. In particular I have always had absolute faith in my ability to outperform investment markets and so for an investment institution I was advocating that the fund should be guaranteed to perform in line with a given index, like the FTSE100, and then I would manage an equivalent sized fund for the institution and so the profit over the index would go to the institution. Another reason for putting this forward was that after my outperformance in 1982 I left the City and competitors and even fellow fund managers said that I only achieved that performance by speculation and that they could have done the same but they were more conservative!

Don’t follow the index – maximise return with the minimum of risk

My investment policy was actually to maximise return with the minimum of risk. The main risk being economic risk but it included many other risks, one of which was price. If a company’s price did what I expected I would sell and buy a lower valued share. I did not consider myself a trader although the fund was ‘turned over’ 5-6 times in a year. At that time GEC was 5% of the index but I felt there was a lot of price and economic risk in it so I did not have any shares, the same for Beecham and Sainsbury, but I had the equivalent in small electronic companies, Glaxo and Tesco.

It does not matter whether you can explain a successful investment policy, if there is significant performance, up or down, or dealing activity, then the financial intermediaries would class it as speculative. The other thing is that to have performance related investment fees it then can entice speculation. I saw that, whether it was right or wrong, there was going to be a move towards index funds because that is what the marketing people and companies could sell and therefore wanted.

Being two years out of the ‘City’ people said that I would find it difficult to get an investment management job so I set about marketing my scheme, and the first company I went to see was my old company, Friends Provident. Due to poor investment performance after I had left, the Actuary suggested that I should rejoin them. Previously I was the youngest manager they had and I was the Investment Manager in charge of UK Equities.

This was in 1989, I needed the job desperately, my mortgage company was about to foreclose and I went to see the Investment Director who happened to have been my manager when I first joined the company in 1974 in the pensions department as an actuarial trainee. He said ‘ You realise that you cannot have your same job back, our endowment assurance sales have grown considerably since you left and we have expanded by acquisition; we are a different company. We are now the fifth largest property development company in the country’. As is my usual disposition I said ‘Oh ----! Don’t you realise what is going to happen to the commercial property market?’ Anyway we agreed to disagree and I got the job, sold my car to them to raise cash and started on a salary that was about half what I needed to live on, but I had confidence that I would perform and soon get my old job back.

I was investment manager responsible for its managed pension fund and within six months it started to become a top performer. Within a year I was again head of UK equities and controlling about $8bn dollars. The first thing that I did was to sell all of the property shares in order to offset the company’s exposure to property development and that did not go down well with the property bulls. In order to develop my economic thesis I had visits from the top economists and then I visited the banks because my thesis was dependent upon the availability of credit. My visit to Natwest showed me that they did not have a clue, they were increasing their exposure to small companies, Barclays were property bulls, a trend is a trend, but Brian Pitman, the Chief Executive of Lloyds was unbelievable. We sat and talked and he listened and then he said, “I absolutely agree, we have been reducing our lending to those areas since May’. You can guess my bank holdings after those visits.

The relationship with my ‘huge bull’ Investment Director and the other Directors went from bad to worse. I rearranged all the funds to a depression scenario and in doing so took stakes in utility companies and telcoms. I was in charge. At the beginning of 1992 the investment markets came alive again as they tend to do at the beginning of each year and the recovery stocks started performing because investors were now looking for a recovery from the recession that they had not forecast in the first place. The view from the top was ‘you have done well but now you have to change your investment stance and how can we sell investment policies if we are bearish of the market?’ In the middle of 1992 they appointed a ‘bull’ as Head of all Equities and my fight continued until I wrote a letter direct to the Board explaining my views of the mismatching of assets and liabilities, the failings of the endowment assurance contract, ‘do they realise they are punting their houses on the stock market’, and the solvency risks of the Company in respect of its holdings in equities. We agreed to disagree and I left. If the UK had not exited from the ERM currency peg in the autumn of 1992 a number of insurance companies would have been in trouble and the stock market would have been in freefall.

I have written the above to show that I was fighting for my economic views and therefore it is in those situations where you scrutinise all the good and bad things about the economy and the psychological positioning of the participants within both the economy and the stock markets. All the time there is the questioning of every detail of information in respect of its effect on those markets.

I remained a bear until 1995, somewhat too long, but once I saw that a trend had been built I changed in time to ride the technological bandwagon especially in telecoms and Internet. I sold a bit too early but at least I sold, waited a bit, and then resurrected my thesis because the outcome, to me, was inevitable.