GVI Investor December 2021 Video Call

Hi, everyone. Hello to the Manward family and a pre-Christmas, Merry Christmas to you all as well. I've got some fantastic slides I've put together. I love putting these together because I know I'm going to be sharing them with people who are really keen to see them. Well, as you know, I'm Alpesh Patel, I run a hedge fund and a private equity fund. I've also written all these books you can see over my shoulder and had over 200 columns in the FT. Well, you know all of that. Anyway, let me start with what I really want to share with you, what's really been getting me excited. In terms of just the market, how we get to our destination in 2022, where the markets are at the moment and a few other things. There's no subliminal message with this particular screen that you could see there, okay? The sharp shooters, if you all know what I'm talking about. So let's look at the agenda that I want for this video. And you might want to grab a pen and paper, close the doors, make sure you're concentrating, it's quiet and all the rest of it.

So first of all, just want to give that welcome to you all. I want you to ask me questions, in the future just send them across. I will endeavor to answer every single question I receive. Think of me almost as your investment tutor, not just as your investment guru, but your investment tutor. So, that's really important, I want this to be a journey. I want it to be interactive. I want it to be something not just where you are receiving, but almost like your university, we're sort of interacting, okay? Now on this video, I'm going to give you an overview of the markets, you're going to love that, because I've got some great insights. I had a rule when I was at Bloomberg, when I had my show at Bloomberg TV, which is unless I've got something innovative, original to say, then don't say it. So I'm going to give you some of those insights in a moment. I'm also going to give you a performance review of my current recommendations. We've only just got going, so there's quite a lot of recommendations to come over the next few months.

I'm going to give you a strategy review, just to remind of how I pick stocks and also an outlook of the outcome we seek and a bit more about the process in terms of stop-loss as well. So first of all, like I said, the welcome. Let me tell you something interesting as part of that welcome that I've been doing this past week and what I've got coming up. So the past week I was at my alma mater, some of you might recognize that, the University of Oxford. I was there for a carol service and classical music service and a launch. It was a quite nice intimate affair with about 10, 12 of us invited for that and then there was lovely music after that.

So that's what I've been doing, and it was great because that's really where I started my investment journey. I was fortunate enough to have the time and energy and incentive and motivation as a student, and the motivation was I didn't have much money as a student, to go out there and learn about investing and I was surrounded by, well, some economists who'd won the Nobel prize in economics. So it really gave me this top quality insight into investing and then I took that with me, that desire to be the best at what I was doing. So, that's part of what I've done this week. And I've got a separate video message, which I recorded when I was out there for you all as part of the whole Manward family and all my subscribers to my newsletter as well. Where, like I said, I want to give you that kind of elite exclusive content, but share it with you. So I can take you on that journey as if you are with me as friends and we all sort of do better as a result.

What have I got coming up? Well on Tuesday, I'm going to be meeting, possibly the Queen, but depending on our itinerary, it might be the Prince of Wales who I've met before to receive my medal, and the medal will look like that. That's why you might often see after my name, the letters, O-B-E, stands for Officer of the Order of the British Empire. And I'll be receiving that medal on Tuesday at Windsor Castle, like I said, it'll be pinned on me. So I've got a picture of her majesty, the Queen pinning it on someone. And if it won't be the queen, it might be Prince Charles just depends on itineraries for members of the Royal family.

So, that's the big thing happening and I'll receive that medal for my services to the economy. And that's part of what I'm doing here with you and the content I'm giving you. It is, I just want people to be better at investing, better at making their hard earned money, do more for them. That's where all those books came out from and the Financial Times Columns and all the rest of it, okay. So let me now give you the overview on the market, right? That's my market overview. Well, there's just something which caught my eye a little bit, I hadn't realized December tended to be fairly insipid. And you can sort of see why people might be looking at December thinking, you know what? Yeah, I'm just going to stop now, I've made enough. And I did have one of my friends who follows all the investment ideas I gave him, and he said to me, he said, "You know what? I'm off to Phuket in Thailand. I've had a great year, thank you Alpesh for making me lots of money, I'm going."

So, [Dan Shaw 00:05:16] if you happen to be watching, it's you I'm referring to, enjoy that holiday. But yeah, you can see why some people just call it a day in December and you can see also why they might want to start back in January. There'll be some [stonk 00:05:29] in January's, 2019 was basically good. Anyway, have a look at that in your own time, I just wanted to share that with you. The other thing I wanted to share with you is this. Now these are the analysts forecast from Morgan Stanley, Wells Fargo and Goldman Sachs. I'm not going to read through it all. There's a point I want to make about their forecast for the S&P 500 for the end of 2022. First thing I do want to say as an aside is the new global head of communications at Wells Fargo, she used to work for me, Susan Monahan. And Susan Monahan, as I said used to work for me, so I'm delighted she's now at Wells Fargo's global head of communications.

Again, Susan, if you're watching this congratulations, I'm incredibly proud that you used to work for me and that you've done so well in the world of finance. And not least because there are so few women in finance, so that's another reason. Anyway, Susan Monahan, good on you. Now, the reason I wanted to mention these targets is this, look at the disparity. I mean, after all surely Morgan Stanley know the same things, Goldman Sachs know, know the same thing Wells Fargo knows. So how come they've all got such big variations in targets? And I've learned the fact that Goldman Sachs's target is what 25% away from Morgan Stanley's, that's a big gap. And especially when you consider the staff are moving from each firm, one to the other, and they've all got their own different excuses and reasons why those are different.

This is why I think it's really important, people such as your good selves, do have that independence of mind. And my job is to inform your decision making, but have that independence of mind. I mean, if the supposed highs were paid the big box, I haven't got a clue because they don't know, then why should anybody else expect to be different? So I wanted to share those sources of information with you. The other thing I wanted to share with you, and this is sourced from Bloomberg, is this notion about the bubble, this really... Everyone talks about bubble, bubble, bubble. Of course, I want the markets to keep rising. Of course I do, I've got a vested interest. I make more money if they keep going up, so do you. Having said that, just look at that, the blue line is the five years to 2000. Now some of this you might have seen before, because I might have shared some of this before, but that doesn't mean it's not important. And the white line is the five years till pretty much about now.

And you can see we're nowhere near, if we re-based and started... Assume we started at the same point, we're nowhere near what we did in 2000. I remember those Go-Go years. So there's a counterargument to this whole bubble notion as well. One thing which did catch my eye, however, is this, you see whether there's a bubble or high volatility, whatever there is, people don't simply get out of the markets. What they do is they reorganize their holding. So what do they reorganize them into? Well, look at this from Bloomberg, unprofitable companies are lagging their peers. In other words, it seems people are looking for more quality companies, i.e profitable ones. And the ones which are unprofitable, they're getting out of. Why would they be getting out of those all of a sudden when they haven't been doing in such large numbers for so long? Well, I think because they're getting a bit worried about the markets.

Put in another way, the percentage of say, Russell 3000 growth stocks with negative earnings, in other words, unprofitable companies. Well it's above the percentage at the peak of the 2000 markets and the 2008 crisis or slightly after the 2008 crisis, the numbers are getting pretty high. Now is that an indicator of a market fall? Could be. We've got too much unprofitable loss making companies going out there. What does that mean? Well, it means not that people will say, "Oh, I want to get out of companies entirely," the equity markets or investments, they don't do that. They'll reorganize to get into more profitable ones. Is what I think is going to happen, and my picks will of course reflect that. Similarly, and this has come from Goldman Sachs, no profits, no problem. I think this is an important chart, it's one that, again, I stocked. There's a lot of charts, they send me that I don't look at, or the Financial Times send me, I don't look at. Or I look at it and I think, [inaudible 00:09:38], it doesn't matter.

This one caught my attention, and the reason is this, it is making a difference if you are not profitable because the companies are not growing as much. They're not giving us the kinds of returns they could before. And that suggests a more mature market, it suggests coming towards the end of a bull run. Same thing is happening with IPOs. I think these initial public offerings, and the source is Professor Jay Ritter here, is the reason, the percentage of IPOs where the company's profitable has pretty much got to the lowest level it's been at since 2000, remember the bubble. Is because the investment banker is saying, "Listen, we can't wait for you to get profitable. We need to get you on the market while it's still high, sell your stock to a bunch of punters who don't know any better. Just get it out the door now before the market crashes and you can't IPO." That's what I think is actually happening.

Again, what does that mean? Well it means that people don't have as much confidence in the future of the market. Doesn't impact us, we're not going to go into unprofitable companies, not the way I pick stocks, and I'll come to that in a second as well. I want to have reward without crazy risk. Just want to give you this image from Bloomberg, stocks decline, US equity benchmarks fall amid COVID variants, worry because of Powell speech. Now, the reason I wanted to show you this is to put it into some kind of context. When we get these falls, do I panic? No. One of the reasons I don't panic is because I've got perspective. Best way to remove panic in anything in life is to have perspective. And this gives a bit of perspective that look, when we get these deep falls, well, they do come and they do go, let's not panic in our holdings.

I see this from hedge funds and the kind of holdings they've got. Let me explain this. And this is data from Goldman Sachs. Hedge funds are carrying elevated exposure to high growth. I don't have a problem with high growth companies. It's in essence, an essential component of what I'm looking for. High valuation stocks, now that worries me, because I don't look for high valuation stocks. I look for high growth, but fairly valued stocks. And I think the reason hedge funds are looking at these high valued stocks is because they just can't find the quality companies, i.e companies are getting more and more overvalued. EV over sales by the way means enterprise value, think of it as the share price, over sales, which is different of course, to earnings. But it's a bit like a PE ratio, which is more popularly known. And an EV to sales ratio over 10 suggests a degree of overvaluation, over 20 means seriously overvalue and you're seeing that happen.

Why is that happening? Well, it could mean that hedge funds are taking more risks to try and get the same returns that they've been spoiled by over the last year or two years, or it could mean there's just not enough companies out there. Now that's their problem, it's not ours. Good news for us is we don't have trillions to manage so we can still cherry pick high growth, but good value companies and that's what we're going to try and do. Now again, you might say, "Well, wait a minute, Alpesh. I'm somewhat worried, despite you saying all of this, that the markets are all time highs. Should I be waiting for a fall? If there is a fall, I'm worried I might not get a good return." This is data from Fama and French. Eugene Fama won the Nobel Prize in Economics in, I think it was 2016. And I've written about him in my books well, before he got the Nobel Prize in Economics.

Return after 10% decline, after a 20% decline, after a 30% decline. Actually the market doesn't do too bad, so if the market were to fall, I don't think you should dread it. Because it still gives us opportunities and that's what we're going to be after. So I don't want you to worry about broader market falls or what you might be thinking about that. As long as we pick quality companies, good growth, well, the other actors I'm going to discuss in a second. Similarly, people ask, and this is from J.P. Morgan's private bank, average cumulative S&P 500 total returns, "If you invested at all time highs as opposed to just any random day." And actually it doesn't make much of a difference, in fact you'd be marginally better investing when the markets are at all time highs, which is pretty much near where it is now. So again, it gives the case for being invested as long as we want to try and cherry pick the best companies on the criteria that I like to look at.

So that's the market and where we are on the sort of, some of the things that I want to show you. I know I've repeated some of the stuff, you might have seen elsewhere that I've recorded before, but I don't have any problems repeating what's really important and should be drilled home. So now let's turn to the existing picks that I've given so far, very few so far that I've given. The markets are fairly volatile, so I'm always worried about trading stop-losses. But overall, okay, we're either flat on a couple of stocks, which is fine, because they've got 12 month holdings, remember. So I'm not going to look at everything every single day, every week, every month. Well month, yes maybe, but not every single minute of every day. And then we've had some good returns already so far for Shutterstock and for Molina healthcare already and for Williams Sonoma already, or Sonoma already. But the others, no waiting about, I don't... Yeah, 12 months, I'm relaxed.

And that's an important lesson I want to teach you, which is, listen if we are looking for... While it hasn't exploded to the upside as soon as he mentioned it, that's not what this is about. This is about getting our rewards, but getting it without losing sleep, without panicking, making sure the companies are solid. That's what this is about, this is not about, "Hey, let me pick the tiniest no name company and hopefully if I send it out, the name enough on social media, it'll go to the moon." That's not what this is about. Because we're looking at making our savings work hard and not take crazy, crazy risk. Put another way, and this is not one of my picks. Put another way, it's try and also find companies which exhibit this kind of return, and this is the return histogram happens to be for Moody's.

Now the reason I want to show you this, is over a 250 day holding period, statistically, if it did what it did in the past, which nothing ever does, but if history repeat itself, these are the probabilities of the kinds of returns one would expect. Now notice I'm most concerned about making sure I don't get a negative return over 250 days. Now I know in the interim, over 20 days, look at what can happen. The variations are quite wide on actually any stock. Over 250 days, those variations diminish. This is one of the reasons why people sometimes say, "Hey, find a good company and buy it for the long term. Don't trade it or panic." But you can only not panic, if you know that when you go through the rollercoaster of say a 20 day holding period, you know that over a 250 day period, that's why I look at 12 months, which is roughly 250 working days, it's going to be okay because we know the fundamentals are sound. So that's part of why I get my perspective and I don't panic.

There's also something else which many people won't know about, which is this, data suggests. Now let me interpret this because that's pretty complicated stuff. Less volatility means better results. What we found is companies which have tended to be less volatile, equities with less volatility, have tended to do better. In other words, the tortoise, the slower, the sort of less bouncy stock, less risky stock, tended to outperform over the long term. So the hare who gets all the noise and all the news because it's gone up today, that tends to also crash back down to earth, whereas the tortoise steadily wins the race. And if you know the story of the tortoise and the hare you'll know exactly what I'm talking about and that's what, in a way, the statistical data.

And I'm very much about the data. Data, data, data. I do all this hard work for you, using all that education that I've had the privilege of having, so you don't have to do it. I'm your person in the sort of city, as it were in the hedge fund industry to share this with you. So less volatility means better results. And well, I incorporate that in to when I'm looking at picks. There's something which caught my eye on exchange-traded funds. What is happening at the moment, is there's a hell of a lot of money going into any exchange-traded fund with the word inflation in it. These are all the exchange-traded funds or index trackers with inflation in it. Now that tells me something. First of all, it tells me a lot of people are worried about inflation or made to worry about it.

The second thing it tells me is fund managers are marketing the heck out of your fears, as they would do. And they're saying, "Right. Hey, listen, we better create a fund with the word inflation in it so we can get all this money." So I just want you to be aware of what's actually going on. They know it's a wall of money and they can panic people over inflation. I'm not saying inflation is not real, what I'm saying is there's a business to be made out of selling inflation and that's what the exchange-traded fund industry is doing right now. So what's my process and what's my outcome? Well, let me tell you the outcome of my picks from 12 months ago, 12 months to November, 2021. The annual return happened to be 53.4%. Well, how did that happen, and what's the process? What's the process that you share with us on this? And by the way, some of the top performers in that period to November were these. Now did I know Crocs was going to get 209%? No I didn't.

Did I know Flex LNG was? No, I didn't. Otherwise, I would've put all my money in one stock and said take the rest of the year off, that's the only one you need. These out of the stocks... All stocks over 100% were these. You can pause the video, I hope and look at these, if you wish. Don't go looking for patterns, don't go saying to me, "Oh, well there were some which was in this and there's a pattern in this." Don't look for patterns where they don't exist, don't be fooled by randomness. These were the ones which run out 50 to 100% on their returns. Did I know that we were going to do that now? No. I knew if I pick from a good list after filtering it down, and that's my process, how do I filter, I'll share within a second, that I should get these kind of returns.

That was the overall distribution of all the stocks, and I'll tell you, which were the stocks in a second. So on that end, were some which actually did make a loss. They are few and far between, I couldn't guarantee every stock's going to go up. And then there are these which were up. All of these over here and you can see the returns they made in the range, and that tells you the number in each range, were those. And these were all of the stocks from 12 months ago, so all that were on my approved... What I call my approved list, what I internally call it. And you can see some did really well, very few did poorly. That's what's going to happen with any use that I stock it, whatever. What's going to happen is you're going to get some, and you'll make losses and they'll hit the stop-loss.

And my stop-loss strategy, generally it is to make sure the stop-loss is not so close that volatility and noise knocks it out. Not so far away it's meaningless, and it tends to be as a default 25% or 30%. It's a more volatile stock from the peak trading stop-loss, basically. And we're going to pick from this universe. Now, like I said, if I could just have picked just the one, which run at 300%, I would've said, "Pick that, go home now, get the rest of the year off." So that's the outcome we're looking for and that's the best that can be done. 53%, I'll take any day, we had a good tailwind, that's why. If we get a headwind, we won't do as well, but we'll do better than the market, that's the aim.

So what's the process now? You do know that part of my process... Yes, I read all of this research so you don't have to, and these are the kinds of things that I'll be... Yeah, you can see 6:46 AM Eastern standard Time. Yeah, no kidding, as soon as it comes out, I'll get a ping, I'll read it. I'll read stuff and keep referring back to stuff, which is even from last year. And the Bear market guidebooks and look at it. Of course, I'll incorporate all that, but I make my own decisions so that you can benefit from them. And I'll look not just at what the banks are saying, but what, particularly these three Nobel Prize winning Economists are saying as well. But that's not all, because I didn't care about other people in one sense. I care about taking all of that and making my judgment. You are watching this for my judgment. So from my judgment, these are the things which I'm looking at and all the factors within valuation, price earnings, price earnings gross, price to book, price to sell, discount cash flow.

All these things in growth, sales, earnings, cash flow growth, income, dividend income, are they producing earnings? Momentum of the company, all of those various things, which I won't go into. Statistically, and I showed you some statistics already, I want to tick every single box of every single stock. So really filter it down to get the best of the best and then see what are the Nobel Prize winners and the big banks and the hedge fund saying as well. And what that means is I'll start off with about 10,000 stocks and narrow that down as I tick every box, I'll eventually be left with only about 2%. That's the process and a reminder, that's a hell of a lot of due diligence. Luckily you'll be delighted to know, I'm not the only person in my team doing it. There's a lot of people who do the work for me and then I go through it all as well. And the end goal being to get to that 50% return.

But it's not just numbers, it's not just Excel spreadsheet. It is also what are you hearing? Not just from the investment banks, not just from emails and reports and all the [inaudible 00:22:26]. When you're out there, that's the former governor of the bank of England, "Hey, what are you hearing? So what's sort the feel you're getting?" And what's partly important about all of this and you need to know is what's your pedigree? Well, look, that's me in 1999, and The Winning Ways of Uncle Sam was my very first column in the Financial Times. So there's a pedigree here, I've stood the test of time. Now, if you said entrepreneurial process was one of the most important things you look at, I like cashflow. Why do I like cash flow? Well, this is a formula. I mean, this is too much for anybody to take in, but that's cash return on capital investing.

You know I keep banging on about this. It's one of the factors, probably the most important, it's not the only factor. It's cash generated by a company on the money it has. Well, pretty important and what they found is, and you can see it there, 30% return is the long term average. And I want to then add more filters, which I showed you, to try and get to a 40% return on leverage, that's what I'm looking for, without any margin. So that's the process in broad terms, I know it's a lot of information I'm giving you. What you need to know is that's the work I'm doing. This is sourced from Goldman Sachs global investment research and their quantum database. You don't need to know, there's a lot of stuff. We take a lot of stuff from Nobel Prize winners and from big investment banks.

And we'll look at risk. I talked about my stop-loss strategy earlier. Well, one of the reasons that affects that stop-loss is I also need to look at this kind of data. What's the probability of a big loss? Now this says, for instance, 23.5% is the probability that this particular stock will be more than 20% under water, at least. On 18.9%, it'll be more than 30% underwater. Now, I'd look at that, I'm not just saying, "Trading stock, 25% sounds about right." No, we look at the statistics, history never repeats itself. All investing is risky, we know that, but we do, do all of this for you. And then in the end, my sort of holy grail secret vault, it looks like this. That's the goal, it'll be a detailed Excel spreadsheet. You can't zoom into this, I've blurred out the names because they're not timely, now.

So there's a lot of crunching, I wanted you to know what goes on in the laboratory as it were behind the scenes and the work that's done and that goes into each newsletter. And then I pick what I think, yeah, okay, that really stands out. And do I enjoy it? Why do I do it? Well, why do I do it? Because I get a hell of a lot of appreciation and feedback and please do keep it coming and do ask any questions. But it's incredibly fulfilling, I mean, I love it. I'm a geek, what can I say? It's like asking somebody who's a geek who loves doing it. You are not a geek on investing, I am, so my job is to save you time. I hope you found those insights helpful. I hope you found the starting point, why I do what I do and how my week has been and where it's going and the things that I'm doing.

So hopefully a bit of more of a personal touch, because I do want... I mean, look, hopefully God willing, I'll meet every single one of you, but until then, I want you to know there is that personal element, that personal commitment. I have a level that I set myself, a standard I set myself, which is why I name drop the books and stuff. I've only got those and the newspaper articles because I set myself a very high standard. And I hope to meet that for you, and I want you to know that's my commitment and my promise to you as well. So wishing you all a very Merry Christmas and a peaceful festive season and most importantly a prosperous 2022. Thank you all very much.