THE CITY GRUMP
Last week the Financial Times reported that Zoom now has the same market capitalisation as the combined market caps of Barclays, Deutsche Bank and Unicredit. The downward progress of the banks won’t come as much of a surprise to the City Grump who, in an article from 2011, warned investors never to go anywhere near bank stocks, and indeed airlines and textile companies to boot. But can it really be right that Zoom is as “valuable ” as all that? Are markets taking into account the true value of firms’ assets or are they swept along by the zeitgeist only for inflated stock values to spectacularly burst?
This is what I had to say back in 2011. Pertinent for today, I might add:
Airlines are crazy businesses. Firstly you have to commit to financing equipment that is mind-blowingly expensive and requires hugely costly maintenance in order to avoid things falling out of the sky and the company covered in public opprobrium.
The equipment is frequently run by bolshy staff (eg: BA cabin crew, Virgin pilots), you have no control over the vagaries of the people who own the landing sites and, just when you think things are running smoothly, up pop volcanoes, terrorists, a few inches of snow at Heathrow, absurdly overpriced fuel, and civil wars.
I hear you say, “What about Ryanair?”
I agree it has successfully revolutionised air travel. But if you check out its share price graph, you will see the shares have more or less flatlined for the past ten years (even though it is probably the best in the business!). Meanwhile, the latest stock market hopeful, Flybe, has plunged from 295p when it was listed last December to approximately 195p now. Avoid.
Where do I begin? The basic business of banking is reassuringly boring. You take money in from depositors and you lend it out, on a prudently geared basis, to customers who have the ability to repay in the agreed period. The problem is that throughout banking history there are countless examples of bankers becoming ever so bored with this (usually low-return) operation and so off they go to try their hand at new exciting things they have no experience of.
Whether it was Midland Bank buying Crocker (how apt!) Bank in the US, RBS buying ABN, lending money/dealing in shonky and inexplicable derivatives, or Bank of America buying Merrill Lynch, the list of stupidities is endless. If any of you have university-age children looking for a financial subject for their PhD, may I suggest entitling it The long and inglorious history of the banking industry?
The big problem is that those in charge don’t learn from history. I see Barclays’ American CEO has launched an initiative to double the bank’s return on capital. That should set alarm bells ringing.
If you really can’t resist the siren calls of the sector, you might like to think about Lloyds Banking Group where, encouragingly, the new CEO (Antonio Horta-Osario) said recently: “Banking is supposed to be boring in my opinion.”
Personally, I’d rather avoid them all and get to sleep at night.
About 20 years ago, I had a sizeable investment in SR Gent, then one of the biggest suppliers of ladies’ apparel to M&S. In those days, M&S made a big thing about buying British so, when SR Gent announced it was moving a large part of its manufacturing to Sri Lanka, there was quite a kerfuffle.
Accordingly, I very quickly got to understand the first rule of textiles: no matter where you’re currently manufacturing, there is always someone who can do the same cheaper elsewhere. Thus the whole thing is a global race to the bottom (as it were!). No doubt, the present holder of the textile crown, China, is beginning to experience this right now.
The rag trade can seduce: don’t be lured in.
Many well-known investors like to tell you about their successes. Candidly, they would admit that much of their good fortune is down to avoiding the major duds. You know where they are!
The City Grump has spent some 40 years in the City of London. He started as a stockbroker’s analyst but after some years he decided he was too grumpy to continue with the sell side of things so he moved to the buy side and became a fund manager for the next 20 years, selling his own business in the 1990s. Post the millennium, he found himself in turn chairing a stockbroker, a financial PR company, and an Exchange. He still keeps his hand in, chairing a brace of VCTs and investing personally in startups. The City Grump’s publications are available here.