Sep 20

Good Years Follow Fallow Years

A long standing definition of a bear market is when the market ignores all good news and reacts negatively to the smallest bad news. Conversely a bull market sees us all ignore any raft of bad news and yet set the market running on any small amount of good news.

So what do we call the current situation, one where the market drops 5% on bad days, based on a mere rumour, then claws its way back based on any semblance of good news? The answer; confused, fearful, uneducated, highly speculative, stupid or just recessionary?

Take your pick, the fact is that we have enjoyed an exceptional period of growth, the land is tired and we need a fallow time to find some equilibrium. A long term plan requires long term players, long term investors and long term vision. Short term requires only a computer in a house, a day trading mindset and lots and lots of clean shirts. Why? Because you will lose several!

I have just spent some time in Kwa-Zulu Natal and Mauritius, purely for business old chap! Both are big producers of sugar cane and each time I go I am reminded of the sugar cane cycle and each time it reminds me of the planning that the farmer, in this case the sugar cane farmer, must engage in.

There has to be a simile here with the broader economic cycle? Well even if there is no direct correlation I am sure that you will grasp my meaning.

Forget the number of years, just think about this. That wonderful sugar cane plant grows out of what in many areas seems to be often barren and harsh land. Growing to over 2.5 metres, once ready for harvest it is burnt! Fires are deliberately set by man and they rage through the field, seemingly hell bent on destroying the crop the planter has nurtured! But the good farmer knows his business, the core product is unaffected, some even say it is enhanced by the flames and the exposure of the living gold, the sugar cane itself. All the surplus and useless vegetation and undergrowth is burnt and cleared away, the core, sweet, golden sugar cane remains and is now easy to see and therefore differentiate it from the waste, the real value is ready to harvest and pay the farmer his annual dividend.

The sugar dividend is thus harvested and that quality plant begins to grow all over again, and all by itself! For thirteen years this cycle will happen. A messy, crowded and confusing field cleansed back to the true pure product, by fire, a product that will give you what you planned for each and every year. But then that land must also be respected, it needs to be given a two year rest, a fallow time, no product will be produced, the land is cleaned up and the old plants removed, a fallow period allows for regeneration.

If we in the markets plan our clients and our own lives, taking many of these lessons to heart, we may just learn a few key points. Invest in the quality core shares and asset classes. Even a fire will not destroy them it will just make them easier to see. Understand also that nothing can grow indefinitely without a pause or fallow time, otherwise it will eventually collapse! Because you already know the above to be a fact of life, you plan, you educate your clients of this reality and you therefore become a great financial farmer!

Finally, a little cynicism, just for a change! Prime Minister, Tory Leader, ex Etonian and Oxford Boy David Cameron, says he has been informed, by many, that it would be a good idea to scrap the 50% tax rate for those who earn over ?150 000 pa. This is a group that represents the top 1% of UK earners and a great number of them are not British nationals and cannot vote in the UK!

Strangely young David does not seem to have been chatting with many of those who would have him rather ensure that the zero tax rate is raised, to include all those earning under ?10 000. I just wonder who young Dave is having over for drinkies and dinner and getting all his smashing advice from?

Wake up Prime Minister, battles were possibly won or lost on the playing fields of Eton, but that was 150 years ago. You are in an alliance government only, and your next election will be fought in the concrete playing fields of the suffering working classes, even the wealthiest politician in the house of commons today, yes you Dave, still need to keep the voters happy. Politicians need to be reminded more often that they need voters and therefore respect their intelligence. You don’t do that with a plethora of manifesto u-turns and or playing to the already privileged few, Mr Obama is slowly waking up to that himself!

Not quite Voltaire, but you hopefully get my point or as we once said without fear of belittlement from our children, “catch my drift”.

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