A recent article in the Financial Times seemed to sum up our approach to investing. In it John Kay likened the market’s short term focus to that of a tailgater on a motorway. The practice pays off most of the time with a slightly quicker journey, perhaps even a more efficient one; but now and again the car in front will brake and a horrific pile up will ensue. We have seen this in financial markets periodically since their first inception, but it is becoming more frequent. Investors have been taking ever bigger gambles - driving closer and closer to the car in front - safe in the misplaced belief that it is not risky or that they are too skilful to be caught out. A lot of the time investors get away with it and the practice is very profitable, which is why so many do it. Occasionally however the car in front brakes, the market turns and usually very quickly and despite their skill, investors get wiped out. The sight of a motorway crash does cause drivers to slow down, but arrogance and the appeal of a quicker journey soon causes the tailgating to begin again. 2009 and the ‘dash for trash’ is proof it is the same for markets.

 

So what does this have to do with us at KMG? We are neither the tailgater nor the one being tailgated. Perhaps we are the old Volvo estate, maintaining a steady speed and distance, avoiding the racing and resulting pile-ups going on in the outside lane. A client remarked last year that we could have made a fortune by tailgating. A fair point; we could have been more aggressive and captured more of the rally, but in all honesty we were neither arrogant  enough nor quick enough to abuse the system by risking clients’ money to follow the latest fad. More essentially, we have spent the last decade trying to spot the vagaries of the system; indeed we kept advising people that the credit expansion could not survive and would eventually end in tears.

 

You could argue that what marks KMG out within the financial services industry is simply the following:

 

·         we have not chased illusory profits

·         we have not sold contracts for our own profit or at risk to our clients

·         we have not believed the mantra of investment bankers, fund managers, and politicians; indeed we do not really believe anybody

·         we very much understand the issue of tailgating and the fact that somewhere along the line, if you follow fashion, you will eventually crash or be bitterly disappointed. That is why we got out of the property bubble, and why we did not follow the technology bubble etc.

 

Our policies continue to be contrary to general economic thinking. Yet, they have consistently produced good, average returns in a tax efficient environment. KMG will not chase bubbles and as a result we will probably not produce spectacular, albeit illusionary, returns. KMG does however:

 

·         have clients that have been with us for 50 years

·         look after second, third, and fourth generations

·         get a constant flow of referrals

·         look to protect and preserve clients’ wealth in a market downturn

·         maintain a fairly selective client base

·         only recruit staff that adhere to our genuine philosophy of care, concern and thoughtful application of high standards.

 

Clearly we may not always make the right decision but it has to be recognised that historically we have got far more right than wrong. We do not follow fads and fashions but will continue to row our own boat along the lines of stable economic performance. Our current position is a testament to long-term, strategic thinking here at KMG.

 

 

 

Patrick McIntosh

26.2.10