Confessions of a bear market survivor
 22 Oct 2001
Jonathan Compton takes an irreverent look at the recent record of the securities industry
 
I am a taxidermist, a male go-go dancer and occasional window cleaner. In
many ways I am very similar to St Peter. I deny my true history, not three
times as he did, but far more regularly. I do everything I can to cover up
my dirty little secret - that for 24 years I was in investment banking. Why?
Because by the time this bear market is fully understood, to have been
involved at all and to have profited as a stock market expert will be a
cause for contempt among right-thinking people.
As our friends, families and neighbours continue to lose more and more
money, we will be as shunned as a mediaeval plague ship. When our friends
and clients find out the facts as to how we have cheated them, we will be as
chewing gum on their shoes. Read your Financial Times. There are well over
50 funds listed there which in any other business would have had their
managers put in jail. I refer to the mega takers. Consider, for example,
Fund X (I can't give you its name.) In this fund, the management charges and
other costs taken out over the last 10 years are more than the current size
of the fund. It is not just one fund that has done this - as of the end of
June I have so far found more than 50.
These are managed by the very bluest names in the business. This is why so
many would be wise to, like me, rewrite their own business histories.
 
I came across a letter in my files the other day from a well known
investment banker, dated April 2000. He was leaving his firm, it said, but
not to go to another company as is usual, nor to spend more time with his
family. He was leaving because the bear market had clearly started and he
wanted to get his capital out of his firm.
Moreover, and I quote, he was expecting the 'mother of all bear markets' to
develop and had no intention of returning till it was fully mature. What
fabulous forecasting, what perception. How did he know?
When I wrote that letter to all my clients I was not being tongue in cheek.
Anyone who claims that this bear market was not obvious has spent too much
time watching Tinky Winky, Laa-Laa and Po.
 
There was plenty of evidence, as I shall demonstrate later. The World Trade
Center  terrorist attack was, and is, of course, horrific. But I suggest you
keep, as I have, all the FTs or whatever is your favourite business paper
from the week before. The collapse in business was obvious then, as it was
15 months previously and well covered. The attack has merely allowed many
badly-run businesses to find a fig leaf to cover their incompetence.
 
Now what few people know is that I am probably the world's leading expert in
bear markets. I believe that over two and a half decades I have lost more
clients more money in more markets than anyone else present today.
My first job was as a fund manager at Samuel Montagu in charge of gold
shares in South Africa. As was normal then and is still largely true today, I
was wholly untrained. Two weeks into my job - boom - the Soweto riots and
the index fell 91% in five months. I moved to Hong Kong to test my talents
in another continent, arriving in August 1980 when the index was 1810. Boom.
Fifteen months later, I had managed to help it and my clients down to 676,
only a 70% loss. In 1987 I was the only fund manager long of Hang Seng Index
Futures and yes, boom, along comes the crash and the market closes. This was
my finest hour.
 
When the market opened five days later half the money was lost. With such a
record I had to get my first broking job and for a while, in 1989, did the
strategy on Japan. Surely no one needs to be told about the last decade in
Japan?
The 1990s increased my expertise. I opened our Karachi office in 1993. I
rearranged our Philippines office in 1997. Yes, boom, 61% and 74% down
respectively in dollar terms in a year. These are but a few of my triumphs.
I was calculating last week that I have operated in no fewer than 18 fully
fledged bear markets as defined by a fall - peak to trough - of more than
60%.
 
And now I stand here in the biggest bear market that any of us will ever
suffer. Let us recognise when this bear market started. Do you know when? At
9am on July 2, 1997, when the Bank of Thailand abandoned the de facto peg of
the
Thai baht to the dollar. In the US, Japan and the West it was noticed only
by the tiny handful of sad people who cover Asia. Thailand, to misquote
Neville Chamberlain when talking of the Nazi part invasion of Czechoslovakia
in 1938, is a small country a long way off of which we know little. But it
spread. The domino theory of the Vietnam War 30 years previously came true
in financial markets. From Korea to the Philippines, then Africa, Turkey and
Eastern Europe, it spread further. Then to Latin America, Russia and
Long-Term Capital Management (LTCM).
 
You would have thought with more than 30 medium-sized economies hitting the
buffers, investors and business might have smelt the coffee? Far from it.
Because the great and the good were involved in the exclusive club of LTCM
and the major EU banks were up to their gunwales in Russian debt, in came
the Rescue Rangers. The IMF , World Bank and others for the emerging
markets, Alan Greenspan for LTCM and the EU central banks for Russia.
 
This was fatal. It confirmed the belief that bankruptcy and cycles could not
be allowed to happen again. Leaving aside the utter nonsense of such views,
these events let open the floodgates for rampant speculation. The world's
central banks flooded the markets with cash for the bail-outs. Soon after
they then flooded them again because, as we were all aware, the millennium
bug was coming. We would be shortly eaten by our toasters or assaulted by
outraged microchips that had got the date wrong.
 
That too never happened but reinforced, understandably, the universal belief
that governments would never allow losses and are wedded to ever-higher
stock markets. And in a way of course, governments are. Have you considered
it odd that even the Big Issue seller outside knows Eddie George's name but
not that of his MP or MSP? Or that Alan Greenspan's recognition factor in
the US is higher than any senator or state governor? Central bankers and
chancellors,
the people who charge taxes and take our money, were not only popular but
admired in every advanced country except Japan. Strong markets help their
national budgets.
 
Now all I know is, when chancellors and central bankers are popular, then
the lunatics really do hold the keys to the asylum. The abolition of
national or serious bankruptcy coupled with the flooding of world markets
with liquidity has been a disaster. The world has long been building up
excess capacity in almost every single business. I will rephrase that. I
cannot think of a single business where there is not huge excess capacity.
In steel, autos, optic fibres, fund management, platinum, wheat, disc drives
and all major business, the excess capacity is vast. Profits must therefore
and, of course, have been collapsing. But wait, the killer punch is simple.
 
As governments have become used to intervention, so they are propping up the
excess capacity, thereby ensuring that profits don't just fall, they dive
and stay down. Tragic though the events of September 11 were, the collapse
in a large number of industries such as airlines was obvious months ago.
Swissair was deep in the dooh and bust beforehand. Ditto Sabena.  BA was
clearly in trouble: my favourite target candidate today is Virgin There will
be many others. The insurance and life companies in the UK and offshore were
in trouble before too. Equitable Life was and is not a one-off. The list is
long. We do not even have to discuss TMT as it is but one of a myriad of
obvious problems.
 
How has the investment industry responded? With a raft of the most idiotic
and harebrained plans we have ever seen. Consider football. Always a bad and
unprofitable business, yet several football funds were launched into this
new paradigm. For those interested in numbers, revenue last year - the best
ever - was 1.02bn (EUR1.63bn), pre-tax losses 146m. Apart from the
criminally irresponsible internet funds, there have been in the last decade
more than 350 country funds launched for such awful opportunities as
Indonesia, Bolivia, Bangladesh, Argentina ,Peru and Vietnam. These are
countries where for all intents and purposes, neither contract law, a fair
judiciary nor minority shareholder rights have ever existed. Good property
title for foreigners is unknown. Then there were the sector funds and other
specialist funds, for broadcasting, pharmaceuticals and telephones. The
investment industry has done a magnificent job of wealth destruction and, as
I have said before, you will deny your part in it.
 
But being negative is all too easy. Good for headlines, good for
controversy, but not very helpful. I have some infallible tips (below) to
ensure at the very least that in two years' time that you will have a job
and a salary, both big wins. These ideas may even make you money as others
lose - a happy thought. I will cease here as I have to catch a plane
tonight - to Latvia where we have some excellent wheat land. Why? Because in
every down cycle, you want to own the lowest cost producer and in Europe,
that's Latvia.
 
Jonathan Compton was formerly managing director of Crdit Lyonnais Securities
Asia and deputy group chairman. He worked in corporate finance, investment
management and stockbroking for 24 years. This article is based on a speech
to the Stewart IvoryFoundation's Edinburgh conference on October 8.
 
Top tips to keep your job in a bear market
 
1. Have an affair with at least two of your bosses. You cannot be sure which will be sacked. If neither is willing, then resort to their adult children or at a pinch, their grandparents. Family contacts are always sacked last.
 
2. Take long lunches - but always with a client. Like you, they will have little real work to do either. But in every bear market, trustees sack half their managers, managers their brokers and investors their advisers. When this inevitably happens, if you are the lunchtime buddy and mentor, it will not be you. I cannot believe anyone is so nave as to believe that business flows are a function of merit or performance.
 
3. Don't fiddle. (If you think I am talking about expenses, then you really do have a problem). In my broking years, I had around a dozen clients whom I considered outstandingly savvy and intelligent, people of considerable ability. They are great. But every single one suffered from the same flaw.They always dealt too often. They know and I knew this was expensive and did not aid performance, but they persisted. In bear markets, the only rule is cash. The secondary rule is simple. Hunker down in rock solid
balance sheets and do absolutely nothing. You will still lose money, but at a much slower rate than other people. Wealth is when your purchasing power is more than your competitors or your neighbours.
 
 4. Clean up your own personal assets. We all have small holdings and losses here and there. Junky stocks and punts that went wrong. Cash these in today. At the end of the bear market they will have no value - you need cash and cashflow.

 

 5. Sell your property. No bear market ever ended with property prices holding up. Yet in the US, UK, Australia, France and many others, property prices are close to all time highs, yet credit availability is already tightening. If you only have one property, and after the bull market of the last decade you should have more, rent out a room or two, good cashflow.

 

6. Beware the dead budgie going cheep cheep. Don't buy cheapness. US utilities were absolutely and relatively cheap by October 1932. Yet the utilities index did not get back to its 1929 high until 1958. Many cheap assets stay cheap or get cheaper.
 
7. Take up a hobby such as origami. It will give you hours of pleasure at home and is far cheaper than golf, rugby, opera or skiing. You need the cash.
 
8. Become a Lloyd's name. I can give you details later, but hull insurance, say, for ships not at any greater risk today then four weeks ago is up 20 fold and the increases are sticking. After a 16-year bear market, the cycle has turned. But don't buy insurance companies; the worst is yet to come.
 
9. Watch gold. No need to buy yet but the chart has broken upwards and held up for three weeks, if it stays up in another three, then the 1981-2001 downtrend is broken. Plus, do you know any holders at all?
 
10. Most important, buy some yield. For younger listeners, in the old days equities used to pay dividends rather than stock buy-backs. These are usually paid twice a year in cash. Yields are still mostly derisory but some reasonable ones are beginning to appear.
 
 11. Don't ignore fundamental analysis. I have worked in or on Asia for many years. Why invest in an economy, 65% of whose exports are electronics, where another 26% of GDP is tourism, 31% financial services, 16% agriculture.
Would you invest there? Of course not - these numbers, by the way, are for Scotland.
 
12. Short all banks. I did a little research two weeks ago on 20 banks which had reported their June half-year figures. Median provisions were down, yes down, by a third. Despite the huge hits they are taking now on TMT, and of course many other businesses crumbling while I speak, they were clearly blissfully unaware that the business cycle had turned. There will be pain.