I think the biggest lesson that I've learned is to back that judgment, to be willing to stand aside and stand apart from the general trend. It's not about being contrarian just for the sake of being contrarian. The market can often be right. It can be telling you things you didn't know.
Hello and welcome to a value view from the Merchants Trust. I'm John Cronin, and in this episode I'm joined by Simon Gergel, lead fund manager of the Merchants Trust. Now, Simon has spent around two decades managing the trust, investing through the financial crisis, the COVID pandemic, inflation shocks, and plenty of market ups and downs along the way.
But rather than simply looking back, in this episode we're asking something more useful. Namely, what does long experience in markets actually teach you? And how does it help you when everyone else is getting carried away or even panicking? Simon, it's great to see you in the studio.
It's great to see you again, John.
Well, I'm really interested in just finding out some more about your thoughts here, based on the experience that you've had. We talk about 20 years with the Merchants Trust; it's actually 30 years for you, a little bit more in the markets themselves. I guess the first point I'd like to discuss with you is: what does that actually teach you? How does it help you do better in your day-to-day work?
Experience gives you perspective in the market, and I think humility. I mean, there are lots of things we can't ever know, and we can't know with certainty, but experience teaches you to recognise certain patterns of behaviour, certain patterns in the market, and certain events. So things never recur exactly the same, but as they say, history rhymes. So you get to see familiar patterns in markets, and you get to see and learn how you yourself deal with that in the behavioural response. So I think experience is enormously useful, but it certainly doesn't teach you everything. It teaches you humility above everything else, actually, I think.
And when you look back over those 20, those 30 years, talk to me about some of the major events and how they've shaped your approach to what you do now.
Well, in the last 20 years we've had the great financial crisis followed by austerity. We've had the COVID pandemic. We had in the UK Brexit. We've had the Ukraine invasion and so on. So there's been an enormous number of shocks to the system, really quite major events, many of which were quite unpredictable from the outside. And so we've seen an enormous variety of environments, I suppose, in the last 20 years.
Do any of them hold anything in common when it comes to the way you need to approach the markets and the stocks that you choose to invest in?
Well, very often what you see is a narrative that develops, or a theme that develops, and the market, or the stock market, sort of goes in one direction, and there's almost like an overwhelming drive in that direction. And that can lead to overexuberance or overpessimism sometimes. At the financial crisis, there was far too much pessimism, actually, by the time you get to March 2009. Really, I think what you see is periods of overexuberance and also panic, I suppose, on the other end of it. And those can create great opportunities for disciplined investors who can take advantage of those cycles.
Let's take a case study and wind back just a little bit further, at least 30 years, and think about the TMT, the technology, media, telecom bubble. You've cited this in the past, many others have as well. But why does it still matter today?
I think it's a really pertinent example, because during the late '90s, when the internet was really becoming a force and developing, there was a massive boom in companies associated with telecoms, media and technology, and share prices moved to extremely high valuations, expecting or discounting enormous growth out into the future. And it's a little bit reminiscent of what we've seen in the last year or two with the rise of generative AI and the way that the hyperscalers, as they're called, the way those shares have moved, and many other actually quite a few non-profitable technology companies as well. So there's a parallel with what happened 25, 30 years ago.
Although there are also differences, of course. The companies at that point, 30 years ago, many of them were tiny and very small and not very profitable. Today's most successful technology companies are often gigantic companies, but are still growing at a heady rate. But you can still see parallels in investor behaviour and the way that money has flowed into that theme and actually away from other areas of the market.
So does the TMT bubble teach us to expect something similar with what's currently happening with AI? I guess I'm asking you: is this an AI bubble? Is it going to burst in the same way as the TMT bubble did?
It's hard to judge because there are differences, and particularly the difference that the companies investing this money, a lot of them are incredibly profitable — some of the most profitable and large companies that we've ever seen on the planet. So it is inevitably different, but I think the emotional way the market's moving behind it, and the way other areas of the stock market have been left behind.
Although, take the UK stock market — it has been left well behind the US market in the last few years. I think there are parallels in that; there may be great opportunities that are left behind because there's so much focus elsewhere. So I wouldn't want to say whether it's a bubble or not, but I think what it's creating is opportunities elsewhere to invest in very sound businesses at sensible valuations that pay good dividend yield and deliver, hopefully, a good return.
