Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 581

The everything rally brings danger and opportunity

The following is an edited extract of a presentation from MFF Capital Investments’ Managing Director and Portfolio Manager Chris Mackay at the company’s recent annual general meeting.

Risk and Opportunity are never far apart. It would be more comfortable but imprudent to talk only of the Federal Reserve cutting interest rates, of China’s belated stimulus multiplying around the globe, of Goldilocks, of the owners of capital riding sustained increases in record market prices for most asset classes plus better interest rates on their bonds than they have had for decades. 

Most importantly – and before we get distracted by risks or anything else – now is the time of greatest opportunity for many. Including calm, rational knowledge seeking investors. A few decades ago, it was impossible to access knowledge easily. Now, in an instant, we can go back centuries to first principles. 

Steve Jobs famously studied Aristotle and wished to know what Aristotle might have thought about digital technologies’ ability to deliver the knowledge and learnings of modern geniuses as well as centuries of cumulative knowledge. In business, we have at our fingertips the combined experience of thousands of failures and successes, the track records of the greatest entrepreneurs, capitalists and investors.

A desire for quick validation and few questions

Concurrently, in markets, opportunity has the huge advantage that the Index has conquered the world and has been perverted even beyond what Jack Bogle feared. Market players today require immediacy of reward and validation of opinion.

Many trillions of dollars are misapplied on the basis of 140 “characters” of false opinion. On predictions of short-term unknowables. Trumped up cats and dogs of narrow ETFs. Record single day option and meme trading. Agency fallacy idiocy that higher prices for illiquidity or opaque black box lock-ups better protect capital. Active decisions that are handed to index providers, provided that they are labelled passive and fee-takers take but don’t think to question. 

Beliefs are embedded into marketing, and huge incentives and institutional imperatives retard prospects of change. They reinforce the narratives and nothing exceeds like success. Bertrand Russell decided that most people fear thought as they fear nothing else on earth. This applies to 2024 markets despite the massive advantages of technology, which should unlock curiosity. 

MFF’s opportunities are better and our risks of permanent capital loss smaller when most do not seek to question and understand the WHY of principles and processes, the how of business operations and valuations and refuse to accept ambiguity, to challenge shortcuts, the beliefs and truisms of appearance.

Contrary to today’s noise, and despite the Intelligent Investor being first published 75 years ago, successes in markets continue to include sensible rationalists, to outsiders willing to use old-fashioned patience and focused analysis, now aided by vast tools of new technology. 

History rhymes

Why the Giraffe? Why the advertisements from Australia’s leading mortgage trust from before Australia’s last real recession, before many were born, before Victoria almost was bankrupted and Royal Commissions were held into economic collapse and mismanagement?

In Australia in the early 1990s, it was not about equity speculation as euphoria had not returned after the heavily borrowed paper entrepreneurs evaporated with the 1987 market crash aftermath. Early 1990s risks were disguised by the success of yield chasers which encouraged greed and envy and of course fraud and total devastation.

In the 2020s, the ‘everything’ rally amazes, with direct and second order risk effects building over time. Yield chasing has become rampant with myriad promotions providing everyone with extra percentages and basis points, except in Omaha where US treasuries are rolled over month after month. 

As many companies report reduced revenues, profits and forecasts, their share prices gloriously uncouple from the drudgery, whilst cost of living pressures bite hardest on non-asset owners. Anti-business, anti-growth regulations, decisions, commissions and enquiries, fines, taxes and tariffs are becoming more popular as many voters favour populists and socialists, rejecting responsible, prudent societal growth policies. 

However, unlike the early 1990s there are massive booms going on in all things digital and in financialisation. Massive efficiency benefits of the internet, mobile data and communication and digitization is followed by general artificial intelligence. The profits of digital businesses and networks have exploded, and equities have followed - as have alternative investments. Real technology benefits accrue to some businesses on revenue and to more on costs. Alphabet technologists already use AI with leading health insurance companies to cut half hour human tasks to mere seconds for each of many thousands of claims.

Of course, euphoria loves technological success and breakthroughs to amplify rather than replace market economic cycles. Alphabet’s Google easily finds credible research that a small minority of equities represent total sustained above inflation returns over decades and very few animals sustain the heights of giraffes.

Benefitting from irrational markets

We sometimes benefit when markets are irrational. In early August, the Japanese equity markets fell more in a short period than they had in over 30 years: 20% in less than 2 days. Other markets collapsed in sympathy. We dropped everything, assessed causes and anticipated effects, and swapped our steady selling for some buying. The rebound happened within days, which was not to our favour as we are investors who can hold high quality businesses for decades.

Despite equity markets generally being high by historical standards and volatility modest over recent years, we have found a few opportunities where high-quality companies within our focus areas have been underpriced. Even very large companies have periodically been materially underpriced, sometimes because of disillusioned, panicked forced sellers. 

Although these recent opportunities have been okay, low risk and high probability opportunities with massive margins of safety are rare and we have not seen them recently. Our process is to be prepared but, in the meantime, to earn from more moderate mismatches and from compounding gains in the high quality businesses we hold. 

Currently it is fashionable to rebalance towards lesser quality businesses and demonstrably less attractive market jurisdictions as most market participants chase short term rewards and overweight lower probabilities with perceived higher potential payoffs. But history indicates lower aggregate results. Better to instead read Benjamin Graham’s warnings about lower quality and late cycles.

Keep the focus on individual companies and industries

In assessing risks, the primary focus is upon individual companies and industries within the context of the portfolio. If we were required to invest directly in so-called emerging markets, so-called macro considerations would loom larger than simply saying “no thank you”. 

Many will have seen the charts for share price returns for the greatest emerging market which net out to about zero over 20 years. Specificity also applies to opportunities; for example, markets underestimating the potential for profitable growth for a small number of extraordinary companies which can comprise significant holdings in the portfolio.

Broader risk assessments currently include high levels of government and consumer debts (with unconstrained, unfunded election promises currently not dissuaded by the recent UK Truss crisis), geopolitical issues, ageing demographics, immigration, competing deflationary and inflationary pressures, which mean that margins of safety (or margins of error) should be wider than in recent decades of digitization and globalization benefits plus low inflation and interest rates.

For those interested in the very short term and overall markets, our views are of limited value. It is best to ignore much of the Noise that derogates from core fundamental processes and risk controls must consider alternatives. Less time is wasted if we do not predict but focus upon understanding businesses, their cycles and current details in comparison with market prices. The best bargains are when outlooks are bleakest.

 

Chris Mackay is Managing Director and Portfolio Manager MFF Capital Investments.

 

4 Comments
Ryan G
October 11, 2024

It's a bit of a mish mash and headscratcher.

Investors aren't rebalancing into lower quality stocks, they're continuing to load up on the US megacaps, especially tech, many that MFF owns.

Peter Calo
October 14, 2024

It’s interesting how Chris mentioned Estate Mortgage, who’s tagline was “Estate Mortgage; high returns, nice and safe”. Until of course it was no longer safe. The 2 TV commercials from 1989, featuring the giraffe and the rhino are available on YouTube. Just look for “Australian Ad Estate Mortgage #1” and “#2”.

Phil Kennon KC
October 16, 2024

I have a large shareholding in MFF which has done extremely well.
But, surprisingly, Chris Mackay writes in riddles. So it's very hard to work out what he is trying to say. And I've been an investor for 50 years, and a director of two Industry funds for 29 years!

 

Leave a Comment:

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.