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Thoughts on frothy markets and a bumper nine company round-up

There’s a lot of talk of how frothy share valuations are right now.
Thoughts on frothy markets and a bumper nine company round-up
  • Markets look frothy, with some investors chasing stories and ignoring important fundamentals.
  • Due diligence is still vital for a big winner approach. 
  • This week's round-up takes a deep dive into the investment case for nine companies.

There are many cases of speculative excess. Perhaps one of the best examples came last week when Tesla founder Elon Musk - associated with one of the frothiest shares out there - advised his followers on Twitter to dump Facebook’s WhatsApp messaging service over privacy concerns and use Signal instead.

The shares of Signal Advance, which lost $125m in 2019, literally exploded and went from a price of 58 cents to just over $38, no doubt netting small fortunes for those who got in early.

This symbolises the current trend of chasing stories rather than established businesses with meaningful profits and cash flows. Yet, it is not just private investors with their keyboards and mobile phones that are employing this kind of strategy, some of the best performing fund managers are doing similar things.

I have a huge amount of respect for Baillie Gifford and think it is one of the best investment businesses in the UK and I currently have investments in several of its investment trusts. It makes no secret of the fact that it does not invest like many of its peers do.

Over the Christmas period I spent several quiet hours reading the annual reports of its investment trusts. The common theme of its investing strategy is well known to people who have invested with it for years. It believes that the really big investment returns come from just a few rare, outstanding businesses and it spends all its time trying to find the businesses that will do this.

The key difference between Baillie Gifford and amateur punters on Robinhood is that it spends huge amounts of time understanding company business models and end markets before it invests its customers’ money. This is the key part of its risk control and all investors would do well to follow this approach.

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