Investment strategies from Morgan Stanley’s market guru

It so happens this approach to investment is exactly what was recommended by Peter Lynch, the former chairman of Fidelity in his book One Up On Wall Street (Simon & Schuster). Lynch recommended buying shares in companies after your own positive personal experiences of their services. It worked for him with a number of firms including Amazon. Wilson is a big believer in Lynch’s approach to investment.

He is also wary of the traditional tactics of broking analysts who visit companies and believe what managers tell them.

He says you have to be sceptical and use your own judgment about companies and their prospects.

Deliberately provocative

To put Wilson’s talent in perspective, here’s a snapshot of his recent track record.

Mike Wilson bought his first shares in Nike on the basis that he enjoyed its products. Paul Rovere

In 2017, he issued the highest S&P 500 target for year end 2017 of all Wall Street strategists.

In 2018 he went from being the biggest bull on Wall St to being the biggest bear with the release of the lowest S&P 500 target for the year of 2750. That compared with the median forecast of 3050. He matched his bearish outlook with advice in June this year to rotate into defensive stocks such as utilities, telecom and staples.

Then, in July this year he downgraded small caps and the tech sector before they had a 15 per cent fall.

Wilson admits he is deliberately provocative because that’s how you make money. “You have to go against the grain a little bit but you have to verify if your thesis is correct in the market,” he says.

In 2018 Wilson released of the lowest S&P 500 target for the year of 2750.  Griselda San Martin

Wilson worked out a unique way to check his thesis. He created baskets of stocks representing different themes in the market. He created scores of different baskets including a basket of cyclical stocks, a basket of defensive stocks, a basket of inflation stocks and a basket of stocks leveraged to fiscal spending.

“A basket inflation of stocks tells you what the market thinks about inflation and a basket of stocks that is leveraged to fiscal spending tells you that people believe that maybe there is a tax cut coming or maybe there isn’t a tax cut coming,” he says.

“When I started it 15 years ago it was like nothing and now every every firm on the street has this business – they’ve created their own version of it. There are thousands of baskets of stocks.

“I didn’t create this to be a product. I created this as a tool for me to verify what’s actually going on in the marketplace. Is the marketplace telling me I’m right or is it tell me I’m wrong?

“I think too many people, when they invest, don’t verify their thesis in an objective way. This is the confirmation bias that we all have. So the way you fight that is you go to the scoreboard. And the scoreboard says you’re wrong man.”

Markets ‘are changing’

Wilson is big on portfolio construction for different levels of risk but he is no fan of being wedded to a particular investment style. “The market goes in pretty regular cycles every seven to 10 years,” he says.

“We’re probably going through a new one now with the growth guys being religious about their view.

“They’re being basically taken to the woodshed because they don’t understand what’s going on because their confirmation bias is well entrenched.”

Wilson says that just because you have made money for nine years in tech growth stocks does not mean you will always be right in your view or should regard yourself as a genius.

“In fact, actually things are changing,” he says. “I could be wrong about that transition going on but I don’t think I am.”

The transition Wilson is talking about is the tightening in interest rates as the US Federal Reserve does its job and moves to stop an inflation breakout. It is tightening for the first time in 10 years for good reason.

“The Fed is not here to bail us all out, they’re not here to make sure we have the longest expansion ever,” he says.

Wilson’s bearish view about the US market – he thinks the S&P 500 will rise about 2.5 per cent to 2750 between now and the end of 2019 – is shaped by Fed tightening and the dramatic deceleration in central bank balance sheets.

“The rate of change in the global central bank balance sheets has been like 15 per cent a year ago to something like 2 per cent now – that’s a massive deceleration and that is the main why asset prices have suffered this year,” he says.

Tony Boyd

tony.boyd@fairfaxmedia.com.au

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