Terry Smith: TINA — There Is No Alternative

Johnny HopkinsTerry SmithLeave a Comment

In his latest 2022 Semi Annual Letter, Terry Smith discusses TINA — There Is No Alternative. Here’s an excerpt from the letter.

In inflationary periods, an acronym which is sometimes used to describe the investment options is TINA — There Is No Alternative. It refers to the concept that equities will be the least poorly performing sector in such conditions because of the ability of at least some companies to continue to grow revenues in real terms and generate real returns on capital above the rate of inflation.

Bonds with fixed interest coupons are certainly not the place to be in these conditions. Real estate may provide some safety but it is a notoriously local market with poor liquidity and high frictional trading costs. Commodities have had a day in the sun at the start of this inflationary cycle and this may continue, or not.

But there is no inherent return on commodities — no interest coupon, dividends or profits reinvested. Investing in them is pure Greater Fool Theory — you can only make money by selling them to someone willing to pay more than you did. I have no confidence in my ability to accomplish that.

All of which may point to the fact that There Is No Alternative to equities even though they have performed poorly so far this year. However, even if you accept that, it may be tempting to sell equities and go into cash as this may enable you to avoid further falls in the equity market.

Timing is of the essence in doing this and if you haven’t done it already I think we can safely say you missed the top. Getting the other side of the trade roughly right will almost certainly mean buying back into equities when economic conditions are at their most bleak.

This is a skill which few, if any, possess. Meanwhile, time spent in cash whilst waiting is hardly a good bolt hole from inflation. Finally, even if you accept the logic of the TINA mantra, maybe equities of the sort in our portfolio are still not the best place to be for a while.

This is really a subset of the market timing approach: Sell quality equities, buy lowly-rated ‘value’ stocks and then reverse this when the time is right. I wish you luck if you intend to pursue this approach not least because I am fairly sure how lowly-rated stocks, most of which are heavily cyclical, have low profit margins and returns on capital, will fare in a recession.

We meanwhile will continue to do what we set out to do. Which is to assemble a portfolio of high-quality companies and hold onto them so that their inherent ability to compound in value will determine how we perform over the long term, not the vagaries of the market. I hope to see you on the other side.

You can find the entire letter here:

Terry Smith 2022 Interim Letter

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