Investors in every industry should pay attention to what Adrian Day has to say. Mr. Day, who heads up Adrian Day Asset Management, has some good investors looking to get the pulse of the market and find investments that work for them.
We spoke to Mr. Day recently, to find out what he thought of the market and where he was putting his money. He gave us a quick overview of his background: “I'm from England; graduated from the London School of Economics. I originally did research on political economics so my background was economics and writing and then it slowly developed into an interest in investing. I've had no formal training and I don't think that's a problem. Some of the best managers have a liberal arts or psychology background. These things help you understand history and give you a knowledge and awareness of psychology and how people react. These elements are far more valuable than MBAs.”
Next, we asked him about the economy and where he saw it going. We wanted to know if there would be some good opportunities even though the market is so unpredictable. Here's what he said: "We look at a lot of history. Here we are in a certain economic situation today [so we need to ask] has this ever happened before? What are the closest parallels? And what happened last time? Those are basic questions and history can tell you an awful lot."
This is a good practice, not only for economists but for individual investors who are trying to discern the economy and figure out what to do next. Here's what Mr. Day said about today's historic parallels: "There's no absolute parallel. History doesn't repeat but sometimes it rhymes. The closest parallels to what we're facing here in the United States right now is Japan at the end of 1980's and the Great Depression, although I think that Japan is the closer parallel. In both cases you had bubbles, in both cases you had excess credit, and excess valuations in everything (not just the stock market or real estate but everything)."
Once you've identified the historic "rhyming" parallel, the next thing to do, according to Mr. Day, is to see what happened as a result: "Bubbles burst, as bubbles do," he said, "and the reaction [in today's economic situation] has been very similar to Japan's, although Japan's response was slower than the US. In Japan, interest rates went way down and have stayed down, the bad assets were purchased from the banks, which was a quicker and cleaner way of doing than giving banks bailout money. They set up a bad loan bank and put all of the banks' bad loans into one bank, and they inflated money."
That was the immediate result. Fast forward to today to see the long-term impacts of that situation on modern-day Japan: "The result in Japan has not been a rapid economic recovery; it's been a long period of stagnation where the economy has done nothing. The Japanese economy today and the Japanese stock market are at lower levels than they were 20 years ago. During those 20 years, we've had little bursts of growth but basically they've been in a recession or deflation for 20 years in Japan. I think that's a risk in the US."
With that bearish view, we next asked Mr. Day for his take on what stocks might be an interesting opportunity given the economic climate: "I'm particularly cautious right now," he said. "There are times when you can focus more on the potential (of an investment) and there are times when you need to focus a little more on the risk. Any market that you look at will always have positive factors and negative factors. But right now, one needs to focus more on the risk."
So, what are those positive and negative factors and how do investors understand and react appropriately to them? "The biggest positive factor for the stock market is the liquidity; and stocks tend to do well when there is liquidity. But overall, I don't think the risk/reward is very favorable."
He continued drilling down from a macroeconomic view to a stock-specific view: "When I look at individual stocks, I don't see great bargains. I'm a value investor not a momentum investor or market timer but the plain fact is if you are a value investor and you can't find anything of value, you become a market timer because you come to the same conclusion. The market remains overpriced right now. So we're being extremely cautious with money. We're buying very little. We're looking at some of the gold stocks – both juniors and seniors – because I think you have to have exposure to gold right now. We're looking at buying (but it might be too early to buy) some of the base metals companies right now. We're buying some of the income stocks in the US, companies that have good dividends well-covered by earnings; and lastly we're looking at big cap global markets and some of the emerging markets, particularly in Asia."
So, there are opportunities, according to Mr. Day but they seem to be few and far between. If that's the case, we wondered, what should investors invest in? "One of the keys to successful investing was said well by Warren Buffett when he said that as an investor you should be like a batter at baseball where there are no strikeouts: You just stand there, waiting for the perfect ball. You don't have to hit at everything. We're not afraid of having cash. Right now we're at about 30% cash and there are newer accounts that we've got over the last 6 months are about 70%. ”
He went on to describe this approach even more clearly for investors: "I'm not afraid of holding cash. You just have to wait for the right opportunity. It will come. We're not buying a lot but there are pockets of value. Some of the things we are buying quite aggressively are the smaller geothermal companies. I think geothermal is very attractive because it's a cheap source of energy, it's renewable energy, and it's economic without government subsidies."
And in the metals sector, we wanted to know what he was looking at: "Try to invest only in things you understand. I don’t pretend to know enough about rare earths. Right now in the base metals, we would be looking at BHP and Xstrata Minerals. We're not buying them yet. Those could be very good buys."
And the ever-popular rare earths aren't as popular to Mr. Day for an interesting reason that investors might consider carefully: "The problem with minor metals and rare earths is that the major production comes from big diversified companies. So take molybdenum for example, and moly is not the most extreme case by any means. The biggest molybdenum producer is Freeport but you don't buy Freeport for their molybdenum. They're hidden inside big companies. If most of the production comes from big companies, they're the ones that control the price and the supply, and some of the smaller, purer companies (in my view) have properties that may well contain [the metal] but they're not big enough to be economic. So I find rare earths to be difficult markets to play."
Mr. Day had a lot of good insight for investors as well as some compelling ideas for what markets are interesting and what aren't.
"We're not buying a lot right now. The biggest mistake a lot of investors make is feeling impatient with their money. Just wait for opportunities," he concluded.
References
ADRIAN DAY ASSET MANAGEMENT
www.adriandayassetmanagement.com
801 Compass Way, Suite 207
P.O. Box 6643
Annapolis, MD 21401
410.224.2037
AssetManagement@AdrianDay.com