Always a puzzle, never a game

All-weather investing

Seeking consistent positive returns.

Come rain or shine.

Ruffer provides investment management services for institutions, pension funds, charities, financial planners and individual investors.

About

Thinking

Careers

Contact

Select Location

Europe

Australia

Asia

Middle East

Channel Islands

Rest of world

Type of Investor

Individual investors

Institutional

Charity

Family office

Financial planner

Individual investors

Institutional

Charity

Wholesale

Institutional

All investors

contact

ruffer@ruffer.co.uk

London

80 Victoria Street
London SW1E 5JL

Directions | Map +44 (0)20 7963 8100

Edinburgh

31 Charlotte Square
Edinburgh EH2 4ET

Directions | Map +44 (0)131 202 1602

Paris

103 boulevard Haussmann
75008 Paris, France

Directions | Map +33 (0)1 88 45 02 54

Articles by Jon

Jon Dye

Research Director

6 June 2023

Tony Dye was the chief investment officer of Phillips & Drew, one of the UK’s largest pension fund managers in the 1990s. He was known to most people for his value-driven approach to investing and his bearish prognostications on the dot.com bubble. But I knew him as Dad.

One of his defining qualities was intellectual curiosity. By nature, nurture or both, it was a trait I inherited – making a career in investing a compelling vocation for me. I joined Newton Investment Management as a junior economist during the epic final blow out of the dot.com bubble. Prices of internet-focused growth stocks were soaring, with the technology-heavy Nasdaq doubling in the first six months of my career.

It was a remarkable time – and one I remember extremely well, not least because it was humiliating for Dad. He was forced out of the investment firm he had led – just before the start of a three year bear market which ultimately vindicated his views and portfolio positioning. (He stuck to the terms of his non-disclosure agreement, so the first I knew of this was when I read about it in The Times.)

During this period of market euphoria, Dad wasn’t exercised by a yearning to be proved right or by bloody-minded contrarianism (though I suspect both had their appeal). His motivating grievance was with the way investment professionals were willing to act with other people’s money.

His exasperation came from seeing money management transformed into a casino of relative performance chasing, with perverse incentives for the casino’s players and operators. In his view, this was an affront to the true purpose of the professional investor –to compound people’s pensions and savings over time. Dad regarded John Maynard Keynes’ General Theory of Employment, Interest and Money as a foundational text in investing. One quote felt particularly apt at this time: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Behaviour throughout the investment industry in the run-up to the dot.com bust was frequently ridiculous, sometimes disgraceful and almost always detrimental to clients – a fact that was not lost on Dad, and one he had no qualms about pointing out.

SMALL PRINT, BIG REVELATIONS

Some time in my mid-teens, my dad had handed me a copy of Terry Smith’s Accounting for Growth, an exposé of how companies manipulate accounts to create the appearance of profit growth. Most of the specifics went over my head, but the main message stuck: corporate propaganda can be a million miles away from the underlying economic reality.

When Enron imploded in 2001, going from one of the world’s largest companies to the bankruptcy courts almost overnight, I (like the rest of the world) smelt a rat. So I dug out Enron’s annual 10-K report – a comprehensive summary of a public company’s financial performance, filed annually and required by the regulator.

Could you tell it was a wrong’un just from reading that report – what the company has to tell you, not what it wants to tell you?

Yes, you could!

Dad always bothered to read the small print, because “if it didn’t need to be there, it wouldn’t be.”

How many analysts and investors were reading these things at all, let alone properly? I was amazed how much information could be unlocked by a careful and skilled reading of these required financial disclosures. It was like finding the corner pieces of each company’s jigsaw.

Shortly after, I joined an accounting-based research firm where I learnt to read accounts properly and relished the chance to detect and unmask corporate obfuscation.

These lessons are critical to our approach to equity analysis at Ruffer today and help us avoid catching falling knives. For example, the sell-off in tech stocks in 2022 prompted us to look more closely at the sector in the hope of identifying a bargain. But almost all of the companies we looked at shared a common trait – the enormous use of stock-based compensation, where staff take a proportion of their compensation in newly issued stock.

Compensating staff this way is fine when the share price is rising. But it becomes a problem on the way down, when the same dollar amount of compensation requires the issuance of ever larger amounts of stock to staff, at the expense of other shareholders. Nevertheless, many companies report financial metrics which exclude this cost, in an attempt to distort the economic reality.

VANISHING VALUE

Apart from corporate and investor behaviour, one of Dad’s main frustrations with the investment industry later in his life was the lack of value on offer in the stockmarket. Although he became known as a bear, he had made his reputation by backing value stocks throughout his career.

He liked being bullish, perhaps even preferred it, but felt denied this opportunity in an environment where central banks had artificially inflated and destabilised markets.

Dad was always keen to impress on me (and anyone else who would listen) the importance of taking a long enough view of history. Doing so allows us to look beyond recent investment conditions and back to the 1970s and 1980s – when value outperformed growth not just for a quarter or a year, but for the best part of two decades.

We have entered a new investment regime, in which value-driven investing appears to be making a comeback. This poses new challenges to investors, challenges Dad would have relished.

Understanding the market was like doing a 10,000 piece jigsaw puzzle made entirely of black pieces.

10,000 PIECES

One of the last memories I have of Dad is of him hunched over a laptop monitoring the prices of his short bets on the financial sector. This was February 2008, on his sixtieth birthday, during the early stages of an experimental treatment for his cancer.

The financial crisis was beginning to unfold, but the full weight of the crash was yet to come. He died a few weeks later, missing the final throes of the meltdown. He would have found the market dynamics utterly fascinating, though he would have deplored the devastation inflicted on so many individuals.

Dad considered it a privilege to work in investment management – a unique profession, where you can learn something new every day in economics, politics, business, technology and a host of other fields.

To him, understanding the market was like doing a 10,000 piece jigsaw puzzle made entirely of black pieces. You could devote your lifetime to it and never finish.

But the urge to find another piece, time after time, is as great a motivator for me as it was for him.

This article first appeared in The Ruffer Review 2023.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This article does not take account of any potential investor’s investment objectives, particular needs or financial situation.

This article reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. This financial promotion is issued by Ruffer LLP which is authorised and regulated by the Financial Conduct Authority in the UK and is registered as an investment adviser with the US Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. © Ruffer LLP 2023. Registered in England with partnership No OC305288. 80 Victoria Street, London SW1E 5JL. For US institutional investors: securities offered through Ruffer LLC, Member FINRA. Read the disclaimer