What does decades of investing through market booms, crashes and uncertainty teach you?

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In this episode of A Value View, Simon Gergel, lead fund manager of The Merchants Trust, shares lessons from more than three decades of investing through major market events. He discusses the importance of disciplined, research-driven decision making, staying focused on long-term value, and avoiding emotional reactions to short-term market volatility.

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Simon Gergel (SG): I think the biggest lesson that I've learned is to back that judgment, to be willing to stand aside and stand apart from the general trend. It's not about being contrarian just for the sake of being contrarian. The market can often be right. It can be telling you things you didn't know.

Jon Cronin (JC): Hello and welcome to a value view from the Merchants Trust. I'm Jon Cronin, and in this episode I'm joined by Simon Gergel, lead fund manager of the Merchants Trust. Now, Simon has spent around two decades managing the trust, investing through the financial crisis, the Covid pandemic, inflation shocks and plenty of market ups and downs along the way. But rather than simply looking back in this episode, we're asking something more useful. Namely, what does long experience in markets actually teach you, and how does it help you when everyone else is getting carried away or even panicking? Simon, it's great to see you in the studio.

SG: It's great to see you again, Jon.

JC: Well, I'm really interested in just finding out some more about your thoughts here, based on the experience that you've had. We talk about 20 years with Merchants Trust. In fact, it's 30 years for you, a little bit more in the markets themselves. I guess the first point I'd like to discuss with you is what does that actually teach you? How does it help you do better in your day-to-day work?

SG: Experience gives you perspective in the market and I think humility. I mean there are lots of things we can't ever know, and we can't know with certainty. But experience teaches you to recognise certain patterns of behaviour, certain patterns in the market and certain events, so things never recur exactly the same. But as they say, history rhymes, so you get to see familiar patterns in markets, and you get to see and learn how you yourself deal with that in the behavioural response. I think experience is enormously useful, but it certainly doesn't teach you everything, it teaches you humility above everything else, I think.

JC: And when you look back over those 20, those 30 years, talk to me about some of the major events and how they've shaped your approach to what you do now.

SG: Well, in the last 20 years, we've had the great financial crisis followed by austerity. We've had the Covid pandemic. We had in the UK, Brexit. We've had the Ukraine invasion and so on. So, there's been an enormous number of shocks to the system, quite major events, many of which were quite unpredictable from the outside. And we’ve seen enormous variety of environments in the last 20 years.

JC: Do any of them hold anything in common when it comes to the way you need to approach the markets and the stocks that you choose to invest in?

SG: Well, very often what you see is a narrative that develops, or a theme that develops and the market or the stock market goes in one direction, and there's almost like an overwhelming drive in that direction. And that can lead to over-exuberance or over-pessimism sometimes. The financial crisis, there was far too much pessimism, actually. And by the time you get to March 2009, I think what you see is periods of over-exuberance and also panic on the other end of it. And those can create great opportunities for disciplined investors who can take advantage of those cycles.

JC: Let's take a case study and wind back just a little bit further, at least 30 years and think about the TMT, the technology media, telecom bubble. You've cited this in the past. Many others have as well. But why does it still matter today?

SG: I think it's a really pertinent example, because during the late 90s, when the internet was really becoming a force and developing, there was a massive boom in companies associated with telecoms, media and technology, and share prices moved to extremely high valuations, expecting or discounting enormous growth out into the future. And it's a little bit reminiscent of what we've seen in the last year or two with the rise of generative AI and the way that the hyperscalers, as they're called, the way those shares have moved, and many other, actually quite a few non-profitable technology companies as well. So there's a parallel with what happened 25 to 30 years ago.

Although there are also differences. Of course, the companies at that point, 30 years ago, many of them were tiny and very small and not very profitable. Today's most successful technology companies are often gigantic companies but are still growing at a heady rate. But you can still see parallels in investor behaviour and the way that money has flowed into that theme and actually away from other areas of the market.

JC: So does the TMT bubble, does that teach us to expect something similar with what's currently happening with AI? I guess I'm asking you, is this an AI bubble? Is it going to burst in the same way as the TMT bubble did?

SG: It's hard to judge because there are differences, particularly the fact that the companies investing this money are some of the most profitable and largest companies that we've ever seen on the planet. So it is inevitably different. But I think the emotional way the market's moving behind it, and the way other areas of the stock market have been left behind, are similar. Take the UK stock market, for example, which has been left well behind the US market in the last few years. I think there are parallels in that there may be great opportunities that are being left behind because there's so much focus elsewhere. So I wouldn't want to say whether it's a bubble or not, but I think what it's creating is opportunities elsewhere to invest in very sound businesses at sensible valuations that can pay a good dividend yield and hopefully deliver a good return.

JC: Okay, so I guess what you're saying here is that the perspective you have is shaping how you perceive markets today?

SG: Yes. And giving me confidence and giving my team confidence to back those views and to stand back and keep those investments in the face of what can be quite challenging periods where many of those companies that we invested in have not kept up with the market because of this rally in some of those themes.

JC: Does experience help you stay calmer, particularly in more volatile markets? Would you say that on the whole, Simon, you're a pretty calm fella.

SG: I try to be, but what's important is not so much how calm I am. It's what I end up doing in the portfolios. So I may not be quite so calm on the outside, but it's really important not to do the wrong thing in portfolios and not to let the behavioural aspects, not to let the sentiment, affect what you're doing. You need to come back to an investment discipline and be really disciplined in the way that you think about what a company is worth and what you should be paying for it, constantly rechecking your investment thesis for the business to work out whether it is still valid or not.

JC: Okay, so what would you then say is the biggest behavioural lesson that you've learned over those years that shaped you?

SG: I think the biggest lesson that I've learnt is to back that judgement, to be willing to stand aside and stand apart from the general trend, provided I've done the work, provided we've done the analysis, and we have built conviction in an investment. To be willing to stand back and take that view and have confidence that, most times, that will work out.

Clearly not every time. Things will go wrong. But on average, that approach will work if we've done the work and we've identified companies that are significantly mispriced. It's not about being contrarian just for the sake of being contrarian. The market can often be right. It can be telling you things you didn't know. It's about doing your homework. And if you've done your analysis and you've really got confidence, then absolutely you can take a contrarian view. Something can happen in the share price. Clearly, there's always people who've got more information about a company than you have. However much you try to analyse it, you've got to be humble. If a share price moves and you're not sure why, you need to try and understand what is driving that because you might have missed an important piece of information. But if you've done that analysis, then you've still got conviction. Equally, the market can be wrong. It can over-exaggerate trends in either direction, and that can create great opportunities.

SG: And it's separating the wheat from the chaff. It's identifying those situations that is critical.

JC: So, for people watching out there now listening to this now, what's the simplest way they should apply that thinking?

SG: I think one of the simplest things to do is to write down an investment case as to why you own this company, or why you think this company is interesting and attractive and then monitor that and constantly update it as you go through.

JC: So put it down in words?

SG: Put it down in words. And when something changes, if the share price goes down 10% or up 10%, ask yourself and look back at that and say, has anything really fundamentally changed? It may have changed, but if it hasn't and the shares have gone down 10%, then should you have more conviction in that company because it's 10% cheaper than it was? Or are you losing conviction because it's gone down and you're not comfortable? I think that's a great starting point, actually.

JC: Well Simon, great insight born out of some considerable experience there. Thank you so much indeed for joining us in the studio.

SG: Thank you Jon, it's been a pleasure.

JC: And thanks for watching A Value View. If you enjoyed this episode, do subscribe, comment below and share it with anyone interested in long-term investing, market cycles and better decision making. You can find out more about The Merchants Trust, and read and watch Simon's latest investor notes, by visiting The Merchants Trust. We'll see you next time.