In the above video message, I introduce the theme of this letter. Please watch the video before you continue reading this letter.
Dear Monark Investors,
The mornings are cold, the days are short, and the new financial year is up and away.
Writing this occasional note has become one of our favourite activities. It’s an opportunity to communicate with every investor engaged in some way with Monark. It’s akin to a fireside chat with a large family where we feel comfortable being frank and transparent. We hope you enjoy the read.
Our tone tends to be somewhat sceptical.
There are enough cheerleaders in financial markets.
“Talking up their book” is an engrained trait. That’s to be expected. Almost all participants make more money when markets move up. Being conservative people involved in a generally conservative asset class, we tend to mull over what could go wrong. To step back from the hype, the noise, the momentum. And to be wary when investor mood suggests too much certainty, confidence, and complacency.
We believe our value is to offer our investors an alternative point of view. This, we think, provides the perspective and balance so necessary for profitable outcomes.
Nothing influences perspective more than the stories we tell each other.
The power of stories
Everybody loves a good story.
Most of us have fond memories of being told stories as kids. Educators and presenters understand the power of a story to anchor facts and concepts. For many, a good book is the last activity of the day before falling asleep.
Many religions are explained through stories. They bring values and beliefs to life and are often recalled at houses of worship and during religious festivals.
Stories inform the history, culture, and priorities of countries. They can inspire patriotism and unity amongst citizens.
Corporations and smaller businesses embrace stories to communicate their background and the value they look to provide their stakeholders. We regard this as so important at Monark that we record and recall those stories which we believe explain who we are and what we stand for.
Of particular importance to investors is the underappreciated role that stories play in the behaviour of financial markets.
Logic would insist that the price of a particular security be determined by its objective fundamentals: its current cashflows and its future prospects. Indeed, that’s what the entire research industry is based on – cold, objective, analysis. Truth is, both stories and facts play a role.
Benjamin Graham’s book, The Intelligent Investor, is recognised as one of the most important contributions to understanding market behaviour and successful investing. One of Graham’s most famous quotes is:
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Simply put, in the short run pricing is determined by the heart. But in the long run, through objective fundamentals.
Stories talk to our heart.
Today’s story
There are many stories influencing market behaviour and asset pricing. We’ll focus on the one creating the most excitement – the expected impact of Artificial Intelligence (AI) on business, profitability and investor wealth.
AI has been the defining story providing impetus to today’s bull market. It is common knowledge that this bull market has experienced the narrowest participation in history. The “Magnificent Seven” have been the sole locomotive.
At the time of writing, these seven stocks account for over 30% of the world’s most important share index – the S&P500. Their contribution to market performance is even more startling, at around 60%.
The share that has generated the most excitement in this exciting group is of course Nvidia, the company responsible for providing the processing units and software needed to power the AI revolution.
Nvidia is the leading actor in today’s AI story. Few seem to realise that this story has been told before…
Yesterday’s story
The internet boom found traction in the late nineties.
Not unlike AI, the internet was expected to revolutionise the world as we knew it. It did not disappoint. And, not unlike AI, the emergence of the internet was accompanied by stories of substantial change, progress, efficiencies… and the profitability and wealth that would result.
Not unlike AI, the dawning new age produced new heroes. The one resembling Nvidia the closest was a company called Intel. Almost every computer used to access the internet shared the same little sticker: Intel inside.
Intel was yesterday’s Nvidia. The manufacturer enabling speedy engagement with the internet. Every self-respecting portfolio had an allocation to the firm. It was the bluest of blue chips. The key ingredient for tomorrow’s high tech world. Destined to create more and more shareholder wealth.
That was the story circulating at the dawn of this century.
Stories are powerful. And Intel’s share price moved from around just over $4 in January 1995 to around $74 in September 2000. Intel’s revenue for the year ended 31 December 2000 was an impressive $34B.
Sadly, this is where the story goes south.
Intel is still a major chip manufacturer. Indeed, the laptop on which this note was composed has the neat little Intel sticker next to the keyboard.
Intel’s revenue has continued to grow since the heady days of the dotcom boom-bust. It’s a real company providing an important component. In 2023, Intel’s revenue had grown to $54B.
But what of its share price? And that promise of substantial shareholder gains?
At the time of writing, Intel was trading at around $35. Less than half its peak almost 24 years ago.
Tomorrow’s story
It is more than likely the Nvidia story will echo Intel’s. We say this not as diviners of the future, but as students of the past and close observers of the prevailing narrative – the stories we tell each other.
Competitors will appear. Margins will suffer. Growth will slow. The share price will slow and slip.
Or, as a writer in a recent AFR article, when reflecting on the uncertainties underpinning the expected fortunes awaiting investors in AI, neatly put it, “(there are) doubts around who actually wins from the AI revolution, and perhaps just as importantly, when”.
Tomorrow’s story is still to be written. But when today’s story is too-hyped, too-positive, too-expectant, tomorrow’s is often just the opposite.
Our story
Whilst we love using stories to explain who we are and what we stand for, our investment opportunities are not explained this way.
Not even a combination of JK Rowling and the late Alistair MacLean could turn a senior secured debt opportunity into a riveting story. In the short term we are a weighing machine. And in the long term we are a weighing machine.
We construct and present our opportunities using objective metrics with clear objectives. Secured private debt offers no “blue sky” and no prospect of “ten baggers”.
We are neither yesterday’s Intel, nor today’s Nvidia.
Our story, such that it is, is that we want to be that part of your portfolio that keeps moving forward. That won’t let you down. That won’t affect your sleep when other markets experience their regular and inevitable corrections. We want Monark to be understood as safe – indeed the safest – hands in our market.
We wish you every success for the remainder of 2024.
Warm Regards
Michael Kark and the Monark team
CEO and Co-Founder, Monark