Ruffer LLP Q3 2025 Investment Review

One of the banes of the life of a fund manager is the tsunami of wise words which pour into the inbox of a morning. Are they helpful, or merely irrelevant? Maybe they are actually unhelpful.

When I was a student, I gave my worldly wealth of £200 or so to an ignoramus stockbroker in the City who specialised in hot stocks. He didn’t do well, but he didn’t do that badly either. I undertook some basic analysis as to what was going on (perhaps I would have been better-advised to have done that before engaging him); what I discovered is that he was so slow on the uptake that he bought into investment ‘certainties’ as the excitement was subsiding, providing him with a better entry point than his sharper colleagues.

This point of detail came to me while wrestling with the relationship of knowledge with investment success. Why, for instance, are the cleverest economists not the richest? I think the answer is twofold. The correct answers to the most interesting questions are educated guesswork, and where it is possible for an expert to have a precise grasp of the likelihood of a particular outcome, the right answer isn’t significant enough to lead to a major investment opportunity. And because most investment decisions are binary, there is a 50:50 chance of being accidentally right in the short to medium term – perhaps an 18-month timescale. So bypassing the absolutism of true knowledge isn’t a showstopper. Many analysts in the City are the successors of the wizards in the royal court, employed to ascertain whether the royal birth would result in an heir. The answer was always yes, and half the time, it was right.

It’s possible to be right more than 50% of the time, since the most likely thing to happen in the stock market is a repeat of what has just happened – it’s called the momentum trade. Although the blade of this way of investing is double-edged – it can make markets spiral downwards as well as grind upwards – it is universally understood to be a bullish phenomenon today, since the market has gone up in pretty much a straight line from January 1975: half a century. Bear markets have been sidelined. Instead, the relentless climb of Wall Street and the rest have been punctuated by crashes, which have – in nearly every case involving the major markets – bounced back again in short order. But the racing certainty is that, at the true inflection point, the market is much more likely to fall chaotically (at first), rise back up briefly, and then decline again relentlessly. Hence our preoccupation with the flak jacket to sit alongside the parasol.

Let’s spell that out. To the current generation of investors, taking risk pays off – buy to the sound of gunfire! It is hard, though, to buck human nature, and the crevasses are visceral events – they are, like King Lear’s threats, the ‘terrors of the earth’. Every crash takes out some fools, but not the foolhardy – they have learnt to close their ears to the ‘fundamentals’, which are as fugitive as the Siren songs from the beautiful enchantresses who would seduce Odysseus. Thus the first thing to avoid is being the coward when the jingle says, ‘Buy! Buy to the sound of gunfire!’ But the jingle has a second part to it – ‘Sell to the sound of the violins!’ That is as hard as purchasing in adversity, and – most importantly – for 50 years it has also been wrong to do so. So the violins are held in the pending tray, and investors try not to mourn their mistakes – selling Microsoft in the late 1980s (at least I owned it…), thinking that the bull run was over in 1987, 1998, 2007 – and so on.

What a bleak picture this paints, inviting the fund management industry to dwell on the design fault human beings endure – that we cannot predict the future. And yet we have nothing but fraudulence to offer our clients if we believe that we have no value to add, being merely the wizards in the court of the king who wants to know what kind of heir is to be born in the months or weeks to come.

What can we bring to the table which will show up in performance that more than pays for its keep? We have guiding principles which, while on occasion difficult to keep to, are nevertheless worth having as companions. Among them is the idea that the valuation given to an investment is more important than the attractiveness of its fundamentals. This is the opposite of an investment strategy born of momentum, which ignores valuation, and puts all the emphasis on the story. It is nearly always the case that high valuations cluster around things unknown – two examples of that are the Magnificent Seven tech companies, and gold shares. The former we own in tiny size; the gold mining stocks by contrast are a key part of our Praetorian guard. We eschew the tech stocks almost entirely because of their valuations, subjective as they are – not because the outlook for the fundamentals of those businesses is poor. In the gold miners, we have substantial positions (recently reduced) because the gold price is a mysterious beastie, but it is a store of value at a time when currencies may not be as roseate as they have been in the past.

On top of these guiding principles are what we consider to be areas of significant interest. First and foremost is the unsustainable level of government borrowing. Almost no Western country has escaped the nettles of over-indebtedness, except Germany, who is busy making up for lost time by doubling its debt burden. The supposed policemen of inappropriate debt levels are the rating agencies, who spectacularly failed to spot the problems in the mortgage-backed security markets in 2008 and are making precisely the same mistake again. Fitch has three countries rated at A+, but you have to be a village in the canton of Debt-Ratingen to have the first clue whether this is high or low; whether it is of interest or ‘for enthusiasts only’ – the code word for terrifyingly awful historical renditions of classical music. France has just been demoted from AA-, and Italy and Spain promoted from A (a jolly prime minister in Italy, Buggins’ turn in Spain).

It is debt which kills off empires. The bigger the empire, the longer it takes, and the more money is thereby lost by the faithful – 17th century Spain comes to mind, and Britain in the 1960s, whose former Commonwealth countries were encouraged to deposit their capital in London – capital which was then subject to the consistent haircut of devaluation. Quite a good test as to what has happened to Britain over the last 60 years is to compare the metal coins of Switzerland and Britain. The Swiss five franc piece (worth about £4.65 today) is, give or take, the same size and look as the 1965 Churchill crown (five shillings or 25 pence). In 1965 they looked the same because they were worth the same, yet sterling has declined by 91% against the Swiss currency in the time since; one wanted to own the five-franc piece, not the Churchill crown! The least interesting way of getting frightened about this is to take the figures themselves; rather it’s that the devaluation has been invisibly yet relentlessly painful for the holder. That the surge in money supply in covid and its aftermath hasn’t yet resulted in greater problems is simply testimony to the fact that there are no roadmaps in uncharted territory.

What else interests us? The West has been living off the workforces of poorer countries who will do jobs those with a more precious sense of their worth choose not to do. Now this golden stream of goodwill is regarded as an existential danger and must be repatriated. To the seasoned market watcher, this translates, before long, into a change in the nature of the workforce; it will be locals in Britain who do the crop-picking, the bed-turning and the bus-driving. Here’s a question: do you think they will do it for less remuneration, anxious as they are to do their bit for their country? Or do you think that, having the fruit farmer, the NHS and the transport system over a barrel, they might want a tiny bit more?

Tariffs also interest us, because historically they acted as a handbrake on activity. To us, they are an accelerator of a phenomenon which has been around for some years – the end of the optimised ‘just in time’ supply chain, which kept costs to a minimum, but fragility to a maximum. Add a third element, the onward advance of technology, notably AI, which is a really big deal. Add a fourth to that, the crusade against fossil fuels, which means that the automobile industry doesn’t know whether it was a mistake to replace petrol with a different pollutant in diesel, or whether electric cars (which may or may not be self-driven) are the future. All this undermines the traditional manufacturers, and allows China to pick and choose which Western enterprises to torpedo. If this feels fanciful, it is exactly what happened to Britain in the second half of the 19th century. Overtaken in pretty much every industry, it was able to hang on to its financial pre-eminence for another 50 years but by 1945 the game was up, and the direction of travel for the UK was down.

Fifty years is a long time for a market to go up, from once-in-a-lifetime cheap to the exact opposite. It’s a mug’s game trying to balance out the relative advantages of the following wind of momentum with the knowledge that, one day, there will be a reckoning of no little magnitude. Indeed, if we call the timing of that reckoning right, we are most likely doing things wrong, since our job is to hold both possibilities in tension, and to make consistent positive returns, whatever the weather.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.