Lessons from Nils Taube, sage of sinking markets

Taube is famous for anticipating the stock market crash of 1987. He had been shorting stocks - selling in expectation of a fall in prices - for several months before the crash, which initially led to heavy losses. By December, though, he had made a profit of £75m.

Speaking at his St James's offices, from which he runs his new venture, the S&W Taube Global fund, Taube had clearly lost none of his appetite for going against the herd. He had that morning put in an order to buy shares in American bank JP Morgan, just as Swiss bank UBS was announcing further write-downs as a result of the credit crisis.

Jonathan Miller of Citywire, a financial website which rates hundreds of fund managers, said: "Taube is the most experienced investor in the UK who has produced exceptional performance over the years. He has shown an eye for spotting global trends and long term themes ahead of the market. As he approaches his 80th birthday, he certainly hasn't lost his touch. In the summer he was buying gold, was strongly underweight financials and increasing his cash position."

Here are his views.

Kathryn Cooper: Is the turbulence we have seen the start of a new bear market?

Nils Taube:This is absolutely a bear market, because every single theme is being destroyed. Professor Karl Popper, closely followed by George Soros, said the establishment of truth lies in the destruction of alternatives. We have about 35% of the UK fund in cash and gold at the moment, and about 65% of our offshore fund is liquid.

KC:Is this like the downturns of the past?

NT:This is a cross between 1987 and the early 70s, when the market disintegrated here. The 1973-5 market was the worst I've ever seen, in that volume dried up completely. It is not that bad now, but there is the same feeling of disorientation.

If I could say one thing from my experience, it would be buy value investments. I remember having lunch the week before Christmas in 1974 with friends who included Tom Griffin, Richard Thornton and Teddy Butler-Henderson - lots of big City figures. I had just spent my last £2,000 buying investments for my children. They thought I was irresponsible. I bought Mercury, Hoover and Shell - not fly-by-night companies - and the investments are now worth roughly £250,000.

In 1987, I was hugely liquid and shorting the market. By the end of September I was £7m down - not a big position, but quite a lot to be short. I was in Paris on the day of the hurricane so I didn't realise markets were closed. Our Australian portfolio was the first thing I sold, because it was the only market I could get hold of. On the Monday, the market opened hundreds of points down. I stayed short until December and then bought back my positions, making £75m.

KC:What are the lessons for this bear mar-ket? When will it end?

NT:It will probably go to sleep in a sort of nasty long-term trickle. The main thing is that the telephone just isn't ringing, brokers don't call, they have given up trying to get business. When people have completely given up, it will be properly right to go back in, but at the moment there are too many people wanting to put an arm in the fire. Too many people are still bottom fishing. Ideally, I want to see a high volume of selling, and then the fact that shares don't go down any-more - a selling climax, in other words, would make me feel more comfortable.

KC: Could one argue we are there now with banks?

NT: We are as nervous as kittens about banks in general, but we have started to dip into the sector. JP Morgan is probably the most conservatively run American bank, and it is now in a position where it can borrow at 3 per cent following the cuts by the Federal Reserve, but it can lend it out at 5 per cent or 6 per cent - it can do quite nicely, thank you.

KC:So what do you buy in times like this?

NT: If people lose faith in currency, the price of gold will go up. That might happen. I think of the Federal Reserve as being the driver of a car who is putting his foot on the gas pedal and the clutch starts slipping and the car doesn't go forward.

KC: And what about stocks?

NT:We are looking for big industrial companies that offer relatively high yields and asset appreciation. EDF, the French electricity company, is a good example.

We have taken quite a big position in British Gas which has discovered, along with others, an enormous find off Rio de Janeiro.

We don't think there will be deep correction in energy prices, and we would like to increase our positions in a period when oil is being sold off because of recession worries.

Oil companies made plenty of money with oil at $40 and $50, let alone $70.

KC: What about the agriculture story?

NT: It continues to play well. We have Australian farming stocks such as Australia Agricutlural and I personally have farms in New South Wales. The momentum people haven't left this particular party yet.

They started to exit energy in the last quarter of 2007, but agriculture is holding up relatively well in a falling market - so we are not selling yet.

Having said that, what concerns us is that you are betting that prices are going up based on government policy, which is a very risky bet; in fact it is simply a bet, not an investment. This policy is going to persist for a while, but at some point it is going to tail off as all cultural policies do.