What is a melt up?

Investopedia defines a melt up as:

In a melt up, share prices rise fast.

Before the conditions for a melt up can occur, the market cycle and sentiment needs to turn from negative to positive and ultimately euphoric.

The recession experienced on a global scale since 2008 has been one of the worst in history. The crash of August 2007 to December 2008 saw the S&P 500 decline 53% in 16 months. Fear and bad news dominated investor sentiment. During that phase, global employment was declining, there was little extra cash to spend, and the overall negative mood dampened enthusiasm to invest.

We have been in a bull market since late 2008. The S&P500 is up 218% since its low, and 90% up from its previous high.

The 9-year-old bull market accelerated in 2017, with the Dow starting the year at 20,000 and ending 2017 at over 25,000.

The conditions underlying this acceleration in 2017 may become amplified in 2018 and result in a melt up. These conditions are described below:

1. Economic recovery. Economic performance and related news have improved. There are signs of improvement from the recession as the US, and Chinese economies are starting to grow. People have jobs in both the US and Europe and consumers have more disposable income.
2. Recent new market highs in 2017 combined with the extra funds consumers have awakened demand for shares.
3. Asset Managers are meeting this consumer demand with marketing past performance and new products.
4. “New” investment opportunities are surfacing. “New” financial innovations and investment opportunities that promise outsized returns are a characteristic of melt ups. Examples of these innovations and opportunities that are currently receiving attention and massive flows of cash are:
   1. a. Exchange Traded Funds (ETF’s): Passive investing has become all the rage. ETF popularity has exploded. There are now more ETF’s than individual US stocks and billions of dollars of new funds flow in on a weekly basis.
   2. b. Cryptocurrencies: Crypto-currencies like Bitcoin are a technology-based means of moving currency from one place to another. Increased speculation in these new currencies saw their prices rise dramatically in 2017.
   3. c. Technology Unicorns: Unicorns are start-up companies in the technology and mobile sector that are worth over $1 billion. Less than 1% of technology start-ups reach the $1 billion mark making them as rare as a unicorn. The final throws of the Bull Market will be marked by these highly priced technology companies being listed. Initial Public Offerings happen when markets are most euphoric. Some potential IPO candidates include Dropbox, Airbnb and Uber.

Our investment philosophy focuses on buying companies that own sought-after brands and generate large and growing cash flows. These strong cash flows provide a growing income and have the longevity to be part of our portfolio for decades.

While ETF’s that track indexes like the S&P 500 do own companies that own brands, they also hold shares in companies that do not own brands. Also, they hold companies with attributes we avoid, like high debt and low cash generation ability.

We avoid speculating in assets that do not generate cash flow to justify their value. We do not succumb to greed and avoid “FOMO” (fear of missing out).

Regardless of whether a melt up is on the horizon or not we will stay true to our philosophy and remember Warren Buffett’s sage advice:

At AXIAM, we have spent many years growing wealth with an investment strategy inspired by the wisdom of great investors like Warren Buffett. We buy shares in companies that pay regular, increasing dividends, because they own great brands that are known, loved and used around the world daily and we keep them for a long time. Sign up for our newsletter, or contact our fund management team to invest.