Well, that’s all right then. Looks like the Greeks have passed their vote on the austerity measures, so everybody gets to ignore the issue for another month or so. FTSE100 is up, everything is good and we’ll carry on as normal then. Both the Greek people and us as Europeans have been failed yet again by the dismal spinelessness and lack of leadership across the board.
Any fool can see the Greeks can’t live with the same currency as the Germans under the current rule of engagement. They only managed in the first place by fiddling the figures, and the poor foundations of Greece’s entry to the Euro are now giving way under the load of their lifestyle and lack of earning power. Greece either spends too much or doesn’t work hard enough. They can never make up the productivity difference with Germany, even if they wanted to. There are two possible responses to that, either drop them out of the Euro, preferably before the Army generals take over the country again and the EU has its first military dictatorship in the ranks, or treat them in the same way as the Americans treat Indian reservations, and simply accept that we have a group of people that will continually require Federal subsidy.
It’s not as outlandish as it sounds. We do that sort of thing in the UK already – we take the money that used to be earned by financial services in the City and Labour used that to cover up the increasing structural unemployment in the rest of the country, both explicitly in generous and uncapped benefits, and more perniciously as middle-class welfare by excessively expanding the public sector (ONS stats). Part of the hoo-hah from Yvette Cooper, Harriet Harperson et al that the cuts are going to disproportionately impact women and the poor is because that stands to reason – the primary beneficiaries of the largesse will take the greatest hit when it runs out.
Greece could be made to work with a permanent financial transfer from other countries, though it would be polite to ask both the donor countries and indeed the Greeks themselves if that is really what they wanted of a European Monetary Union. And perhaps get some more political accountability all round, so that politicians can’t let grand ideas run away without regularly testing them against the ideas of the poor sods that are going to have to pay for it all. It’s the old taxation and representation issue that caused a load of trouble in some obscure colonial outpost in 1776.
What isn’t working is to pretend that Greece can sort the problems out without continuous gifts from abroad. Even if they get the gifts they may not make it, so endless talk of bailouts and austerity is whistling in the dark. In the beginning, perhaps there was a case to be made for pretending it won’t all end up in a horrible mess, so enable the French and Germans to stabilise their banks. They’ve had long enough now.
It’s time to stiffen the spine of leadership and start taking action to deal with the place we find ourselves. Europe is still reasonably rich, and in some areas reasonably productive. We have some serious macro challenges. We are living beyond our means. We may have less oil available to us that we had in future. Some of us have created a monetary union without creating a fiscal union.
None of these issues are intractable, either in isolation, or together. But they are hard, and if we leave them to fester they will cause us very serious grief. We need leaders that will give it to us straight, and get us to roll up our sleeves, spit on our hands and get to work fixing some of these, to build us a better future, rather than lolling about resting on the fruits of the last twenty years.
Of course, what the Greek government says and what it does are two very different things. And yet another shedload of EU taxpayers’ and IMF money is going to be burned worthlessly on the pyre of this characteristically European failure to take decisive action. Guys, the mission is lost. There’s no way back from here. Either man up and buy Greece time, again and again forever, or let go.
The Greek public sector workers, and indeed ours here in a much lesser way, just haven’t accepted that in the fight between European living standards and global capitalism has been won. The living standards lost, to the rest of the world that generally gets by on less, and to the transnational corporations and the guys that own the capital wealth.
Defeat is inevitable, but if effective action is taken soon then a successful retreat may be possible. Living standards are going to fall across the West in general and Europe in particular, the question now is how quickly. And if we continue to ignore reality and go la-la-la-la all the time, then they’re going to fall pretty damn quick.
Greek public sector workers aren’t going to be retiring in their mid fifties in the coming years, unless they have been saving hard and been squirreling their savings abroad. If they’re lucky they’ll get to retire at all! This bomb is going to go up in the next year or so, as Labour’s Liam Byrne so succinctly put it ‘there’s no money left‘. At least in the UK we can create the money, effectively taxing holders of cash and all consumers to make up the difference.
The Greeks could do the same with the drachma. They have the advantage of a decent climate and a place people want to go on holiday to. If they want to kid themselves they are rich enough to retire at 53 then they have to get other people to fund it, and it’s more civilised to do it by continual devaluation making the country a cheap destination for tourists that blagging it from other people via the EU and IMF. Of course that will have the corollary that imported Stuff will continually get dearer, but Greece can probably feed itself, and hey, early retirement does have its price!
This one is going to cause the mother of all financial shitstorms when it finally comes off the rails. I’ve been holding off buying shares for the last couple of months, partially because I wanted to get into index-linked cash in a serious way, but now I am going to start saving towards a war chest to buy into that shitstorm when it turns up. I have a list of firms I like the look of, that do real stuff and have been doing for years, and get to pay a dividend. They’ve been getting too dear of late.
There’s some chance IMO that the storm will be such that it may take down the Western currencies, in which case all bets are off and money itself may no longer have any value, effectively we will have what happened to the Reichsmark. That kind of thing destroys things like pensions, savings and anything that isn’t stuff or land. It’s not impossible to imagine that happening, but it is probably not going to happen, and in that case the storm will offer opportunities. It will probably be ruthless in testeing for value, however – ‘goodwill’ has questionable value when all around you are losing their heads.
It’s also interesting that the old saw about the volatility of the capital value being higher than the volatility of the income is what I experience. Against that should be set the fact that I’ve only been tracking this for a short while, so it’s hardly like I have been seeing things over a couple of business cycles. I qualify yield in terms of income as a fraction of what I paid for a share rather than in terms of the current share price, which takes at least one volatile variable out of the equation. However, it does reflect how I intend to use my holdings, once I have retired.
I’m also surprised that there aren’t more PF writers getting ready to steer into the coming storm. Maybe I am just crazy, but I am up for it, though I need a bit more time to save up that war chest. So in some ways I’d rather the EU and the Greeks play a little more shadow boxing before the levee breaks and the shaky edifice assembled from the combination of cowardice and misplaced conviction crumbles in the tide, perhaps later this year or early next year.
For sure, I could end up doing the same as the EU politicians, and burning the whole stake as I buy into a moribund market if the financial system is destroyed, the sky turns to endless falling rain and the markets flame out. On the other hand, this is one crisis that is clearly going to happen, the only uncertainty is in when the deonouement will play out. It seems kindof rude not to at least consider whether I can make something of it… Yes, it is market timing. No, I can’t call the exact bottom, so I will have to wade in when I feel enough damage has been done and have to be prepared to see gut-wrenching losses if I call the low too early. That’s life – the meek do not inherit the earth, they get slaughtered in the crossfire. The main lesson I should take is from the pusillanimous European elites fixated on weak deferral of action. That lesson is “Be Not Them”. Yoda had it about right. “Do or Do Not. Do not Try”
The price of freedom is eternal vigilance, and that applies to freedom from consumerism too. I came close to being had by the old serpent of gadgetitis lately, and it was the good old 30-day rule for new purchases that saved me from an unthinking purchase suckered by marketing. I might even make the purchase after 30 days, but I’ll make it for my own reasons.
I was looking at Everyday Minimalist’s pictures from China which are quite striking. I’ve never been to China so of course it will be striking because it’s new to me, but I was struck by gadgetitis was when she said
I took each and every shot with my amazing Canon G12 camera.
I will go as far as to say it is the best camera for a tourist because of it relatively light body compared to its packed features, the easy exposure dial on the left to adjust each shot, the amazing flip screen and overall awesomeness.
BF was cursing his heavy “professional” camera the entire 5 weeks, although he loved his wide lens option. He wished he had brought his Canon G11 as well, for quick (amazing) shots like mine.
I know how he feels – I have a couple of SLRs and if you’re going to shoot pictures that will be used in print or of anything that moves then it’s the only way to go – the larger sensor and the fact that the picture gets taken when you press the shutter button rather than some random but noticeable period of time afterwards means a digital SLR is the only way to go – for A4 size and up you need the quality, which is different from pixel resolution, and to capture the decisive moment you need the speed.
But they’re a bear to cart around, and don’t go in your pocket. Plus for some types of photography like street photography you change the action with a big SLR so you need something smaller, like EM’s Canon G12. Or in my case, my Canon Ixus 950
Pocket digicams don’t last forever with me, whereas my SLRs are still going, even my film ones, ‘cos they are in a bag when not actively used. I don’t know how people manage to keep their digicams in the sort of condition where they can sell them, perhaps they don’t take them out with them. I can see how girls have a chance keeping them in a handbag, but as a guy I stick the damn thing in a pocket. The trouble is that if you stick a pocket camera in you pocket, it gets to look like this. After a while, dust works its way into the lens mechanism and you get the dreaded E18 lens error. I’ve already had to dismantle this, taking out a bazillion tiny screws to get dust out of the lens mechanism. The only way I could do this was with compressed air, after which some of the dust lodged in the sensor cell so I get dark spots in the sky on bright days.
I use this one if I expect low light and the aperture wide open, and a secondhand Nikon coolpix 4500 for daytime digicam shots. And in general, the photos I took with those a couple of years ago, or their predecessors five years ago, are better than what I shoot now.
It’s not the camera that takes the picture, it’s you
I’ve read a fair few photography magazines in my time, and the spiel is always the same in both editorial and the ads, if you want to take great pictures, get a better camera. Well, they would say that, wouldn’t they? This advertising was imbibed over many years, all B.F. (before frugality). It still lies there in a corner of my mind, and rises like a snake-charmer’s cobra when I think of wanting to take better pictures.
It’s utter bollocks. The message is always something like:
Psst – wanna take pictures like David Bailey? Use the same camera as he does and you’re away!
For most consumer products, it’s true, because they are consumed passively – if you want to get the same features on your phone as David Bailey then use the same phone as him. If you want to look like Kate Middleton then wearing the same dress as her gets you some of the way there if you’re young enough and of her general physique. Unfortunately if you want to take the same sort of pictures as David Bailey then you really do need to be him. You need to go where he goes, have his contacts, and his vision. Even if I use the very same Olympus Trip as he did, his photos will be better than mine.
At least there is something noble about aspiring to be like a well-known photographer if you want to take pictures, even if it isn’t your camera that will make your pictures great. I detect the strong whiff of decadence in Nikon’s adoption of a well-known generic celebrity to market their current camera line. I had to look him up, because my first reaction was who the heck is Ashton Kutcher, I’d never heard of him? As soon as I saw a picture of him I knew he wasn’t a photographer. Real photographers usually look grizzled and weatherbeaten, rather than some Hollywood pretty boy. Let’s just say that when you Google Ashton Kutcher photography you get a load of pictures of him rather than by him.
I’ve got nothing against the guy, and good luck to him for earning a few more dollars. It’s more the social science of it. Either the ad company was lazy, and generalized the usual ‘if you want to get her look, wear her dress’ ad campaign. I hope so, because otherwise we’re all getting simple, and merely aspire to be minor celebrities by using the same Stuff.
So why are my pictures getting worse then?
It’s not that my camera is knackered. It’s what’s behind the viewfinder that is at fault. I am jaded, I am not living my values. Saving money means I haven’t been anywhere different on vacation for a while, apart from the odd work trip. What you put in front of your camera is half the work of making decent photographs, however, I live in a beautiful county of England and occasionally travel to London for work.
Let’s face it, tourists from other countries come to the UK for its sights and history, so it would be rude to use that as an excuse. And I’ve taken enough magazine features even in the last couple of years, so 40 years of experience is still working for me, I can get the light right and depth of field and all that jazz, and basic composition.
So I thought I’d go out into the pleasant Suffolk countryside and shoot some pictures with my old Nikon Coolpix (it was bright enough the Ixus will have spots in the sky from the dust).
I ran into this red-spotted moth, it’s a workmanlike record shot of what is probably a five-spot burnet. Or maybe a six. Something bored me about this so I figured I could try a bit better, the bugger’s trying to get out of the frame so it was time to see if I could nail him in context.
It’s better. It’s not a great picture, but it’s a step in the right direction, the moth should be pointing up a bit and shame about the moth antenna in line with the thistle spike. I wasn’t able to see subtleties like that on the screen in daylight.
Further on the light interplayed with the water-starved grain which is a sort of greeny-yellow compared to what I think it usually looks like.
All-in-all the trip served me well. it reminded me that it’s not my camera I need to fix, it’s me. That’s not to say I won’t get the G12, but it’ll be for the right reasons. Not because it will make my pictures better, because only I can do that. But because I’m tired of spotting the dust specks out of the sky with the Ixus in Photoshop, and because the flip out screen will enable me to shoot from lower down or higher up than the usual eye level. Perspective is another key aspect of getting better pictures, and eye level isn’t always the best vantage point for a lot of things – like the moth for instance.
Or I might wait, because the greatest weakness in my image taking system is my own inspiration, which is unlikely to be fixed for a year and a bit. I’m not David Bailey, the fire of photographic creativity doesn’t blaze from my very pores, it burns low at the moment. That’s the trouble with anything in the artistic line, it’s moody, and sometimes creativity just goes AWOL. And I learned the memes of advertising sleep for a long time just below consciousness. That is scary…
How do you qualify how well you’re doing at stock market investing?
This isn’t straightfoward, since the value of an investment is a noisy signal with switchbacks. There are a couple of obvious ways:
Wilkins Micawber approach
Take the current value which your ISA provider usually computes from the last market valuation. Add any cash sculling around in the account, subtract what you’ve put into your ISA since opening it. Outcome > 0 result happiness, outcome < 0 result misery. Simple, honest, and automatically tracks your dealing fees. You ought to rescale each year’s input to allow for inflation, though I haven’t done this so far. In my case the result is a 7% increase over the 1.7 years that the first transaction appeared, so result happiness?
This valuation is as of Friday 17 June 2011, so as of the first part of the hit caused by the unfolding Greek tragedy. The Greeks will no doubt be able to switch the result negative over the next year, and if I had a crystal ball I’d sell some stuff and buy later. Trouble is I don’t have one, I don’t know which bit so sell, or when, so I’ll sit tight. and save to buy more, I have been waiting for this rumble, and have switched much of this year’s savings to cash in the meantime.
There’s much to be said for the honesty and simplicity of the WM approach. However, due to the volatility of stock markets, it is more suited to portfolios that have been running for five years or more. It’s also what fundamentally matters for people investing conventionally towards their pension – it is the size of their pension pot that determines their annuity value and thus their retirement income.
Cost of purchased income (how good an annuity is this?) approach
However, that doesn’t really reflect how I plan to use my ISA, which is to use the income to boost my income. I hope to have the intestinal fortitude to be able to focus on the income and leave the fluctuations in capital value alone. Say I take the amount I have put in, minus the amount of cash still lying around in my ISA, and divide that cost by the dividend income over the last year. That ratio is 4% in my case.
How do I allow for the fact that I haven’t owned some of the companies for a whole year? At the moment intuitively this would seem to underestimate the portfolio’s performance. I target reasonably reliable dividend payers, so if I had had them for a whole year presumably the dividends would have added up to more than 4% of the stake.
Another honest and decent approach, but again more suited to an investment account that has reached steady state (new money contributed < 10% of total invested)
So far so good, we’re still in the elementary-school arithmetic stage. Maybe there’s a better way?
XIRR, PRR and RIT to the rescue
For things arcane and technical I look to Retirement Investment Today who has usually spent some time understanding the intricacies of analysis. RIT introduces us to the Excel function XIRR and the required fixing factor to turn that into a PRR (personal rate of return) to account for sub-year periods. As I’ve been running for more than a year I can use XIRR straight off the bat. For my trusty old copy of Excel2000 I had to go hook out the install CD to add in the analysis toolkit before any of that would happen for me. XIRR takes the valuation at the end, and the series of times and associated cash inputs that made it, and gives you an annualised rate of return. It allows for the fact that some of the money has only been working for a short while, while the initial stake has been working all the time. Here is one example, though the illogical American format dates will barf on a non-US date format PC. A more homely explanation of XIRR is available
XIRR% is the answer to the question: “What constant, annual, bank-like interest am I getting, considering various deposits and withdrawals at arbitrary times?”
Now my current ISA has only been running for 1.7 years since Oct 09. My XIRR is 9% as opposed to the 7% calculated above. Is it really a better estimate of “what constant, annual, bank-like interest am I getting”? Search me, guv. Intuitively since my full stake hasn’t been working for me for the whole time I probably do get more than 7%. 9% sounds reasonable, so I’ll run with that.
Why Stock Picking?
It’s been a while since I had to liquidate my previous index-tracking ISA in 2007 for a life change reason, and it’s been an even longer while since I did any stock selection in the dotcom bust. I’ve come to view the current investment mode de rigeur, index investing, with a jaded eye, as it failed me in the first decade of this century after I cleared out of tech stocks having taken a jolly good hammering.
It takes a while to get back in the investing traces, and I had some things to learn, for which I have much to thank The Investor side of Monevator. For my investment activities in a ISA targeted at UK stocks, I will do stock picking (this is contrary to the general recommendation from TI, BTW). I do income, not growth, because I have no talent for growth stock picking, whereas I can see income track record and other fundamentals. I believe some of the assumptions behind index investment may break down if the mix of what works in the economy starts to skew as a result of oil shortages, and partly because I don’t want another slice of passive sideways tracking over 10 years 😉
However, when I diversify into foreign markets index investing will be my weapon of choice, because these will be smaller amounts of my ISA, I will find it hard to gain domain knowledge and trading non UK shares is more expensive. I also use it for my AVC savings that are larger than my ISA, because I have the option of two pretty decent low cost index funds there – I choose the 50:50 UK/Global.
I did some damn fool things in the first year, particuarly associated with BP Macondo. Not just once, but twice, and it didn’t end well. There’s a case to be made for taking a look at what would have happened if I had been a straight index investor.
How did I do against Index Investing with the FTSE All-Share?
If I were a UK index investor, I would track the FTSE All-share, because I feel the FTSE 100 is highly skewed and more varying in content than, say, the S&P500 – it is more of a top slice by definition. Since I have an Excel file of my cash injections with dates, I can run a what-if on how much I would have in my ISA if I just went and bought the FT all share index each time I lobbed some cash in. The ^FTAS has currently got a yield of about 3% so I have also added a 3%*no of years to date from purchase date* cash injection since I was only able to get a historical price series rather than a total return series for the ^FTAS. It’s not exact, as the yield varies with time and value of the ^FTAS, but for about two years it is hopefully good enough.
The difference is 1.3% in my favour. It isn’t a huge amount of cash, given the ISA is only a little under two years old. I was lucky in being able to compensate using gold and silver ETFs for the rank stupidity of losing £350 on BP, though as a lesson in ‘do not churn’ and ‘do not do what you did in the dotcom boom-bust’ the learning was cheap at the price.In aggregate I’ve lost more than that on some other holdings, but these are stocks I believe in, and some have more than made up in dividends for the loss of capital I have eaten, making the total return positive.
The 1.3% difference doesn’t probably tell me much, other than that an older head than mine in the 2000s can curb some of the excesses. I’m not going to do BP-like things and I will not do PMs in my ISA again.
The yield profile is more suited to my future needs. If I take the arithmetical 4% I need a stake 25 times my desired annual income boost, if I take the 3.1% yield of the ^FTAS I need 32 times the income boost, or I have to start selling down lumps of capital every year. The capital will hopefully have appreciated more with the ^FTAS, but selling chunks usually is a hit on dealing fees.
I’m not going to claim that this is anything other than luck, I’m not a John Templeton. However, I have reminded myself of things not to do, and confirmed so far the validity of seeking income. I hope to take advantage of a damn good stock market crash in the coming months in which to get some good companies at knock-down prices.
It is, of course, perfectly possible that we are in the endgame and that the horsemen of the apocalypse are coming for us from all points as the Greeks stress-test the decaying edifice of Western finance beyond the point of no return. That’s partially why I have non-financial investments, but for the financial investment side I will see if I can make use of the forthcoming white-knuckle ride.
How would I have done with Regular Index Tracking investment?
A chap like The Accumulator would disapprove of both the stock picking part and the irregular lump sum investment process. To evaluate this I took the total amount that I had contributed to the ISA over the time it’s been open, and asked Excel the question
“assuming no dealing fees, what would have happened if I had purchased the ^FTSE index with the same amount of money each month”
The answer was interesting – I would have been 0.7% up on what I managed. I did the same 3% scam as above to simulate the ^FTAS yield.
This shows that for all the sturm und drang of stock picking if I had bought the ^FTAS regularly I would have been 0.7% up (though I would have eaten 1.7* 0.35% TER making it a dead heat IMO). It’s a fair cop, I would have spent less time worrying about BP Macondo and more time living life had I gone this way.
Now for various reasons it would have been difficult for me to do a regular ISA purchase over that time; I started a regular employee expecting to work another 10 years at the same job and had to swing my financial aims to becoming financially independent in three years, and simultaneously investing in several non-financial assets as a hedge against the financial system exploding. That involved lumpy calls on my disposable income so I contributed to my ISA when I could, with the overall aim of achieving the maximum permitted contribution in a tax year.
However, the result is interesting – I am tempted to lob £100 every month into a ^FTAS index fund in my ISA to get a regular index-tracking benchmark. Using a fund such as HSBC FTSE All Share Index Fund identifier: GB0000438233 which I have brazenly pinched from the Slow & Steady Passive Portfolio rather than an ETF means I minimise dealing charges each month. I can check how many more units I have at the end of a year than I had at the start and the current valuation of that number of units. Ideally the over the long term the value of what else I bought that year should be greater than 8.8 times the tracker, else I am drifting off-course. Instant low-stress benchmarking and it saves me grubbing about with Excel and the handwaving fixing factors to account for the 3% yield.
Greek Farce/Tragedy Ahoy
For all the bull being spouted from the Eurocrats, the Greeks are stuffed within the Euro. They can’t pull the nose up before they hit the ground, and either the French and the Germans are going to sub their lifestyle for ever in return for the Greeks surrendering ther self-determination, or Greece will have to bring back the drachma to live the lifestyle they wish to live.
In Greece they don’t like paying taxes, but with the drachma the government could collect the taxes by taxing capital using inflation. They can’t do that with the Euro. Whatever happens, a nasty whirlwind is going to storm through the financial system again. Ths whirlwind is going to sort the men from the boys, and I’m not sure which camp I belong to!
Here, for a change, is a view of the state of the nation through the beady eyes of Mrs Ermine 🙂
Mrs Ermine here… a regular lurker on Simple Living in Suffolk, a lurker who enjoys everyone’s wise comments on Mr Ermine’s thoughts.
The other evening, over a home cooked meal of oxtail from a neighbouring farm, accompanied by homegrown salad, the Ermines were pondering their standard of living. The way we live would be ridiculed by most of the iFad generation: an ancient TV that hardly gets watched, no cable/satellite TV subscription, no fancy holidays and none too fashionable clothes.
Now, in the Ermine household, it is normally Mr E who rants about the economy. I rant about other things, to be sure, but on all things economic it is the male mustelid who is the chief voice. But I’ve been getting this uneasy feeling lately as I hoe my beans, kind of like indigestion, only more in the mind than in the guts. Yes, it was the beginnings of an economic, or maybe even a political, rant, a rant that spilled out during that meal of oxtail, to the astonishment of Mr E.
Before living with Mr E, I spent a number of years in France, a move that converted me from vaguely left wing tendencies to confirmed right wing views overnight, without actually changing my political opinions.
At the age of nine, I took one look at Margaret Thatcher on the telly and announced, “I don’t like her” to my Dad’s friend who happened to be a right wing local politician 😉 And I didn’t change my opinion as I grew up through the eighties, and entered the world of work during the nineties (OK Thatcher had gone by then, but New Labour was hardly so very “new”).
So it was a bit of a shock to find myself thinking, “perhaps Mrs T had something going for her after all”. You see, France, if you compare it to the UK that I left around the turn of the century, was pretty much a socialist state, and IMHO in a bloody mess economically. Employees seemed more interested in the fantastically detailed and ridiculously restrictive “Code of Work” imposed by TPTB than actually doing any genuinely productive work. The French certainly wanted to redistribute wealth, but as one UK journalist put it so neatly, to distribute wealth you do have to generate it in the first place, and this was the bit that my French pals seemed oblivious to.
Having enthused about the UK’s go-getting, entrepreneurial and dynamic economy to the French, my return to the UK in the mid 2000s was a bit of a shock. I still remember Mr Ermine explaining the latest slang to me: “chav” – loud, self-centred person who doesn’t take personal responsibility for anything much at all. Usually dressed in tasteless, but probably fairly expensive “fashion”, and quite possibly under the impression that they were about to become a minor celebrity. Almost certainly in considerable personal debt. There were plenty of examples about, and I soon got the idea.
But it seemed that the rot had spread far wider in UK society. I listen to a great deal of the BBC’s Radio 4, and there seemed to be a non-stop litany from middle class folk who expected someone else to sort their problems out. Someone had sold them crap insurance with their bank loan? Clearly the government’s fault. Their child was a disruptive bugger in class? Little Quentin surely had some disorder that needed special support, to be funded by the government of course. Indeed these people were usually outraged that the government hadn’t second guessed their minor grievances in advance and set up an organisation to head it off before it even happened.
No-one dared say, “do your research before accepting insurance, you idiot”, or (worse), “if your child is a naughty little so-and-so perhaps you aren’t such a great parent”. In general, I wanted to give them all a bloody good shake and say, “you have to make an effort and do some work if you want to get anything in life”. I was clearly out of sync with the zeitgeist of my home country.
So back to the Ermine household and our standard of living. As middle aged folk, I notice that we live pretty modestly compared with most people we went to university with. No dishwasher, old (though serviceable) furniture, and not a smartphone in sight. Yet why do I feel we are far more financially secure than an awful lot of UK households? For a start, we’re not in debt.
Not only have many people in the UK gotten themselves into intractable debt, most seem to expect to live an extremely comfortable life without actually doing anything genuinely economically productive. But people seem frighteningly reluctant to commit cash to, and to just get on with, concrete projects that do generate actual wealth, ie stuff, or a service that is really, genuinely useful. Want something done? Call a meeting, shoot the breeze and seek sources of “funding”. Discuss, face to face, online or by phone. Fill in forms asking for money, hold “awareness raising” events.
Why? Have we all become infantilised in the last three decades? What happened to the “make it happen” approach of the 1980s? Don’t get me wrong, I hated seeing the miners shafted during the Thatcher strike, and hundreds of homeless appearing in my home town. But it wasn’t all negative, people did get up off of their arses and actually do stuff, created businesses, made dreams happen. IMHO there does need to be a basic safety net that keeps people sheltered, fed and warm, with access to education, healthcare and local libraries. But that is about it. No doubt I’ve missed some basic services off my list, but you get the general idea, and subscription television and holidays including air travel are not, to my mind, a basic right.
I now seem to be a dinosaur from another age. I liquidated my entire wealth, pension and all, and sunk it into a plot of land from which I now make a modest living. Modest, but my ideas seem to capture people’s imagination, and slowly the Ermine household is reaping the benefits. Not only salad, but also hard cash. Not much, but a seemingly recession proof income.
A visitor to the farm from the City of London, a financial whiz kid, was beside herself when she tried farm grown salad, she’d never tasted anything so good. Sometimes, to make things taste good, to make stuff happen, to change the world just a little bit, you have to stop whinging that someone else should make the changes, stop demanding that you should be protected from your own stupidity, and simply get on with it. And if that means putting your own money into it, then get on, earn some and put some skin in the game. You’ll care about it more, and when push comes to shove you won’t complain that “something should be done”, instead, to paraphrase some corporation somewhere’s marketing, you’ll “JFDI”.
Obviously there was a near-death experience in 2009, but given that some people thought that the first half of the 2000s was a non-inflationary constant expansion, it looks like we’re off to the races economically somewhere in the world…
I don’t know what they’re smoking, but it looks like these leading indicators are at their highest than at any point in the last ten years with the possible exception of 2007. There’s a country breakdown in the PDF which basically says get out of emerging markets and into the USA, Germany and the UK are okay-ish.
The Mail seem to have confused the economy as experienced by the proletariat with the economy as measured by company results (the CLI graph is not the same as company results FWIW). Jobs are haemorrhaging and wages are below inflation so the popular experience of the economy is pretty rough.This is particularly the case in the UK where we pay too much for our houses, and then often don’t get round to paying down the capital of the mortgage spending the nominal increase in value on cars and holidays.
However, companies seem to be in reasonably good shape as long as they aren’t exposed to the consumer and given the amount of lolly my modest ISA is paying in dividends they seem to be making money too. It is just that the spoils of war are increasingly going to people with money rather than people who are in debt, with the latter being most people in the UK.
Now whether that is a good thing or not is a perfectly reasonable thing to challenge, however, it seems the money is being made even in the bombed-out West. Indeed, the United States which comes across to me as an indebted basket case appears to be growing well, it’s just that people there don’t feel it either. Conversely, there appears to be fire in the engine-room of some emerging economies – it almost looks as if the West has managed to craftily outsource some of its recession, if the turning points of these composite leading indicators really do correlate with growth a little while later. I experience that too – my Brazilian ETF is quietly dying in a lost corner of my ISA, and it’s hardly like the pound is strengthening against the Real to make this happen.
So I’m a glass-half full sort of chap on this, unlike the Mail. Of course, it’s all damn lies and statistics, but it squares with what I am seeing when I look at the companies I own a trivial sliver of. Some of the buggers in my potential candidates watchlist have raced away from me before I could rustle up the wedge to buy – I have £7k of my ISA unused this year, but I’ve been concentrating on building cash reserves with NS&I of late. Hopefully the Greek denouement will bring things back down to earth a bit ready for me to take a second bite at the ISA cherry in the autumn, when I’ve saved some wedge.
These companies are making money. It’s what capitalism does, but capitalism doesn’t say it’s going to spread the money evenly across the populace like manna. Some of the horrible time we the people have been having is because we borrowed like drunken sailors during that apparently NICE era from 2001-2007, and it’s payback time. I’m not sure that capitalism is going to help us do that.
And no, I haven’t changed the medium term view that resource crunches are going to be bad news, particularly for general stock market index growth. However, I note that companies made money before the gift of ancient sunlight allowed us to run year-on-year growth. They just didn’t make so much of it… This is short term noise compared to that backdrop. Anyway, Peak Oil is a timebomb, and I’ve been reliably assured that timebombs don’t go off. I hope the man’s right about our healthy future 😉
Time for a contrarian buy of HSBC N America S&P500 tracker, maybe. I still can’t see the United States as anything but a hopelessly indebted bombed out shell with very serious medium and long-term problems. But on the principle that the darkest hour is before the dawn, and that I have hardly any exposure to the US, I may sport some of my remaining ISA allowance there later this year, or even trickle it in up to 3k if I can convince myself I really don’t pay any per-transaction dealing fees on this with iii. Though I have reservations on the way index tracking works on top-slicing markets like the FTSE with the FTSE100, the US market is huge – the HSBC tracker holds 500 stocks, and seems to provide damn good sector diversification. No sector is > 15% by value, compared to the 1/5th of the FTSE100 in financials and 17% oilies.
Guess there has to be the standard disclaimer – this is not suggesting anyone buy the S&P500 unless you already want to. The US is an oil-dependent empire in Spenglerian decline, though it has a gutsy and enterprising population so if anybody can run on empty they’ll find a way. Don’t do it to yourself 😉 I am mad, but in the end if I trash £3k on the US then it won’t kill me – it’s a mistake I can afford to make.
I blame it on the fact that in the West we have no rite of passage from childhood to adulthood. It used to be setting up an independent household in digs in your early 20s, but that’s not as common as it used to be for a whole bunch of reasons. Doing that tended to enforce thrift, and the electricity/gas meters of the day were quaint old things that took real 50p pieces so credit wasn’t an option, it was cash or no power.
However, the cathedrals of consumerism instigated by Edward Bernays have pushed the desirability of iFads and associated ephemeral tat so hard that the relationship between a lot of people and their Stuff is akin to that between and addict and his poison of choice. According to this study it seems that
[…] the more credit card and college loan debt held by young adults aged 18 to 27, the higher their self-esteem and the more they felt like they were in control of their lives. The effect was strongest among those in the lowest economic class.
Well, colour me a grizzled old fossil, but something has gone very badly wrong here. It doesn’t apply to all young adults in my observation, so either it’s really tough out there in the United States, but yes, I can see where these sociologists are coming from. And it ain’t gonna get better, because these young folk get to find out later on
“By age 28, they may be realizing that they overestimated how much money they were going to earn in their jobs. When they took out the loans, they may have thought they would pay off their debts easily, and it is turning out that it is not as easy as they had hoped,”
Yup. That’s the kicker with debt, you get to find out it’s not half as easy to pay back as it was to take out, welcome to the magic of compound interest, this time working against you. Particularly if you’ve left the debt to fester for a few years and particularly in an environment when middle class jobs are hollowing out. Bankruptcy and IVAs are the only way some of these guys are going to be able to sock it to The Man. At least in America, where that study was done, you can walk away from a mortgage in negative equity… In a final statement of the bleedin’ obvious
“We found that the positive effects may wear off over time, but they still have to pay the bills. The question is whether they will be able to. There needs to be additional research to answer this question.”
Don’tcha love sociology. I can save you the trouble of that additional research, Rachel. Most of them won’t be able to. How do I know that? I did my own research, it didn’t cost me anything and it was done in an afternoon. Allow me to introduce me to The Money Shop, a common sight in Britain’s High Streets. In the States you have Mister Money doing the same job.
Both of these are symptoms that the falcon can no longer hear the falconer, and the centre is losing its grip… The strapline of the research title gives it away – What, Me Worry? Young Adults get Self-Esteem Boost from Debt. They’re hardly going to dump something that boosts their self-esteem, are they? However, let’s not just blame the young’uns here. They at least have the excuse that they are new to the game. If you’re over 30 and carrying on like these young adults, then what’s your excuse for believing it’ll be all right on the night?
Way back when, I think it might have been my Dad, may have been some other wise old geezer, giving a young ermine some advice.
Never ever miss the opportunity, in some situations, to keep schtum and STFU.
The advice sprang to mind as I read that Citigroup are dischuffed that savers have the temerity to get into NS&I savings rather than watch their money slowly die as the rapacious banks refuse to give them a decent return on savings. Apparently the certificates are a bad idea according to Citi-
“While the new national savings index-linked certificates appear highly popular with many investors, we believe they are a bad idea for the government: they are likely to prove a highly expensive form of funding and will hinder the important task of reducing the UK banking sector’s reliance on wholesale funding,”
Obviously they are speaking from the point of view of what is best for the country, then, rather than as a form of egregious special-interest group pleading?
Well, that’s all right then. It also brought to mind another classic quote from the past, the elegant accuracy of Mandy Rice-Davies during the trial of Stephen Ward in the Profumo scandal.
Well he would say that, wouldn’t he?
Exactly, Mr Citigroup. You would say that, wouldn’t you? It’s so much easier than going back to your desk and working out how to offer a decent rate of savings interest. Alternatively, just take my Dad’s advice and observe this is a situation to STFU.
After all, a fair amount of UK Government money has gone into bonuses for some of your buddies. It’s about time some of the lowly grunts that actually have to work for this money got a slice of the pie, don’tcha think? I haven’t loaded up my full 15k because I still have to earn the last couple of grand, probably not something that’s really an issue for Mr Citi, “Thought leader” extraordinaire.
No, I’m not taking the mickey. Seriously, “Thought Leadership” is one of citi’s Vikram Pandit’s core competencies, according to citi’s website. I think they’ve overstretched the mark here 😉
The Torygraph, pondering the sorry state of the FTSE 100 index as compared with itself in the heady days of the dot-com boom, regretted that it was hard to see how you could make money when the market is trading sideways.
At first I was somewhat nonplussed. From my current experience, it seems obvious – find yourself companies making useful stuff. Then chase income, young man 🙂
It highlights a more general problem with stock market investing as it is often thought of now. Way back in those heady dot-com days, I was a highly active trader, burning my way through scads of cash. Because I saved as I was working to ‘invest’ I never got into trouble, but I recently had a clearout. I had an A4 folder marked shares, which was chock full of contract notes from that time.
Even if I was capable of not losing on the turn, which I most definitely wasn’t, each purchase and the matching sell pair of contract notes added up to about £20 in dealing costs ISTR. Charles Schwab did very well during that time, and I really should have taken more holidays or perhaps bought more hi-fi or camera gear instead of ‘investing’.
Ah, buying individual shares was my problem, what I should have done was buy the index. Fortunately, Virgin Finance came along with an index-tracking FTSE100 (no they didn’t see footnote) ISA that adhered to CAT standards with a TER of 1% (which was good at the time). So I bought some of that. Fast forward six or seven years, and I needed to recover the cash. I had sold out of the Virgin ISA at a slight loss over five years and transferred to a Legal and General ISA which offered a selection of funds including the FTSE 100 – I moved because Virgin’s fees were starting to look high. And every year they told me my ISA had gone roughly nowhere, or it had dropped. I never took money out of these ISAs until liquidation, dividends were reinvested while holding.
So I have had two prior experiences of stock market investing. One was quite clear, don’t chase momentum (buy what’s going up, is in the news and all your mates are buying), and if you really have to do that because you can’t help yourself then for God’s sake don’t trade endlessly searching for the Next Best Thing. Don’t do that.
However, from my second experience, index investing didn’t work for me in the UK market, at least over the last 10 years. If somebody asked me how to approach the stock market, I would probably point them at that article and say it’s hard to argue with the logic, though I’d have to ‘fess up that I don’t do that myself, and suggest they take the time out to study the subject more. I am all for people of sound mind applying intelligence to getting to the goals they want to achieve. Driving a brokerage account without having some understanding of the theory and principles just strikes me as unwise – and it was in my case the first time round.
I also observe that Monevator himself swims in the deeper waters outside the index shallows. Some of those are way too deep for me, but I have picked up a fair amount of knowledge from that blog which I have turned to my advantage once I have understood them. And no, I’m not going to blame you, mate, if it all goes pear shaped – my mistakes are my own. And it all going pear shaped is also a serious possibility in my world-view anyway.
However, when I review the articles I have learned from and applied, none of them are the index investing parts. And that’s because I don’t believe index investing works properly any more. That has certainly been my experience over the years 2001-2007, and my L&G ISA was mainly lifted by non-UK funds, which was pure luck as I sought to diversify a bit. That lift compensated for the losses I took on the FTSE100, it was a confirmation of the value of diversification rather than a great success.
So what is wrong with index investing for me?
It’s not great at paying income – it is a combination growth/income play, with in increasing tendency towards accumulation shares (which turn dividends into effective growth). For most people there’s nothing wrong in that but it doesn’t suit my needs for income
Too many people are doing it. I suspect that the huge index investing inflows, and the ‘closet tracker’ active funds are beginning to distort the investment market.
Increasing consolidation and loss of diversity in the FTSE 100 – it was all about tech in the tech boom, it was all about finance, now a third of the market is in oil and mining.
It didn’t work for me – twice, over a period spanning 10 years! (I’ve switched approach for the last 3 years but it would’t have come good till now)
The third point, the focus on the current sector de jour, is I think a serious issue. Perhaps the FTSE100 is chasing momentum by sector.
So what’s so damn special about me then? Part of it is that I was convinced by a couple of Warren Buffett’s maxims. One was don’t buy what you don’t understand, the other is buy and hold like the market will be closed after you’ve bought – for 10 years. Something like that, anyway. Let’s take these two.
Buy what you can understand.
Obviously as a layman I am not going to have an detailed analytical knowledge of the field of operation of a lot of companies, even the ones I’ve worked in. However, I can understand what Shell, Vodafone, AstraZeneca or pretty much any of the companies in Monevator’s High Yield Portfolio do. They are mostly real companies and they do real stuff – they dig stuff out of the ground or enable businesses and people to communicate. There are some airy fairy hard to pin down companies. What does Aberdeen Asset Management really do, where is the wealth created, in AAM or in the companies they own? Generally, the principle of buy what you can understand seems to shorten the chain between you the buyer and the action on the ground. I don’t do hedge funds, I don’t do China, and all sorts of good stuff, because I don’t understand it
So how does a FTSE100 index fund make wealth? Beats the hell out of me, it was a surprise to me that 30% of the index was commodities, mining and oilies. Not so long ago it was financials. Even if I get a list of the FTSE100 components and I work my way through them, I still can’t say what I am buying if I buy an index, because it changes with time, and to some extent it chases momentum, as the FTSE100 effectively buys success. I don’t know whether that’s good or not, you’d have to take a snapshot of it an backtrack to see if you kept the components fixed whether the swapping in and out of the index adds or subtracts value or is neutral. Chasing momentum wasn’t good when I did it in the dotcom bust.
Index investing may work better in the United States, where a common index is the S&P 500, which presumably has a lot less churn of the biggies, because there are 400 more slots for a company having a hard time to drop through, so the churn is presumably at minnow level. This objection might be mitigated by going towards the FTSE350, which seems to be the FTSE100 + the FTSE 250, again forcing the churn at the bottom end to be at minnow rather than shark level.
Buy and hold like the market will be closed for the next 10 years
So there’s two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there’s assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And those are two different games. I regard the second game as speculation. Now there’s nothing immoral or illegal or fattening about speculation, but it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something you expect to produce income for you over time. I bought a farm 30 years ago, not far from here. I’ve never had a quote on it since. What I do is I look at what it produces every year, and it produces a very satisfactory amount relative to what I paid for it.
If they closed the stock market for 10 years and we owned Coca-Cola and Wells Fargo and some other businesses, it wouldn’t bother me because I’m looking at what the business produces. If I buy a McDonald’s stand, I don’t get a quote on it every day. I look at how my business is every day. So those are the kind of assets I like to own, something that actually is going to deliver, and hopefully deliver to meet my expectations over time.
It’s not the first time he’s said it. And slowly, I have come to the conclusion the old devil has a point. I came to it via a different route to WB because unlike him I do not believe in the myth of continuous growth, and I believe there are natural limits to economic activity.
The myth of continuous growth is deeply built into the assumptions of index investing, albeit indirectly. And I believe that assumption is flawed, and that it will fail at some point when economic activity outstrips enough of its inputs. Yes, we have an infinite supply of human ingenuity. But we don’t have infinite supplies of other raw materials, and indeed some are running short. That doesn’t necessarily make me a doomsdayer; for the vast majority of human history we have had an economy which was pretty close to steady-state. The stock market was created before the Oil Age, and worked acceptably, even suffered booms and busts like Tulipmania and South Sea Bubble, showing the same pathologies as today.
In that clip Buffet has also identified the sorts of companies from which you will still be able to turn a profit in a steady-state economy. This extract is of course not his entire philosophy, he can spot growth opportunties too. A steady-state economy isn’t a static one – sectors will still bloom and wither between themselves, and there may well be a gradual slow progress as that much vaunted human ingenuity uses the limited resources in smarter or more efficient ways. But the index investing paradigm will be damaged, because stock market performance will become more of a zero-sum game. At the moment we can turn the gift of fossil energy into embodied capital wealth. You could argue we might want to distribute it less unevenly, but that free energy has been pouring into the economic system, and index investing is in theory a reasonably efficient way of taking a share in some of that wealth increase. If it is starting to break down then it may be telling us something, possibly about Peak Oil from another angle 😉 Or it just may be a statistical blip, you can only make these calls from a distance, which is a drag if you are investing for the future.
The Coffee Can portfolio
One area I will be different from many investors is I aim to go towards a coffee can portfolio, (original reference here, first page free, paywall for more) as well as favouring income. As a policy, I will try and avoid selling for investment purposes. Whether I have the nuts to stick with that remains to be shown, but I am getting better at it. It is particularly hard when you only have a couple of stocks in your portfolio, since you risk being killed off by a company going down. I have enough diversity in my portfolio now to tolerate that risk, with six companies, an investment trust, an emerging market ETF and one fixed-interest component. No one or two companies going bust will kill my ISA off. I will continue to add to it, focusing on income, rather than growth. I had no talent for spotting growth in any consistent manner but I can see a steady income stream. Of course the latter is subject to stuff like BP’s fiasco last year but a good track record is hard to fudge. So I’m just not going to chase growth any more. After more than 10 years (27 if you count my buying BT shares on flotation with a stake of £300 borrowed from my Dad) of stock market investing I have come to know what I don’t know.
A coffee can portfolio, with a policy of not selling, is madness if you are seeking growth. The only way you get ahead with growth is to buy low and sell high, then hopefully rinse and repeat. The selling decision is, however, another opportunity for error. I am going to make a conscious effort to hold on to companies once I’ve come to the conclusion they have a decent track record of providing income, or those that have had a good track record and have fallen on hard times I feel will end. Last year I bought BP after their Macondo mess and churned it before selling out on a dip. I should have held it – over the coming years it will probably more than return to what I had paid for it. Even in their darkest hour the fiasco wasn’t a huge part of their business. Hopefully that was my last lesson on that subject.
So far, once I switched to seeking income, I have not sold any of my holdings, merely added to them, keeping a watch on my diversification by sector. These companies are still working for me, bringing me dividends. It so happens that at the moment the aggregate value is some 8% up on purchase, but I need to learn to ignore that, though I will need to monitor the income. Because the income from my ISA portfolio will only form a discretionary part of my income post retirement, I need to spend less in lean years like 2007 presumably was, or try and smooth the income; this was part of my desire to use investment trusts to do this but I don’t buy them at a premium.
Stock picking is part of the coffee can portfolio. My selection is already skewed by favouring income, and by having criteria for the dividend repeatability, asset allocation and the yield. I will try and compensate for asset allocation shifts with new purchases. Not selling also achieves some discipline – if I have ~£10000 to put in an ISA a year, and invest in lumps of £3000 for strategic high-yield holdings and £1000 for more risky purchases then I’m only going to be adding four to six holdings a year, giving me time to think them over.
Once I have achieved my income target, I may add a FTSE 250 ETF, to try and capture some growth, on the principle that it can’t do any worse than me stock-picking for growth 🙂
From my income chasing approach I’ll already have quite a few of the FTSE100 constituents quite heavily weighted, so I don’t need more exposure to the FTSE100.
I’m still an accidental index investor despite this due to AVCs
For all my downer on index investment in this piece, my AVC holdings are FTSE:Global 50:50 index funds so the majority of my shareholdings are index funds 😉 I am saving more in AVCs than my ISA because of the boost given by Mr G Osborne stealing less of my salary, so I can afford to be wrong about index investing and still come up for air.
There may be solutions to make index investing work better
There are other approaches to avoiding the issues I experienced with index investing. RIT’s Building a Low Charge Investment Portfolio and The Accumulator both deal with the topic in different ways – RIT’s ventures towards a mechanical system look to me like they are a way of selecting market timing by valuation, and market timing is something else I don’t have a huge talent for either. I am lucky in starting in the bear market of 2008/9, so market timing is on my side, and I will use some of RIT’s principles to inform me as to what good value may look like.
It is also more specifically FTSE100 index investing that I don’t like, because of its high churn and sectoral imbalance. The Accumulator could help me address that analytically, but fundamentally index investment bores me, I can’t rustle up any passion for it because I can’t understand or know what I am buying. And 10 years of going nowhere with the FTSE100 has given me a jaundiced view. It is a shame that the FTSE100 index is what most people think of in index investing in the UK, Americans have a better deal with the broader S&P500.
Whatever the reason, one thing I do know is that index investing didn’t work for me, over a ten-year period, and indeed two subsets of that 10 years too. My approach therefore combines the high yield portfolio for picking, where I accept lower growth for yield. and the coffee can/Warrren Buffett approach to holding. I figure this meets my need for income and my beliefs that growth is living on borrowed time… I suspect that this current period may be a local maximum in terms of yield – companies have been cost-cutting madly, but there’s only so far that can go before they will actually have to go and increase turnover to keep profits up. If I screw up, well, the AVCs index stuff will save my tail hopefully.
Finally, this part of Buffet’s quote
If I buy a McDonald’s stand, I don’t get a quote on it every day. I look at how my business is every day. So those are the kind of assets I like to own.
reminded me of my multimedia business on the side, and indeed other businesses I am connected with personally. I didn’t need to continuously revalue the company, indeed, it is very hard to value a company whose output is purely intellectual, in the form of rearraged bits on a screen. I didn’t need to. Intuit’s Quicken software told me all I needed to know – I was billing customers more than my costs, result happiness. Why should I use a different way of evaluating the performance of businesses I own to those I hold shares in?
Index investing is touted as a panacea to the issues of stock-picking and when to buy and sell. However, it is all to easy to take the obvious choice, the FTSE100, and stop there. The FTSE100 is not a totally passive investment, though it could be regarded as a mechanical approach to stock selection by objective criteria. Objective criteria don’t have to be desirable.
Index investment isn’t an alternative to thinking about what you are buying, and why, and how it squares with your view of the economic future. Had I engaged brain I might have seen that I wasn’t ‘buying the index’. I was buying a most peculiar part of it, on the assumption that it was a proxy for ‘the stock market’.
If I am going to have to think, I might as well think properly about my aims and beliefs, and invest accordingly. I’d much rather screw up because my world-view was wrong than because I casually switched my brain into neutral after the dot-com debacle and went with the index investment mantra flow.
* I’ve had a search back in that file of share documentation, and the Virgin ISA was a FTSE All-Share Tracker which somewhat weakens the argument that the issue was due to chasing momentum and sectoral allocation shifts. Such is the fallibility of memory – it appears I thought harder about things then than I recall 🙂 back