Where an Ermine learned his first ideas on Finance and What He learned

Warning. This turned out to be a rant, though unlike the Tax one it doesn’t completely lack the milk of human kindness. However, if you’re a parent that believes More Stuff compensates for Less Time with your kids you might not want to read further than Has Anything Changed since the 1960s to make life harder for Modern Parents. It’s reactionary, unprogressive and not Right On.

Sometimes an Ermine looks at himself in the mirror and thinks

Self, you have become a cynical old sonofagun

So it is with Rob (Self-Employed Investor) and Lee’s (Five Pence Piece) Call to Arms – Campaign to Introduce Compulsory Personal Finance Education in Schools. Don’t get me wrong, I’m absolutely behind them, if it happens to be the case that this is necessary.

But I have to admit, that the first thing that sprang to mind when I read Rob’s piece Personal Finance in Schools was

Eh? Don’t these children have parents? Why aren’t they learning about this at home, what’s it got to do with the school anyway?

You see, success in personal finance isn’t about making the figures add up. It isn’t about the book-keeping, though that’s important. Most people have  on-line bank access and tallying the figures isn’t the main problem.

Personal finance is about personal values, not the adding-up

Success in personal finance is about values, not about arithmetic. Money is crystallised power. It’s a claim upon future work, yours if you owe money and someone else’s if you have money. How you use power is all part of your beliefs and value system. You learn that from your parents, watching how they live life by their values.  Children who see their parents solve problems with a fist-fight learn that a fight is an effective way to get things done, children who see their parents defer purchases and buy with cash rather than credit will buy their own flat panel TV with cash rather than a credit card. Rob cites an example to prove the point

when I was given money for a summer fete as a kid, I was also told that I could keep that I wouldn’t spend[…]. That sub-clause taught me that spending 20p on a 1m cart ride was unlikely to be the best use of my money.

Here’s what I learned as as child about finance, and where I learned it from.

the Ermine is a child of the 1960s

It’s very hard to put across just how different 1960s London was compared the the Britain of today. Money was short, and there were still many bomb-sites in London left over from the war, though that had ended more than two decades beforehand. The freedom that I had as a child to wander seems out of all proportion to what is typical now. For instance, I went to primary school in New Cross, London, and walked the 500 yards home alone from when I was 8 I believe, before then my mum or other adults had helped me across roads –

early school route

The school and my parents’ house have both been demolished since then so the start and destination are approximate. The halls of residence for what is shown as Goldsmith’s College were a building site, and that supplied endless fascination for us kids, we’d play all over them after school on the way back. Building sites weren’t the regimented walled off things with dogs and security they are now – then you’d occasionally get yelled at if a builder saw you. A friend lived on Barriedale, and occasionally we’d go through the gate at the end of the garden into the allotments and climb trees on the railway embankment at the back. We were obviously instructed not to go near the track, but there was nothing seen as wrong about playing on the vegetation fifty yards away. I get the feeling that sort of thing would be frowned on nowadays 🙂

A London of Hire-Purchase, coal fires and credit controls

This was a Britain without credit cards, though many people bought consumer goods on hire purchase. TVs were rented and black and white, and most people’s radios still had vacuum tubes in them. Central heating was rare until the 1970s, most people used coal fires.

My Dad worked as a maintenance fitter for a glassmaking firm, then at a brewery in the City of London for over 20 years. My Mum was a SAHM – though it sounds odd nowadays this was typical of the 1960s and 70s. But it did mean that I had more chance to learn from my parents, simply because I saw more of them than is typical now I believe. So I wasn’t born to parents who had masses of wealth living in a manor house. But they did have time to spend with me, and pass some of their knowledge on.

My Mum helped my Dad do the mortgage application for the house, in those days you had to put a suit on and have an interview with the building society manager, who would ask you about your income, your prospects, your outgoings, your savings, whether you were going to have more children. This was when I was in primary school, and of course I didn’t go to the interview – this was simply my own parents sharing the ways of the world with their son. I recognise the diagram below (taken from Mortgages Exposed) from my mother’s description, though I think she drew the graph as a line graph of capital repayments 😉

how a traditional mortgage builds equity

She took the time out to explain the issue of the interest and the principal (as what we now know of as the capital) get paid off, starting off mainly with the interest every year, but then as time went on more and more of the capital gets paid off until after 25 years the house would be yours. Now I know in the modern world that looks terribly old-fashioned, but we should remember than in 1960s Britain the very basics of life, food, energy, rent, took up the vast majority of people’s income. People ate out a lot less, and generally needs were a much larger part of their budget than wants. You couldn’t just wing it on interest-only and hope something would turn up by the time you retired.

It was a much more stable world, however, and because accumulating wealth was so slow, people planned things ahead more. Jobs were easier to come by though pay was average, and there was a much wider range of manual and semi-skilled jobs for labourers and chargehands as upto the skilled trades, before the big divide to salaried white-collar workers. Blue collar workers tended to be paid weekly, in cash, and have opportunities for overtime, whereas white collar workers were paid for a fixed workign week, monthly, into a bank account.

A world of Hire Purchase but no  Credit Cards

My parents also explained about how hire-purchase worked. In those days there were no credit cards in Britain, but that didn’t stop people living beyond their means. That’s what hire-purchase was for. If you bought a TV on hire-purchase then you’d pay about twice the capital cost for it over five years. But you could have it right away. In many ways it was better than credit cards, because if you stopped paying, I believe the goods were taken back and you lost what you’d paid so far, but that was it. The seller still technically owned the goods until the last instalment was paid. My parents were pretty disparaging about this as a way to carry on.

There were some cases where it made sense – for instance TVs were unreliable then, and since the title of the product remained with the seller until the end, if a hire-purchase TV broke down you could either get it fixed at the seller’s cost or be entitled to a replacement. It all sounds like a better way to do it than a credit card – say you bought an iPad on hire-purchase. If you lost your job you’d lose the iPad, but you wouldn’t have jack-booted goons from some debt recovery agency chasing you for the money outstanding on the credit card.

They’d also share their opinons on the news and why. Because my Mum was German and still had a lot of connections there, they were more attuned to international affiars than people were generally. I recall them making some pretty disparaging remarks when Harold Wilson got on the radio and told us all that the pound in your pocket here in Britain had not been devalued, despite his devaluation. They explained how he was a lying sack of shit by describing how my Grandma, when she came over with her Deutschmarks would find a cup of coffee cheaper, whereas if we went over there a cup of coffee would be dearer, and that this would affect the price of things like wine imported from Germany.

Although I learned a lot from my parents, I also recall learning about preference shares from a children’s magazine called Treasure. It described, at a high level the principles of equity and debt, how debt is senior to equity. My recollection is that they said that preference shares were senior to ordinary shares, but that on the liquidation of the company ordinary shareholders obligations stop, whereas preference shareholders may be called upon for unlimited liability.

Although the debt seniority to ordinary shares is one of the advantages listed in this modern descripton of pereference shares, the unlimited liability either means my juvenile mind distorted the description in the magazine, or this has changed over the intervening forty years.

This magazine (and its successors World of Wonder and Look and Learn) was a great investment by my parents – it expanded my general knowledge no end and as this piece shows, some of the information even stuck. It used illustrations well – the description of how the newfangled central heating systems worked, with the cold-water tank, hot water cylinder and the feed and expansion tanks in the loft is still one of the clearest I have seen.

Treasure or its successor also described how fractional reserve banking worked, though it didn’t call it exactly like that. Remember this was a magazine aimed at 11 to 16 year olds, so I don’t know what’s gone wrong with people’s greneral knowledge because this seems to come as a desperate surprise to members of Occupy.

This was a world without electronic calculators until the mid 1970s, so financial stuff was hard, and compound interest and mortgage calculations often used paper lookup tables and rules of thumb. I learned long division because there was no alternative, and scientific calculations were done with logarithm tables and sometimes slide rules. I saw a mechanical calculator in the business office of the school, a huge beast with a handle on the side you cranked after you’d set dials. Through some remarkable mechanical engineering in the guts it could add numbers, subtract and multlply, but division was beyond it.

Dad was an early shareholder, when ordinary people didn’t hold shares

Unusually for people at the time, as time went on and I was in grammar school, Dad bought shares. He bought a lot of shares in his employer, I believe as part of the Save As You Earn schemes. However, the Wikipedia entry indicates these only started in 1980, so perhaps there were other incentive schemes before then. It’s difficult to understand now just how unusual share ownership was for ordinary people, and it was especially unusual among blue collar workers. He also held shares in some investment trusts, and it was either he or my Mum that explained to be how the net asset value was not necessarily the same as the average share price of the IT and how this was sometimes good for you and sometimes bad. I was to recognise this when I read this modern explanation, but it came easy to me because I had heard about investment trust discounts and premiums thirty odd years beforehand, and indeed a high-level view of what investment trusts were. They also described what share splits were and scrip dividends.

I started at Imperial College in the late 1970s, and unlike the unseemly hurried mess I made of my own retirement plans, it appears that my Dad took a measured and strategic approach to his retirement in the second half of the 1980s. He had been in every sharesave scheme, and amassed these shares over time, his employer was a decent dividend payer that served him well in retirement. He had also paid off his mortgage by the time he was in his late forties. In his favour he had the stagflation of the mid 1970s that made his house debt look cheap. He begans to ramp up his pension AVCs – like nearly everyone else in private industry at the time he had a final salary pension, and I believe his AVC strategy was basically the same as mine, but operated in a civilised mannner over five years or more, rather than in a mad rush over three years. Somewhere in this period  I recall borrowing three hundred pounds interest free from Dad to buy the inaugural public issue of shares in British Telecommunications in 1984 I think, which I paid back from wages when I was working at the BBC.

An unexpected challenge to the workplace financial adviser

When he came to retire, Dad must have had the option of a free session with a financial adviser paid by his workplace, in a similar way to the pre-retirement seminars I’ve been on. That can’t have been that adviser’s lucky day. Not only was Dad experienced as a shareholder, and largely of the high-dividend buy and hold mentality, he was also a believer in investment trusts. I recall him spitting bricks about unit trust costs and this FA pushing unit trusts for his pension commencement lump sum, and high fees and stuff, so he’d have none of it, putting his PCLS into investment trusts and various high div shares.

Dad was basically of the same opinion about the financial adviser industry as Monevator over here, but Dad got there earlier. This must have been a nasty surprise for that adviser. After all, advising a bunch of blue collar workers on how to use their pension commencement lump sum, which was probably the largest amount of money they’s seen in their lives, and at the same time rake off pretty stupendous fees in those heady days of the 1980s must have been an easy ride with easy pickings. Except for one right old awkward bastard, step forward Dad.

He’s getting on a bit, well into his 80s these days, but he still doing well. Some of Dad’s approach to shares looks unusual to me, for instance he takes the actual price of a stock into account, never buying anything > about £8 a share and I believe he has a minimum target. He doesn’t use computers – he used to use the FT and now simply uses Teletext (or the red button alternative).

And yet Dad’s track record is far better than mine. To get where he is, bearing in mind he’s been drawing a penson for nigh on a quarter of a century, he must have preserved the real value of his PCLS and grown it while drawing some income from it. He’s done it across the decades, he wasn’t wiped out in the dot-com bust like I was, he wasn’t destroyed in 2007-8 crunch. Dad doesn’t do index investing, he’s a stock picker, because that’s all he could do when he was starting out and learning. He’s not Warren Buffett either, but he’s still there and his portfolio is doing for him exactly what I want mine to do for me. Great as they are, it wasn’t Monevator or TMF who convinced me that I could top up my foreshortened pension with income from shares. It was my Dad. You can’t argue with track record. Buy and hold works for him. His shares normally only change because of corporate actions 😉 I’m trying to get to his Zen-like approach. I don’t want to have to buy a smartphone when I am retired and track the stock market all the time. I want to sit in a boat on the middle of a lake and contemplate the meaning of life, not stress about how my shares are doing, and if I should sell TSCO and buy RDSB.

What my parents taught me, largely by example

Do not borrow money for consumption

That’s the main one, basically Micawber’s rule.They lived it – they just didn’t borrow money, with the one exception of the mortgage. They never bought anything on hire purchase. And yes, other people did have more consumer goods than my family did. But my parents took the time out to explain that sometimes men in suits with thick necks and bad manners came to some of these neighbour’s houses to take their fancy goods away, and they didn’t want that to happen to them.

Yes, I knew how a mortgage worked and don’t borrow unless against productive assets, and a motley collection of bits and bobs about shares. It was going to be ten years before I did anything with any of that, and by then I was my own man. My parents sent me out in the world knowing not to borrow money, and with some basic cynicism for advertising. That’s good enough. I’m not sure there’s any need to teach kids about ISAs and stuff. The number one biggie is don’t borrow money – essentially Do No Harm to your finances. All that stuff about investment trust NAVs was thirty years before I’d use it, and there were people like Monevator about who could tell me about that when the time had come anyway.

Other financial stuff my parents passed on was

• how a repayment mortgage worked
• a general impression of compound interest (this was shown in Treasure magazine, though their example lived in a delightful inflationless world ISTR)
• how equity and debt finance worked for companies (from the aptly named Treasure magazine)
• what shares and dividends were
• what scrip dividends were (dividends in the form of extra shares)
• what an investment trust was
• how the gold standard had worked (Nixon had gone off it in 1971 ISTR)
• the principles of the Bretton Woods system of fixed exchange rates (overtaken by events in 1971)
• what hyperinflation did to people’s savings
• howa savings account was different to a current account, and what you used for which
• what standing orders were (there were no Direct Debits in those days)
• How you needed to keep a certain amount in a current account to avoid charges (it was about £50 in the 1970s, unlike now, though the charges were not punitive as now)
• how to fill out a cheque and what A/C payee meant. There was a time when you had to write that in manually else anyone could cash a cheque, from the days when few blue collar worers hada bank account.
• what the difference was between a bankers draft and a cheque was in terms of repudiability
• some idea of foreign exchange variation, and how you couldn’t devalue without increasing the cost of imports
• a general awareness of the balance of payments, though my parents had a  mercantilist viewpoint by today’s standards

Not all of it was with a view to being used, the Ermine was of an inquisitive nature (aren’t all children?) so some of this was accumulated from ‘why are you doing that’ sort of things.

Has anything changed since the 1960s to make life harder for modern parents to do what mine did?

The young Ermine was raised, in a stable family, by both biological parents who were married to each other. And my Mum was SAHM, which was common at that time

We’ve made a different compact with the world of economics since then. The world I grew up in was stable, with plenty of jobs at all levels, and somebody who was prepared to work reasonably hard and save diligently could raise a small family and buy a house on a single man’s wage.

You just can’t do that nowadays. Not only are jobs less secure, though they pay a little better, indeed some people a heck of a lot better, but we have driven up the price of housing in the UK so that the average household needs both parents working to be able to pay the mortgage.

Housing in general is very dysfunctional now compared to then. Margaret Thatcher deeply damaged the British housing situation when she sold off council houses that had been built in the post-war period. She did this for the sugar rush of buying votes, selling off the capital assets of the country cheap.

She claimed this was to enable aspirational people to own their own home. There was a perfectly good system in Britain for people who wanted to own their own home, and as a self-styled free market advocate she would have known about it.

It was the open market – my parents never lived in a council house, they bought on the open market. They started in rented accommodation with just the shirts on their backs – when they got married they used upturned orange boxes as seats and secondhand tables. But they bought their house later. They didn’t need Thatcher’s largesse to do it. Basically if you rent from the council then you can’t afford to buy a house. That’s what council houses were for, and there was no stigma in raising a family in one. Many of the kids at my grammar school lived in council houses.

Thatcher fixed an awful lot of things that were wrong in 1970s Britain, but she did untold damage to the delicately balanced housing system, that succeeding generations have been paying for and fighting against ever since. The house I am living in is a semi-detached house, similar to that my Dad bought. I bought it on a single wage for various reasons, but I needed a white-collar job to do it in a provincial town and not London. If I had been in Dad’s generation I could have bought a detached house in the stockbroker belt of London. I couldn’t even afford to buy a house in London – the damage Thatcher perpetrated to the housing market in 1980 had already had that effect within ten years. It still echoes onwards – if I were 28 on the graduate scale at The Firm I would struggle to buy the first two-up two-down that I bought in Ipswich in 1988, as a single man.

It’s unfashionable and considered terribly reactionary, to say it, but over the years we have sold spending time with our children for time at the office, and buried the extra money we’ve earned in house price equity and consumer baubles. We have averted our eyes to the impact on those we claim to hold most dear, and tried to outsource some of the work that used to be done by parents to the State. Heck, the State is making significant transfers from those without children to those with in an attempt to fight back.

And we aren’t acknowledging the fact that raising children is work, it seriously degrades the material living standards of the parents, and reduces their ability for self-actualisation. People, my own parents included, tell me that there are great rewards to be had that outweigh those factors 😉

But unlike my parents’ generation, we now often refuse to accept that compromise. We want to Have It All, and We Want It All Now. How has it come to pass that it’s very right-on to say that It Takes A Village to Raise A Child, but you aren’t allowed to say It Takes Two Biological Parents To Raise a Child in polite company? The house sparrows outside my window know that it takes a cock sparrow and hen sparrow to raise a fledgeling, so how come we have tried to erase this awkward fact of human life in the last 40 years?

Humans have a long and difficult journey from newborn to young adult, the longest relative period of dependency of all animals. The modern world is an increasingly complex place and if anything it needs better parenting, not less parenting.

I’m not such a reactionary old git as to say there aren’t any exceptions to the two parent ideal, and humans are resilient and adaptable, we’ve always had exceptions to the historic norm of two biological parents raising a child. Countering that, we had extended families then which could take up some of the slack.

The proof is in the results. Far too often parents are sending kids out into Britain ill prepared for it, and finance seems to be just one of the areas where we have problems, then they aren’t stepping up to the plate as well as their predecessors did. If you don’t want to make the compromises that having chidren entails, then don’t have them FFS, the means to go about that are free on the NHS I believe.

As a society we could do with being less mawkish about children and actually roll up our sleeves and make life better for them. Government has mucked around with building schools and throwing benefits at families which only seems to have encourages the wrong sort of people to increase their fertility, and make the middle classes who ought to know better dependent on benefits to buy distractions for their children rather than actually spend time with them.

If Government really wants to do something for children then top of my list would be when we do build social housing for families, suspend a very sharp sword above jerks like Cameron who wants to sell it off cheap to buy aspirational votes. Then get a small monkey, say Nick Clegg or Ed Miliband, to cut the rope when bollocks like this comes out of his mouth

£75,000 discounts will help get tenants across the threshold

No. Get your damned mitts out of the housing market. Leave it alone, FFS. It’s going to take another generation of parents away from their kids, and it will reduce labour mobility. Use that £75,000 to build more frickin’ council houses, chump!

My childhood had a lot less stuff in it that current kids, But it had more adult attention in it than is often the case now. Although I’ve fingered Thatcher’s much-vaunted right to buy revolution for what has been a major source of damage for British parents’ finances, the obvious challenge is that I’m an outsider looking in. I don’t know what it’s like to raise children in modern Britain, I merely get to observe the results. Here is a view from a modern parent raising kids in an Anglo-Saxon economy who talks about kids needing their parents’ time.

In the black-and-white discourse that poses as dialectic at times, people will no doubt get on my case for saying every British parent makes a pig’s ear of this in the modern world. Of course they don’t, the vast majority of parents are doing the best they can with the resources they have to hand. Unfortunately, more and more of the marginal cases are losing the battle, and Gordon Brown’s attempts to eliminate child poverty incentivised some pretty rotten prospective parents to become parents. So an increasing percentage of kids are being sent unprepared into the tender mercies of the economic system which does its best to eat their finances. The marginal cases get themselves into trouble and in some cases make life hell for the rest of us.

Parents, you are failing your children if you aren’t preparing them for the basics of life which includes finance. Live your values and pass them on by example, and leave the schools to teach the academic stuff.

We aren’t born wards of the State, and if things are getting to the stage where schools and the State has to teach children how to become competent citizens then we have gone an awful long way wrong. We need to stop, back up a bit and cut the crap.

Parents, your job doesn’t end with bringing the egg and the sperm together. If you want a decent world for your children, then start at home. Build that decent world within your own four walls. Express your values, and live them by example. Show your kids how you save for a plasma TV and explain that if you slapped it on the credit card it would cost you 120% of the purchase price, which would bugger up Christmas.  In the specific area of finance share the basics, and tell them how the world works. Tell them over the twenty odd years they’re in your care –

1. What money is – crystallised power, and a claim on future work
2. Don’t spend more than you have for consumables
3. Advertisers are corporate liars, don’t believe a world that they say
4. They need to develop their own values and live them, not buy them in brand names and empty dreams
5. The true odds of the National Lottery, that it is a scam designed to tax the poor and mathematically challenged and that it fosters empty dreams and it should be treated like a dog turd
6. If something looks too good to be true it probably is
7. There is no free lunch
8. People matter more than Stuff
9. Shit happens, so save towards that rainy day
10. Paying things by instalments is nearly always dearer than saving up and paying in one go. That applies to mobile phones and expensive contracts too
11. Markets like housing are cyclical. If they are a long way off long-term average they will probably revert to the mean
12. Markets can stay irrational for longer than you can stay solvent, particularly housing
13. How mortgages work. You are actually meant to pay off the capital
14. to ask themselves whether university is an unaffordable luxury, but also to understand that this debt is atypical of other debt
15. How a man without savings is always running

As they get into their teens and towards young adulthood, perhaps share some fundamental principles. These five aren’t a bad start.

A child is for life, not just for the Social Security claim. I can’t think of a better reason to sort your life out and get your shit together that to stand as a decent, honest example and be there for your kids.  I’m not quite yet ready to advocate applying a pair of house bricks to the offending organs for the sort of rabble that drag their kids up without equipping them with some of the basics about how the world works. But I’m getting there. Quite honestly if we are getting such rotten parenting then we are encouraging the wrong sort of people into being parents. You don’t have to teach your kids how the NAV of an investment trust works. Just start with the basics of Micawber’s rule. It simple.

Don’t buy shit you can’t afford, son. Save up for that iPad first. There are only two possible exceptions to that in life. Your education and your house, one day.

Neither of those are automatic exceptions. The reason they may be exceptions is one may make you money and the other may save you money, as long as you pay the capital off. None of this interest only malarkey, son, unless you have a plan to shift to repayment as your pay increases.

It incenses me that things have got so bad that good people have to start thinking up ways to outsource this sort of thing to schools. At this rate we’ll be expecting schools to teach kids how to use the toilet and making up for poor parenting in other ways.

It’s the parents’ job to send a child out into the world fit for life. There are always going to be some kids who are slow starters, fall into bad ways or otherwise lose their way. That’s fair enough, but make the effort, guys, then society can handle these kids as exceptions, not the norm!

In the meantime, I’m happy to support Lee and Rob’s  Campaign to Introduce Compulsory Personal Finance Education in Schools. I just want to see a Campaign For Better Parenting at the same time. We need to fight the cause, not just firefight the symptoms 😉