I’ve still got no idea what we are doing up here, mate. There’ll be trouble brewing…

A while ago I posted the observation of a trader at FinanceRomance’s workplace, and it seems to hold just as much now. I was browsing the Ermine ISA, and looked at the bit on TD where they say the difference in purchase price and valuation and thought to myself WTF? Has there been a party on the markets these last few months?

FTSE100. Mad, don'tcha think?
FTSE100. Mad, don’tcha think?

I struggled to find value this year, so I did a capital gains transfer into my ISA rather than buying new shares. And I’m still struggling to find value, though of course a lot can happen by the time of the next ISA allowance in April. Presumably our American friends are going to shut down the government a couple of times and generally give people the willies, though the last shutdown wasn’t really a great win on buying opportunities. In general I’ve dismally failed to find much worth purchasing. Royal Mail was a win, but £300, while worth having isn’t going to make a tremendous difference. The Direct Line IPO was more lucrative but that was so last year. I took a punt on Europe last year and swapped my HSBC dirty funds[ref]dirty with trail commission[/ref] for Blackrock’s clean funds in the same space, adding to it. That’s performed well enough since I suppose. But other than that, nothing much of note. I had to liquidate £5000 worth of The Firm’s shares to make space for the Royal Mail IPO, and have had a devil of a time finding somewhere to lodge the remainder. I’ve put half of it in RDSB because I had nothing from that sector, but the remaining half is in cash awaiting opportunities, and they’re thin on the ground.

Let’s take a look around us at the twisted wreckage that still surrounds us in Britain. The economy seems to be doing well, but it’s been saved by a neutron bomb – the structures are standing but many people seem to be doing badly and falling behind. Some stupid tosser has gone and pumped up house prices again by charging about doling out free money[ref]It’s not officially free, but who’s going to be paying off a 95% mortgage in a world of 6* earning multiples and falling real wages?[/ref] to people who can’t afford to buy houses. I suppose there may be a case for more Castle Trust I suppose. Or Grainger

Grainger - on a roll
Grainger – on a roll

but everything about their fundamentals either offends me like the astronomical PE and the yield of <1%. In a HYP? Sometimes you hafta accept you know that you don’t know and leave alone – it’ll probably carry on rising forever – things to do with British housing tend to do that. Until I touch them 😉

It's mad, it's bad, and it's gonna go downOver in my non-ISA account I have mainly index trackers, another wodge of Europe value shares from an idea by Monevator who has served me well once again. I didn’t have to hold my nose to buy in Europe because I was already in there and filling my boots because it looked like it was going to blow imminently. I used a generalist EU ex-UK index – and these were big European firms earning money all over the world, in some ways more attuned to a HYP approach, so I had some of that IDJV. I like a jolly bad smell in the morning when it comes to buying. Emerging markets have got that sort of feel at the moment, but I’m not yet that brave and I have zero expertise – this seems to be one of the few areas there’s something to be said for active management, but I’m damned if I know what that looks like. Whereas indexing seem to work a treat in the developed world – I may move on from being a HYP investor[ref]move on as in leave my existing HYP shares right where they are, not sell and chop and change[/ref], now that everyone else is at it and mine is up to the target size to becoming a contrarian indexer – find regions/sectors out of favour and buy into them.

But the biggest indication that there’s trouble ahead at t’mill is this extract from my ISA on the right. It’s telling me the markets are overvalued.

In a previous life I would have loved everything going up, and would have piled in. This now gives me the willies – it’s frothy and it’s mad, bad, and it’s gonna blow at some stage. As a net buyer, I want to be buying after the blow, not now when the market is becalmed in the waters of irrational exuberance. I can’t say the sight of all those nominal gains doesn’t give me some sort of a sugar rush – the gain exclude the dividends which I recycled to buy more shares – the spreadsheet version of this looks more outrageous. But it doesn’t feel like it will hold. And I can’t find anything to buy that gives me decent dividend returns these days, not without having to take on dodgy operations.

I’ve learned however – looking back at my 2011 review I have learned one simple move to improve my results no end. It’s simple

never sell

Yes, I’ve broken that rule to try and diversify my large shareholding of The Firm, from all the employee sharesave and Share Incentive Plan shares – it’s just mad to hold more than 50% of one’s total shareholdings in one firm. And I’ve broken the rule in selling that HSBC European Tracker to pick up Blackrock’s fund investing in…exactly the same thing, but with lower fees.

Although that sea of green and some of those nice figures are great, the sooner we get off this high horse and back to buying territory the better IMO. There’s work to be done, this party needs to stop! Dammit, I’ve been so bored this year I’ve bought more index trackers than anything else – even Vanguard Lifestrategy 100% as I feel somewhat exposed with no US, not AsiaPac or Japan and no emerging markets, There’s no thrill of the chase there though, it’s not like buying something stinking up the place in the hope of a reversion to the mean…

That trader was right in May, and he’s right again now. I’ve still got no ‘king idea what we are doing up here, mate.

 

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15 thoughts on “I’ve still got no idea what we are doing up here, mate. There’ll be trouble brewing…”

  1. I like the advice “never sell”! I too look at current returns in my index tracking ISA’s and sigh, wondering whether to convert them all now, at possibly the top, into something safer. And then watch as the FTSE hits 8000 by end of next year. The trouble with passive investing is it’s just too damn passive.

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  2. @BTS – aha, but where from the multiplicity of possible sources. I like the attribution to the White Rabbit 😉

    @Jim

    wondering whether to convert them all now, at possibly the top, into something safer

    I learned, through harsh, bitter and expensive experience, that the combination of my skill level or lack of it and a HYP means selling is almost the worst thing I could do at any time. Almost regardless of the information in front of me. Because a HYP targets yield it often buys you out of mistakes. F’rinstance RSA is the -9.63% in share price on buying (and it’s been down to below -20%) but it bought me out of my mistake on accumulated dividend yield, which isn’t shown in the SP column. If I represent RSA on a total return basis I’m actually up 5%. It cost me a lot of hurt and money to realise the value of doing n’owt. It’s now worked a treat for me on four dogs – I’ve only got one dog that’s down on total return now, although that’s easy to say when the markets are riding high 😉

    Then, of course, you have to ask yourself what you mean by ‘safer’ – where and what is the risk-free asset class free of transaction and holding costs. Cash sure as hell isn’t it – an inflation tax of 3% a year on your converted portfolio. As a passive investor you’d kick someone charging that sort of fees on your investments right out the door!

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  3. Perhaps the iShares Emerging Minimum Volatility ETF might fit your EM requirements? (Though the sort of companies it invests in aren’t as depressed as other EM stocks, at least the min vol stuff in general doesn’t look s overvalued as they did earlier in the year.)

    http://uk.ishares.com/en/rc/products/EMMV

    The info isn’t as nicely presented as the Ossiam ETFs but they are much cheaper. (A TER of 0.4% isn’t bad.)

    Perhaps BACT might also be a good fit? The premium has fallen since they announced a C share issue and it should stand up pretty well if things went pear shaped.

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  4. I just had another thought; what about a convertible bond fund? (e.g. the M&G OEIC or the new JGCI IT.) Hopefully they would be equity-like but with disaster protection, particularly the OEIC as it won’t go to a discount.

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  5. I like that EMMV and looking under the hood at the holdings it seems to match the sort of companies and territories. The only fly in the ointment is it is currently non-reporting, and I still haven’t worked out from this what the effect on this is on a LSE traded Dublin domiciled ETF quoted in USD 😉

    I’m also tempted by JII – India has demographics to die for although rotten government and an election coming up next year. I’ve been looking for an way to get in on that for some time.

    I’m only going to build slowly with these but I need to offset the developed world bias of my holdings a bit as time goes by.

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  6. Note that the GBX class of the ETF is EMV so you don’t have to worry about currency conversion charges. Non-reporting status makes this a no-no in a taxable account – as far as I’m aware all gains will be taxed as income.

    It might be worth looking into the Ossiam version, LMMV for the GBP class, though at 0.75% it’s a bit more expensive as well as being less liquid (0.6% B-A). Their literature is a bit better, and a quick glance suggests the components are a bit more diverse.

    http://www.ossiam.com/index.php/solutions/ossiam-emerging-markets-minimum-variance-nr-ucits-etf-1c-usd

    The characteristics tab claims reporting status.

    As for JII, I might consider waiting until the taper starts – it really got battered during the first taper-tantrum. (I actually have a few subs shares which I’ll have to convert soon which I bought when the government said “We’ve made a load of reforms”, before they promptly said “oh, let’s undo those changes as they weren’t popular”. _Sigh_. I’d consider NII too, though to be honest, picking the right moment to get AAS might be better than taking the single country risk.

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  7. We’re up here because the global economy has recovered and the banks haven’t imploded, and more people now believe that Europe won’t tear itself asunder anytime soon (which was always vanishingly unlikely).

    Doesn’t imply infinite valuations, and anything could happen next week, as ever, but while I don’t think it’s cheap I’m quite comfortable with the FTSE 100 here.

    Hope you bought some Grainger! *cough cough*

    http://simple-living-in-suffolk.co.uk/2012/04/the-buy-to-let-conundrum/#comments

    Thanks for the hat tip re: Europe. You’ll have to remember these wins when some optimistic article of mine goes wildly wrong! 😉

    (I know, you remember “Britain is booming!” Oops.)

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  8. I dunno, Britain is Booming served me well enough in counteracting my natural tendency to irrational pessimism. Indeed 2011 was almost as good as 2009 for me in my ISA, though buying into the rioting was probably the biggest lift that year 😉

    I bottled on Grainger, though I did buy the Castle Trust house price index when Help to Buy was pumped. There are some areas of like I have to accept are beyond my ken, and British housing is one of them. But Government pork and free money helicoptered onto the housing market to win elections is something I can understand 😉

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  9. One final possibility that might kill various birds with one stone: BTEM.
    – Decent discount
    – European exposure
    – Asian exposure
    – Cheap (0.75% OCF)
    – Value style

    It is UK based so there will be Stamp Duty but the bid-ask is low so it might average out.

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