Time for market timing?

On the last working day of 2017, the Ermine pulled up the FTSE100 index and was greeted with the following tribute to irrational exuberance.

All hunky dory and way up in the clouds, eh. What on earth could go wrong here?

What’s a fellow to do? Way back when, I wrote a post inspired by the reported comment by a City gent, to the effect of I don’t know WTF we are doing up here, with the implication that it’ll all end in tears. That was in 2013, with the index about a thousand points lower than now.

I’m still heavy on FTSE100 shares in my HYP, despite efforts to build around them with world index-trackers, which tend to be over half exposed to the US. I used to grouse about that, buying into an overpriced American market, but not so much now. Which brings me to the problem for a net investor, where the hell do you find value?

Ah yes, Bitcoin. It’s the latest craze, tulip bulbs got nothing on this, along with the stories of people making loadsamoney. Trouble is the price curve looks like an exponential ramp, which means if there is value there it’s largely captured by people who were into it over a year ago. Not going there – at least some of what you buy on the stock market is a productive asset, and it’s always nice to see that in an investment, though I will make an exception for gold due to its long history 😉

the fog of war and confounding factors

One confusing factor for Brits is that  we voted last year to kick all those foreign sorts out and/or take back control at the cost of our economy, so the value of the pound is down a long way. Which has the effect of making everything else look higher than it really is, so say a fifth of this effect is due to the fact that the numbers on the vertical scale are 80% of what they used to be. In a country with a midget currency, everything looks like the work of kings. So some of this gain isn’t real, although it still makes life more expensive for  savers buying their future income streams using the fruits of their toil earned in Great British Pounds, because wages haven’t gone up 20% to compensate. I guess Remoaners often work in the City so they may be getting some salary lift, which seems only fair for having their futures shat on. Most Brits aren’t so lucky as to get wage rises, but at least they got the result they wanted.

I’m surprised that the Brexit inflation hasn’t shown up more, I look at things like petrol and food and obviously I’m buying the wrong things. Maybe I need to buy Uber rides and 4k TVs to get my inflation rate down 😉

The BBC wryly observes

If ever we needed a reminder about the disconnect between our largest listed companies and Britain’s ‘real’ economy , we got it today. UK GDP growth is well below the G7 average and real wages continue to fall.

Despite that, Britain’s PLCs are doing very well thank you. That’s because most of them earn the vast majority of their profits overseas and the global economy is enjoying is best period of sustained growth in a decade.

it is the swansong of my investment career

Notwithstanding all that, it all seems a little bit frothy and overoptimistic. That’s a depressing sort of market to buy into, particularly with the possibility that investors may need to lower their their sights due to falling productivity. Buying into a lower future income stream at a high price is not a recipe for deep joy.

I have dropped back to regular index buying to replace my Charles Stanley Flexible ISA where I borrowed money from to fund a house purchase. Arguably the money I borrowed from the Bank of Ermine ISA involved selling stocks at high valuations so I am chilled about buying overvalued stocks with the same money, after all I’ve already had the Brexit Bung on it. I’ve also taken up some of Monevator’s idea of using currency hedged ETFs for a part of my world index funds because, well, perhaps Brexit might be a success and the pound rallies¹.

I still have this year’s ISA contribution to make by March 2018. I’m a market timer this year, because I have to balance being slaughtered by Brexit inflation against being slaughtered by buying into a market at high valuations in the swansong of my investing career. Although 20k is a small part of my ISA, it’s not a trivial part of it. If I were saving 20k a year for the next 10 years I could take the pound cost averaging litany and ignore valuations.

Valuation matters in the Ermine’s experience

Rob Bennett has been snarling about the buy and hold mentality (Google What Is Valuation-Informed Indexing? – RB has a good case but tends to push it everywhere he can without holding back as one UK PF blogger found out, and I don’t need the fight on here) and I agree with him – from experience:

Housing

I bought a house in 1989

UK house price chart

That house price chart is all you need to see how dumb that was².  Valuation matters, it probably took me 20 years to break even

Shares – 1

I started buying in the dotcom boom, and lost about £7k through committing every tyro mistake in the book

FTSE100. Don’t start in the late 1990s, and it’s even worse if you work in tech and think tech is all there is

Start in 1998 when everybody is talking about tech stocks like they talk about Bitcoin now. Just say no.

Shares – 2

A desperate Ermine sits in the office after a bad interaction with the performance management system and a psycho manager who has just had a baby with his new second wife, so he is desperate for money and frightened because of the economy. He wants to squeeze everyone in the team to become the Next Big Thing despite being a talentless though ruthless shit. Ermine thinks I wanna get out of this place and reads this. That was the catalyst, I had been studying why I made such a pig’s ear of the dotcom bust. I realise that valuation matters, start buying in a hole, which is conveniently the stock market on its knees as an open goal right next to me 😉 Buy and hold works a treat then, because valuation matters… Now I had a massive amount of luck since then in other ways, which is why I am writing this as a retiree rather than a wage slave, but the principle is the same. Buy when it looks terrible, run towards fire.

So I’ve had two busts with valuation and one win. The win has beat out the busts³. So I am not that keen to toss my last £20k in shares right now when everything is up in the sky. Where I don’t have Rob Bennett’s chutzpah is I don’t aim to use valuation and sell at high valuations. I aim to buy at lows, and hold. I came to the conclusion a long time ago that I have no talent for choosing the right time to sell, but I am OK on choosing the time to buy. Now is not that time.

Hopefully we will have some sort of reprise of January 2016 when it all looked very different, I still have the VUKE I bought from then which appears to have crept up by a third⁴. But we haven’t really had a bearish stretch worth buying into for a while.

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1. Not convinced?  Me neither, but I need to hedge that unlikely event to reduce my exposure, effectively trying to lock in some of the Brexit Boost. ↩
2. I wish people would use a log scale on the y axis of price charts, the recent gyrations aren’t astronomically worse than the 1989 peak as a linear scale makes them out. ↩
3. valuing it at roughly 60% of nominal value, which is probably where shares ought to be at fair value IMO. ↩
4. I know, I know, it ain’t real, guys, although the Brexit boost probably is there for a while ;) ↩