Ground Control to Major Tom–turbulence ahead

What are the five most dangerous words in investing?

It’s all different this time

Actually it was Monevator who spotted the turbulence, and even he had to admit he was winding y’all up with the clickbaity headline. He’s a much better headline writer than I am, anyway. Plus an George Orwell-esque intolerance of waffle, which is why he shot the long-form “the high price-to-sales multiples / low profit stocks” in favour of growth stocks. Now where have we seen high price-to-sales multiples / low profit stocks before? Ah, I remember, the dotcom boom. I made money in the dotcom boom, despite quite shocking levels of churn

Contract notes from back in the dotcom days. I keep these to remind myself. Do. Not. Churn. Just don’t. There’s an argument I spent far too much on churn, reducing retained profit, these were £12.50 a turn dealing fees which was considered cheap at the time – about £20 in today’s money. But i did get ahead.

Where I screwed up was after that. One was not selling anywhere near the top, and the second way is hanging on to enough of this shit till deep into the suckout and selling out into cash. The chart is in that post. About seven kilosods down the tubes, and the Bank of England tells me that this is equivalent to £12,000 in today’s money. Well done me, eh?

Oddly enough I consider that tuition fees in the art of investing at the University of Life. You can spend a lot more that that in getting taught to be a shit-hot day trader, and people invest more than twice that much into going to uni. The edge I had on them was this was money I had earned, rather than borrowed, and the investment was repaid handsomely in carrying me from when I picked up this bat-signal in the teeth of the GFC.

I didn’t believe him one whit, but needing to get out of the workplace ASAP because otherwise the management crap and miserable metrics would have driven me round the bend I figured it was worth a punt. I had reason to be grateful to that signal, and the training in what not to do, so that doing pretty much the opposite looked like it was worth a go, and when I cleared the workforce three years later it, and the training, were vindicated.

Anyway, turns out the Ermine has had a windfall of late, to add to that from last year, of shorting the suckout. It appears I will continue to be a net accumulator for a little longer. I have too much in cash, and my asset allocation has been crouched in a defensive pose. Cash is not good in current inflationary times.

For pretty much any time over the past 10 years the obvious place to invest capacity I don’t need for spending would be the stock market, but it’s not the obvious place for me now. Valuations are sky-high. Some of this is apparent – loads of money has been created, firstly in trying to dodge the longer recession we should have had after the 2007 GFC. And now with the coronavirus pandemic. I’m not a head-banging Austrian school nut-job, but companies going bust is how capitalism flushes out old forms and misallocations of capital, and low interest rates foul up this mechanism, zombie old forms clutter the system up and starve the new of capital. Personally I feel the place for government is to soften the blow and help reallocate people who suffer the result of these forces, rather than driving interest rates down so companies that should go bust don’t, but that’s not a majority view – we didn’t support people made redundant after Thatcher destroyed mining, we haven’t done that in any of the other layers of creative destruction since. These failures alienate more and more people and weaken an established order, in the words of Gramsci

The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.

This process started pretty much at the start of my working life in the early 1980s, as Thatcher and Reagan remodelled the post-war international order into what is now called neoliberalism, this is illustrated at length in Milan Babic’s ‘Let’s talk about the Interregnum’ article. Some of the morbid symptoms appeared PDQ, but not in areas I was particularly exposed to.

Drive through some of the old Welsh mining valleys, and you still see some places where hope went to die 40 years ago. My Dad carried on working to the mid-1980s as a fitter until he was 65 and retired with a final salary pension but soon after that they cleared the place where he worked in the city of London (nowhere near finance) which actually made something, and turned it into a conference centre. His job would have been roadkill if he were a little bit younger.

There is froth and the stench of decadence in the areas of plenty.

I introduce you to the 20 minute avocado delivery in the Great Wen. Okay, a superyacht is a more egregious example of decadent excess, but most of you can’t afford that. I’d say we can all afford to pay £5+£1.8 for something that would cost half that if we walked to the supermarket, even if it were a Tesco Extra where everything seems to cost half as much again as if you walked a bit more to a regular Tesco. It’s hard to deny the decadence and the froth.

Gorillas grabs close to $1bn Series C funding …values the on-demand grocery delivery biz at $2.1bn

Series C funding is late-stage venture capital funding. Venture capital spends shitloads of money on vapourware. Why do they do that? Heck, so they can do the IPO, get their cash back and sell this shit to you in your passive index funds, rinse, repeat. Because think about it. Hipsters can diddle on their smartphone apps in the London loft spaces to have meal ingredients delivered by e-bike. Where’s the obvious catch? Surely it’s that the self-same hipsters can diddle on their smartphones and have a fully-cooked meal delivered to their loft space, and have been able to pretty much ever since Deliveroo and Just eat. Heck, even when I was working in TV in the Great Wen  in the 1980s we’d ring up (on a dial office phone) for a pizza delivery if it looked like Production would wrap late.

Where have we seen this unprofitable firms worth loadsamoney movie before? 1999. But it’s all different now. Yeah, right. Why are valuations up in the sky? Because money is searching for a return, because there’s more bloody money flying about made to try and dodge the consequences of the global financial crisis and there are fewer places to park it where it does better than slowly die into the night, and it’s getting less and less discriminating about doing due diligence on whether that return has any real hope of existing. We are buying this fluffed up crap in our index funds. This sort of garbage is one of the reasons valuations are going up – there are too many companies

What’s this make-believe rubbish doing in our index funds? Some indexes require profitability for inclusion, but an increase in unicorns are a bad sign of irrational exuberance IMO

that are worth gazillions and yet don’t turn a profit. Still, look on the bright side. Valuations haven’t reached the heady heights of the dot-com boom. Things can only get better, eh?

S&P Composite CAPE (from Shiller)

A fellow on Monevator sensibly asked me why, rather than buying puts at the moment, I don’t

Why not just invest what you are comfortable with for the long term and just forget about the drops?

I’m not a young pup saving steadily from income for 30 years, so I don’t believe in the fundamental premise of index investing because I don’t have that many market cycles. I believe valuation (and indirectly, timing) matters in a cyclical market. Those valuations worry me. If they stay up in the air for a couple of years then I will have spent a manageable amount in puts. If they stay up longer, then yes, I will need to suck it up and conclude things really are different this time and stop buying puts ¹. The equity purchases I will make between now and a couple of years will be up in the sky along with all the rest of what I have had for years. I just happen to be of the opinion this has to go titsup sooner than later. But if I’m wrong I can eat that too, the increased balance in my ISA will salve my dented pride somewhat 😉

For all that, my largest holding is in VWRL, but I am happy to say that the vast majority of it wasn’t bought at current eyewatering valuations.  But I’m not buying into this market large-scale at current valuations, and yes, I am prepared to pay over the odds to insure against some downside in what I have at the moment, because I perceive the downside hazard is a lot higher than the upside opportunity at the moment. It’s not a general view however, and again, a lot of money is flying about the place. The inflation manifesting itself now is one symptom of that – consumer spending seems to be strong in those households that saved money through the pandemic, and in combination with the lost capacity.

Inflation worries sort of jumped me into working, at a fairly minimal level. I guess I need to be careful to stay below the lower profits limit, since now I have a full state pension entitlement there’s no point. It is surprising how the lower profits limit is twice as much as the upper earnings limit, where permies start to pay NI. I am selling pure mind, so pretty much all my pay is profits, and because of my pension I pay tax on all of it. However, I will charge out my replacement computer against income, because the old one was driving me bonkers with the fans screaming as the CPU overheats due to the thermal paste drying out. And it is time I charged my IET/chartered engineer registration to tax again, even though it is largely vanity 😉

But when I sit down and actually think about it, there is no earthly financial reason why I am working. It’s not a permanent job, so it doesn’t protect my future against inflation. It doesn’t really shift the needle on the dial, my dividend income works harder than I can. But I carry on because it gives me connection with a different community of people, and it turns over the grey matter. I have seen a couple of very serious cautionary tales over the pandemic – one fellow I know, bright but seems to have dived down the rabbit hole and is almost a hermit. And another is drifting that way. These are hidden hits of the pandemic. Pandemics accelerate trends that were already latent, in society at large but also at the micro level it seems.

Inflation is bad for me in terms of the pension, since it seems likely that it will overtop the cap, and for cash, and it favours the stock market as a poor choice among those available. At 5-6% inflation, if for example, I sit out five years in cash trying to avoid a 30% drawdown in a bear market, I may get to eat a 30% drawdown in the cash instead. Valuations seems particularly high in the case of big fish, this is, of course, most of the market capitalisation in VWRL. I am trying to diversify away from those high valuation stocks in new purchases. In the flash crash of last year I was buying VMID which seemed particularly beaten up, and I have been adding to that holding. It is now trading sideways, and has a poor yield of about 2.5%. Back in the day I wanted to avoid drawing down capital, but as it is in covid times I find it hard enough to spend my regular income.  I have still never drawn income from the ISA, because just as I started to run out of money drawing down my DC SIPP my main pension came on stream. So I can let that hangup go.

There does seem a greater trend towards tax and spend, which implies minimising my taxable income. That means reorganising my ISA, booting the gold ETFs out into the unsheltered GIA by selling it in the ISA and then buying the same amount in the GIA with new cash. The proceeds in the ISA let me buy shares and shelter the dividend income from tax, which wouldn’t be the case if I used the cash to buy the shares in the GIA. But I do get to eat dealing fees and the spread on the gold 😦

There be turbulence and hazard ahead. I do wonder how many people will be talking about FI/RE if the big One comes in the next couple of years. It’s all looked terrifically easy in a stock market that only climbed higher over the ten years since the GFC, with the exception of what turned out to be a deep flash crash due to Covid last year/ Even at the low-water-mark of that, valuations were getting on for twice the value after the GFC.

Something stinks to high heaven about valuations to this mustelid snout, but the rapid increase in inflation is robbing us of the opportunity to sit out on the sidelines. But I am mindful of Gramsci. This is the interregnum, and morbid symptoms appear. One of them seems to be stratospheric valuations. Unicorn shit is on the rise.

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1. Shortly after that no doubt the Big One will hit us all, because life is like that. You don’t have to win every punt if you take an opinion, these are relatively cheap, though throwaway ↩