Over at Monevator, there is a thread on taxation that also holds a primal scream therapy session about the iniquity of taxation of Londoners these days. While I was born in the Great Wen, grew up there, went to university there and started work there, I fear my City of London passport has run out, so I shut my cakehole as far as London taxation was concerned. I am not clever enough to know if Londoners are overtaxed. London has over a tenth of the population of the UK1, although I suspect most of that population isn’t exercised by the tax issues in that thread. It occurred to me, however, to ask myself how much a lowly London-living mustelid paid in tax, and whether there was the same amount of steam coming out of his ears.
ermine at the BBC
I did try and find a BBC payslip, but it’s nearly 40 years ago, so an annual increment will have to do, £8412 in April 1985, to which we have to add the shift allowance2 to make £9352. The Bank of England tell us this is £27022 p.a. in today’s money, considerably below the median wage of £33,280, so this mustelid was obviously sleeping in a curl under Charing Cross railway bridge.
Not so fast young fellow, bear in mind this is 38 years ago. We were all much poorer then. You may bitch about the cost of living now but 40 years of globalisation and growth did count for something even if we did conclude we don’t need any more of that malarkey in 2016. When I computed the value of my first kitchen portering job it ended up considerably below the current NMW. People in work earn more in real terms than in the 1980s.
The single person’s allowance was £2205 in 1985. The married man’s allowance was 3345, but I got 2205, so right off the bat you can see I was paying 30% (that was the rate!) tax on three-quarters of my pay. NI was 9%3. It’s always the devil’s own job to compute NI, so I am going to approximate this as a combined tax rate of 39% on three-quarters of my pay. That’s 2787, leaving me £6564, a composite tax rate of 29%. Times were tough back in the day, cue the Four Yorkshiremen sketch. If it makes the overtaxed primal screamers feel any better, nowadays you’d have to earn £68000 gross to end up paying a composite tax rate of 29%. That’s over twice the median wage. Even that young Ermine benefited from lower taxes through Thatcher compared to what the Beatles grizzled about in 1966.
No, I couldn’t afford to buy a house in London either, although this was before I thought of such things. I shared, first with ex-university friends, then as they slowly paired off, I ended in a bedsit in Ealing. I had gone up the greasy pole at the BBC, doing an MSc and returning on a higher pay grade at Designs Department. But I had gone down in my housing situation, because I hated paying rent, and I hated having to move because of other people’s changing circumstances. A bedsit with a shared bog is pretty much the last station before the park bench IMO, and this wasn’t because I couldn’t pay. I didn’t want to pay, because rent is throwing money away. Monevator would have approved of my bohemianism, but it was a ‘king miserable way to live. Continue reading “A high tax primal scream – it’s what you keep, not what you earn”
“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
Lewis Caroll, Through the Looking Glass
Monevator had a deconstruction of the potential of Jeremy Hunt’s new pension freedoms to knock £360,000 of the aggregate tax in a dynastic bequest. As a virtuoso performance of creative tax planning there was nothing wrong with it, but I venture the title was either provocative or ill-chosen, because the virtuoso performance was drowned out somewhat by the car-crash of multiple readers losing contact with the narrative. Because this was titled Pensions, the LTA, and IHT: how a middle-class couple can bag £360,000 for free and this crew were earning £160k each.
And that wasn’t how most readers defined middle-class, nor indeed how the dictionary defines it. I am at the end of my working life, so my definition of this was probably set two generations ago, and matches the dictionary version. For a more modern take on this let’s take a leaf from FireVLondon’s taxonomy of London salaries and apply a 30k p.a. malus to their £160k salaries to make it 2015 again.
Even in the rarefied air of London salaries they are almost one percenters. There is vigorous support for Monevator’s impoverished middle-class strivers, however, from the Torygraph which is right behind these poor strugglers.
“Very often high earners will be working in highly unequal environments where the people they network with earn about as much or more than they do, so they are likely to think their income is about average.
“People on £125,000 are relatively close to the top 1pc of earners (those on around £180,000 a year) in their workplaces and social networks, but the rungs ahead of them are further and further apart, so they don’t feel especially high up the ladder.
Diddums. For some reason the obsidian Ermine heart fails to bleed… There’s more love from the Torygraph for these dear folk who can find solace in a forthcoming book Uncomfortably Off. Having read the rubric on Amazon I have the feeling that our tragic Rich Kids of London might feel a tad out of place at the book launch in May, and possibly feel that they are surrounded by lefty snowflakes failing to genuflect to their desperate plight.
The Telegraph really ought to hire more competent interns. OTOH if the the byline writer Harry Brennan gets ChatGPT to write his articles then they only have themselves to blame. Or maybe they will spike the article before the end of May 😉
They say you shouldn’t let the tax tail wag the investment dog, but I would beg to differ in the, er, dog days of the £12300 CGT allowance. It’s probably more important in future as this allowance drops to £3k in a couple of years. Why is this?
First, if you are using your ISA, as I am, then no worries in that particular area. If you aren’t, then Monevator would like to know why the bloody hell not? Only hold investements in an ISA on pension? Stand at ease, as you were.
However, I have concluded that as I can live off my pension then it’s a little bit mad to retain the three years equivalent salary in cash-like savings that was there to prevent me becoming a forced seller into a down market when I was living off savings and then SIPP income with some earnings. The emergency didn’t come, and in Covid that savings crept up to about 5 years, what with spending less, earning a little more. Along with some luck and Covid shorting, so I have unwrapped holdings in a GIA as well as wrapped ISA holdings. It is the holdings in the GIA that exercise me here.
I decided to give the gold holdings the order of the boot from the ISA, gradually selling them in the ISA, buying some equities in there with the proceeds, mainly VWRL, but at the same time as I sold gold in the ISA I bought that much and a little more in the GIA with some of the cash savings. Gold has had a decent run of late, sufficient that I sold all my SGLP to crystallise about 6k in CGT, to buy SGLN. Slightly over 30 days later I look at the SGLN and observe there’s another 5k in capital gain up for grabs, so I flog that and buy SGLP back. I also collected a profit of £2.7k in BP, which I have decided to get out of now, and find I have gone somewhat OTT on capital gains for this year. Never mind, I am prepared to eat a £500 loss in SMT and a £1k loss on LGEN. LGEN is softened by the £500 dividend paid, but I did time it wrong, never mind. The trend towards a tax free dividend allowance of £500 shows that having a GIA containing dividend payers is not such a good idea in future, but that’s another story.
I liquidated a few minor gains1 to get as close to the £12300 CGT for this year but just under. Obviously I get to eat the spread in the turn, I am not so sure I can get so excited about the £5 dealing fee in a seven figure total, but the turn is about 10 to 20 pips, and may be wider on actually doing it rather than a soft quote, which is getting on for at least 200 sods, so you don’t want to spin this wheel too often. OTOH the putative CGT saved is 10% of £12300, which is worth getting out of bed for.
Now assuming that the banks really are strong and resilient as they keep telling us, despite SVB, First Republic, Credit Suissethen it’ll all come good. Probably will come good in a couple of years either way. In that scenario I expect that gold to tank, compared to my last purchase price and go down, by about 10k, less some sort of inflation, as equities increase. But in that case, the embodied capital loss is then able to be offset against any gains, so selling it and rebuying now gives me optionality in future. The gold is there as diversification, I don’t want to off it, so the recent gain is purely notional. What the market giveth with one hand, it taketh away with t’other in its own good time. Of course if I knew that ZIRP was going to return again and money would be there for free I would maybe hold off, but you never know. One day the GFC will have to be paid for…
There’s an asymmetry with capital gains, in that losses can be rolled forward for future use, but gains have to be used in the year. This year’s gain was particularly valuable, because it’s more than it will be in future – 6k next year, three after that. A GIA will be much less valuable in future – in a typical scenario of 7% average annual returns (assuming inflation of 2% as it used to be, hahahaha) a £12300 allowance lets you hold £175k before running into CGT on average. In the end scenario of £3k you get to hold about 42k before running into CGT. And, of course, inflation is 10%, though they all say that isn’t going to carry on. We shall see about that.
I will naturally use the £20k ISA allowance coming up, and perhaps the one after that if it’s on offer. After that, well, who knows.
Britain is a poor society with some very rich people in it.
We have actually seen this movie before, well, those of us of advanced years have. When was that? Way back when, in the early 1970s my German grandmother cam to visit us in London. She was gobsmacked by the number of old bangers on the road then, you could almost see the thought bubble “But I though Britain won the war, what’s up with that”.
I think that sentiment was voiced over a bottle of wine that she had brought with her. Seriously, the 1970s were a terrible time Britain for quality in wine as well as cars, the stuff people drank was revolting. Even Blue Nun is probably better now. My grandmother wouldn’t have tolerated that in the house, never mind brought it over with her own fair hand.
Wonder what else happened around that time, when Britain was known as the sick man of Europe. Ah well, correlation is not causation, so that’s all right then. Like with the banks. Move along now. Nothing to see here at all. Britain is rich enough to laugh off a 4% hit in GDP as a mere trifle.
In particular, since ISAs are a key tool to enable the under 50’s to speed up their retirement then I wonder what the direction of travel will be in a few years’ time?
In the meantime use it or lose it – both your ISA allowance and should you be so fortunate as to have the need and the capability, your CGT allowance!
I was hoping to have enough GIA investment income to defray the increase in power bill but the Buzzard has shat on this idea somewhat with the upcoming £500 tax-free limit on dividends. Though if you are going to pay tax on income dividend income beats earning it or indeed pension income, as dividends are taxed at 8.75% for the lower orders. I was more generally so wrong with that post in its anticipated effect on me :( ↩
It seems to be regarded infra dig for the current government to find the BBC asking ‘how did the government fuck this [insert specific aspect of British life] up.’, although asking that specific question used to be the point of the fourth Estate. ↩
It’s January. The nights are long, and it is cold, and rainy. It’s about this time of year that they always run the articles abut Blue Monday when it’s the most miserable time of the year, because we are done with the Christmas debauchery and it still doesn’t feel light even though the Sun is rising earlier. They are still wittering about the economically inactive. The BBC have at least identified there’s not much chance of getting you FI/RE lot to do your patriotic duty for the economy.
Almost nobody who has retired early says they want to return to work.
A new year, new start
I am old enough to have determined new years resolutions don’t work. I don’t do gyms anyway, but the best way to avoid that sort of resolution is not to pig out to excess extendedly. It’s OK to eat and drink to excess a couple of times in the Christmas period, but debauchery and gluttony are to be avoided in excess.
One thing I am experimenting with is to reduce screens/online. Interesting that Weenie is taking up jigsawing to go in this direction, is it a zeitgeist thing or great minds…
I have already taken step through the end of last year to reduce news consumption. I still remain informed, it’s the time/attention thief I am trying to reduce, rather than to do the full Walden Pond thing. One way is to to act more like it were 1998 on dial-up. As long ago as work I got a win on this with email by not running it all the time, once in the morning and once in the mid-afternoon. I have forgotten what office-worker’s guru put me onto that but it worked. For a wider win I aim to concentrate interwebs in bursts, like it were before the Millennium. GenZ has taken this battle to the enemy with customary panache, at the cost of never clocking off. I wonder if that Zuckerberg isn’t barking up the wrong tree trying to create the metaverse. It’s already here, just unevenly distributed. Poor old Zuck he’s pushing forty, and his younger self called the problem out
Young people are just smarter
I get to listen to a lot more music. Which is more reflective than using t’internet, although when I stream it is from a NAS rather than the likes of Spotify or Apple. I did consider using Tidal but I still can’t bring myself to do subscriptions. It is possible to buy downloads from Qobuz but it’s usually cheaper to get the CD s/h. I listen to music through the electric, instead of on their phones.
Jezza tells us we will all pay more tax. Fixing the value of the personal allowance in a 10% inflation environment naturally means you get to pay more income tax year by year, if your income is above 12.5k which mine is. However, the hazard and arguably the opportunity for Ermine action lies in a different area. I regard the current dire straits of the UK economy partly Putin, but the particularly worse performance relative to our peers is a Brexit phenomenon, now Covid is no longer covering it. And I didn’t vote for Brexit, so if this screws the economy, well, Brexitards, you voted for it, you own it. I don’t feel a moral obligation to help dig you out of the shit, and if you voted for Brexit and feel skint, well, don’t say people didn’t tell you it’d cost you.
Bailey clearly uncomfortable talking about Brexit but Swati Dhingra pulls no punches.
“It’s undeniable now that we’re seeing a bigger slowdown in trade in the UK than in the rest of the world. That’s showing up despite the statistics being much worse than they used to be.” pic.twitter.com/2eJYv7HToh
According Jacob Rees-Mogg it’ll take 50 years to see the economic benefits of Brexit, and I don’t think that many 20-year-olds voted for it, so hopefully most Brexitards were big on sovereignty, because they’ll be long gone before they see the economic sunlit uplands. I don’t have an issue with people who thought it was a price worth paying for sovereignty – freedom always comes at a cost, and presumably you are rich enough to carry the Brexit malus on GDP, which is part of the fiscal hole Jezza wantes to fill.
Income tax changes
I am probably never going to be a higher rate taxpayer. Well, until Jeremy Corbyn comes into power. While over the 12500 level I am far enough off the 50k income mark to feel safe from higher rate tax for a while. I never earned enough to be endangerered by the additional rate, so if that’s you then while I hear your pain, it’s not my problem. I would suggest you research salary sacrifice if you can, and if you are already over the pension LTA then your are rich enough to afford professional advice, as well as caviar and champagne.
I’m not even that exercised about fiscal drag on the thresholds, because I am old enough to remember that Mrs Thatcher took a much higher tax take out of a much higher proportion, about 2/3 ISTR of the younger Ermine’s pay packets at the start of my working life. The current personal allowance is still quite high, historically. You lot don’t know you were born. OTOH there’s some argument to say that government services worked better back then, you don’t get ‘owt for n’owt.
I struggled to find any useful information on the tax changes as they apply to me, because most of these are in the dividend and CGT arena. Most media don’t talk about that, because the vast majority of their audience presumably don’t have that sort of income/assets. Let’s face it, if you are investing up to 20k a year your shouldn’t have that sort of assets either, as Monevator keeps on telling you. Use your ISA allowances, as you were. I have not picked up any signal about changing the ISA threshold, so aim to fill your boots in the next couple of years, I could see that regime getting tougher with a change in government.
Due to the dearth of information about my oddball bias I am going on this Which summary. I didn’t listen to the budget since while it’s within my circle of concern it’s not within my circle of influence, a walk in the countryside snatched between the showers seemed to be a more constructive use of my time. I saw this bad boy perched on some rugby poles. Indeed I spent so much time watching him I pissed him off so much that he turned his back on me.
before he dive-bombed something in the pitch.
Or I could have spent an hour watching this old buzzard instead
I was taking the line that a walk round a buzzard-filled countryside was doing a teeny bit for keeping my sorry ass out of the way of the NHS, because it seems to be needed for keeping the young’uns noses at the grindstone, and the buzzard on the telly was going to do what he was going to do anyway.
Dividend tax changes and capital gains tax changes.
They’re coming for your rentier earnings, capitalists. The amount of dividend you can earn tax-free drops from £2000 this TYE2023 to £1000 TYE2024 and £500TYE2025. The latter is likely to be irrelevant since I don’t think the Tories will be in power. You won’t have ANY tax-free dividend allowance in two years, at a guess. Note that at this stage you pay a lower rate of tax on dividends over the tax threshold than you do on earned income, 10 8.75% for shares as opposed to 20/32% on earned income. I would not bet on that persisting after two years.
This pretty much wipes out my plan to pay for the increase in power bills through dividends held in my GIA (so outside the ISA). I may pause my Vanguard ISA next year and reactivate my iWeb ISA, I hold the GIA with iWeb (which is terrible from a FCA compensation angle) so I will see what they can do about Bed and ISA transfers, from memory they only charge you one side of buy/sell transactions. I have time to boot these dividend payers into the ISA, or sell them out.
Capital Gains tax
The allowance here falls in future, first to 6k TYE2024 then 3k TYE2025 Curiously that makes the carry over of some CGT losses I have more valuable; while you can’t carry allowances forward you can carry the losses. CGT is generally a fight you can choose the time of battle. Not always, some corporate actions trigger CGT gains or losses. Obviously you don’t aim to make a CGT loss, in the event say that I observe a gain is my holdings of Invesco SGLP gold I will sell them and buy Ishares SGLN (first checking Invesco isn’t owned by Blackrock or the other way round. I would need to qualify the cost of the turn and spread, natch. This would circumvent the 30-day rule – same underlying asset, different ETF share instrument. Like dividend tax, a basic rate taxpeyer pays a lower 10% rate of tax on shares CGT over the threshold. Again, I would not assume that applies after two years.
In the big picture, my GIA will end up full of SGLP and SGLN and I will move income assets into the ISA over the next couple of years. I will move all gold holdings out of my ISA, probably swapping this for more VWRL and index funds. I will probably clear down most of my Vanguard ISA into the Hargreaves Lansdown ISA, to kill off percentage fees (I am at the HL cap on shares, I hold no funds).
So yeah, at the edges I will be one of those paying more tax. But not too much more. Because unlike people who get most of their income by selling their time or skills for money I am on the side of capital, and capital always has more choices than Income. Since I didn’t vote for Brexit, I feel no particular moral obligation to compensate for the 4% loss in GDP. I also think it would be only A Very Good Thing if the OBR’s 10% house price fall forecast comes true. Houses are far too dear in the UK as it is. Rather than pissing around trying to facilitate people to be able to afford to pay more, the best way to make anything more affordable is to reduce the price of it. Flushing out BTL landlords are all the other good folk that try to invest in houses rather than to live in the buggers could also work wonders, though we could do well to remember that many people are just too poor to be able to buy houses.
Note that this is relatively short and ill thought out because its’ only been two hours since the buzzard on the telly has stopped talking. E&OE particularly on that single-sourced piece on the changes in CGT and dividend tax, and the ISA allowance being the same.
I stopped working for The Man ten years ago, at the end of June. I spent my last working day in the Athlete’s Village in the 2012 Olympics. It was a little bit odd to end my career working off-site, but I had a little bit of annual leave to use up. I did return the The Firm at lunchtime at the end of June for a valedictory round of drinks at a local pub and a send-off, and that was it, three decades of working life came to an end. It was a good way to finish off, on a high as the last manager said. I look at the pictures and they are good, though I see the signs of three years of the stress and the effects of drinking too much to dull the pain.
Not many FI/RE people are still writing after a decade, so here are a few takeaways from the ride. It has been against the background of a long bull run that is only just fading, as the firehose of central bank interventions begins to surrender to the irresistible force of the accumulated pathologies stoked with it.
I did not get bored
Honestly, I still can’t understand why bright young fellows like Monevator still link to cruft like this. Seriously, if work is the best thing you can think of to do with your limited time on Earth, then you need to get out more and get some hinterland in your life. Preferably half a lifetime ago, but now is better than never. I am sure that for 1 or 2% of people their profession is their one true passion. They tend to be outliers, often psychopaths like Elon Musk, or Mark Zuckerberg, and that passion tends to be unbalanced. That leaves over 90% of us who can probably do more congenial things with our time than working, if only we could solve the conundrum of dreadful things happening in our lives if the flow of income from our jobs were to stop. You know, like losing your home or your kids starving, that’s the sort of thing that keeps most of us working past the point that the Do What You Love, Love What You do meme has transmogrified into Suck it Up, Our Way or the Highway. Solving that is what financial independence is about, but too many people end up with Stockholm syndrome with work. The Escape Artist summed up the problem. Don’t just load the gun. Pull the trigger.
The world is plenty interesting enough to reward an inquiring mind and an inquisitive snout. Learning new stuff has never been cheaper or easier, though it pays to remain critical as there is also much more misinformation about. In many areas of factual learning, favour books over online, and I personally almost always favour the written word over video1.
I got less hard-line about working than my younger self, who was running away from a crap situation. But the key takeaway is still the same. Don’t rely on income from work after you have become FI. Save it, spend it on champagne and caviar, but never, ever, set up your life so you depend upon it again. Otherwise you are no longer financially independent. This severely limits what the financially independent can safely do with the proceeds of work.
Breaking that rule is fair enough if you opted for thin-FI/RE and came to the conclusion you don’t want to live that way – financial independence is not worth more than anything else, and if you want to live high on the hog, or live in London, or send your kids to private school, then you are probably not going to be financially independent as early as someone who can eschew some of that and drink prosecco rather than Dom Perignon.
I use Citywire occasionally, and they spammed me with this breathless noodling. Now don’t get me wrong. I share some of their opinion that economically we are in a hole, and until the last couple of months I would say the stock market was overvalued, particularly in tech. However, this is all storytelling, and one thing I have learned across ten years is that short-term macro storytelling is hard to use. To be honest, you are better off with a Netflix subscription, not so much because the storytelling is better, but because the scenery and the protagonists are more attractive. How do you like your stories?
Which storytelling would you rather look at? Netflix seems to roll in cheaper at £192 p.a
SELL IN BEFORE MAY AND GO AWAY! The market bounce has entered April. Investors should use this rally to sell before May, as equity markets may be about to re-enter a volatile bear market for the rest of 2022.
Hmm, what rally is this we speak of? Let me consult the Great God Vanguard and their price of VWRL
Well, I suppose it’s a rally of sorts. Equity markets may always ‘enter volatility’. What I would expect to get for £280 a year is at least Equity Markets will enter a volatile bear market after May, and if they are higher in December than they were in May (benchmark SPX or QQQ or whatever) then your money back, hows about that? Or if December is too heady for you because of the Santa bounce, then guarantee it till St Leger Day at least.
Record-high inflation has left central banks cornered, unable to resist hiking rates and taking liquidity out of the market. This makes the economic downturn almost certain.
They’ve spent the last ten years resisting hiking rates when perhaps they should have done. Has somebody suddenly taken the old Frankenstein jump leads to Paul Volcker then? Surely the energy crisis is more of a thing than what the Fed may or may not get up to. At least it’s got form.
Yield curves are one of the leading indicators for investment strategists, along with liquidity data and monetary aggregates.
Subscribe to unlock this issue of Pulse.
Plan will auto renew for £280/ year or £28/month until cancelled
Don’t Panic, Mr Mannering. And as a general rule, anything sold via a subscription should be viewed with suspicion. If it auto-renews, then they are out to get you. More widely, I am buying. Bring it on. Monevator dealt with the yield curve earlier, and you’re late to the party, which is not a good look for £280 a year.
I now expect my mum to tell me about the yield curve inverting when I call her this Sunday. In-between her spring gardening plans.
The other problem with Citywire’s Pulse is that I expect competence in the spelling, at least. I will look the other way at the curious construct of SELL IN BEFORE MAY AND GO AWAY!, which has a sort of TEFL feel to it, but the video shows that you can’t get the staff down at t’wire
I’d normally ascribe this sort of puffery to something written by AI, but the brutalised English supports a human origin. Anyway, I intend to ignore this breathless ballyhoo and buy over time. After all, if sell in May and go away, come back on St Leger Day is true then isn’t that when you want to be a net buyer in the summer? Also if you have religion about annual timing, then wouldn’t you want to avoid holding ‘owt in October too?
Last year I had a bash at getting a second ISA platform to join iWeb. There’s nothing wrong with iWeb, indeed if I could find a broker with iWeb’s service that was unconnected with Halifax/Lloyds I would just do that.
Investors with larger portfolios — Look first at the flat-fee platform table if you’ve accumulated over £25,000 (ISA)
Yeah, I was already over that with Charles Stanley before I moved it, and I am now way over. This is not good because – fees.
Iweb are good enough to provide the FSCS regulatory info. I am already well over the FSCS limit, and would suffer a serious haircut if push came to shove. The aim of splitting is to get 1+1 protection, This means I have to avoid
Interactive Investor – just say no, once more, with feeling
I’m not that keen on Interactive Investor, because I have had bad experience with them not just once but twice, though I could jump over it. There’s a lot not to like about iii – the odious scumbag Tomas Carruthers who pissed me off last time is still in there having bought it out, and its owned by private equity associated with JC Flowers, according to Wikipedia. No, I’ve drunk from that well before, and private equity is never any good for anybody other than private equity, with it’s inherent lack of transparency and generally scummy behaviour. If you look at all the M&A activity they are to share brokerages what Endurance international Group are to web hosting and Interbrew are to craft beer. On a more positive note, Aberdeen Asset Management seem to be in the process of buying them out. That might remove some of the reservations.
Strange and fractious times on the markets. Not enough of a hammering to be a crash, but perhaps some of the froth is coming off the top. As it happens I have a significant amount of capital I want to invest. Looking at the sturm und drang on UK share forums, looks like there were many folk balls-deep in Tech, but out in the real world it seems a bit of a meh so far. Of which more later.
What’s a fellow to do, eh? Time to take advantage of a bright winter day to look at some ancient stones near Avebury. As soon as we came past the main stone circle we saw that World + Dog was out. It probably wasn’t the wisest thing to go on a Sunday, after all part of the point of being a retiree is that you avoid the times when others are using the great outdoors. You need other people to make a music concert work, or presumably a football match, and arguably being in a restaurant on your own is a little bit lonesome, but the outdoors is generally best enjoyed with you and yours. The Ermine household switched to the wider landscape and visited Devil’s Den, a dolmen I haven’t seen up to now. We had it largely to ourselves, and very fine it was, too.
We parked at Gravel Hill car park and walked down to it. It was a bright day, and you could see the dolmen from above, there is a permissive footpath to the site. You are aware of old money and the Norman pattern of land ownership in the UK as you pass the horseyculture gallops, but looking at the map the National Trust is making inroads into the estate 😉 In theory National cycle path 403 and 45 would take me from Marlborough where there is a campsite to Avebury, but I only have a road bike, and it’s not clear to me whether the NCN cycle tracks need something more hardy.
Try imagining a place where it’s always safe and warm
“Come in,” she said, “I’ll give you shelter from the storm”
I bought Safe Haven by hedgie Mark Spitznagel from a recommendation in one of Monevator’s comments. I’d agree with the comment that the book doesn’t leave you with anything actionable, but perhaps as Dion Fortune said of the Cosmic Doctrine, the object is to train the mind, not inform it. This Spitznagel achieves IMO. It isn’t a long book, I read it in a couple of hours in one sitting, albeit punctuated by watching a movie with Mrs Ermine.
Reading has its systole and diastole, which is why cramming is tough, which is why doing something else midway lets you digest it better – Darwin was a fan of walking for this purpose. I only find that useful for when I originate something creative, but the movie improved the digestion of the book’s 240 pages, presumably by letting something in the background reflect.
Spiznagel is pretty full-on, a reasonable storyteller, and uses metaphor and analogy well. The main takeaway is that many of us evaluate investment prospects by expected value. Despite the standard FSCS warning that past performance is not a guarantee of future results, that’s sort of what happens. The author disses macro investing, and goes on to make the assertion that managing (tail) risk can be cost-effective. In particular, that it can improve your compound annual growth rate (CAGR) without costing you performance
cost‐effective risk mitigation—or raising compound growth rates and thus wealth through lower risk—is really our comprehensive goal as investors.
Spitznagel, spends the rest of his book showing you how you can recognise an asset class that could do that.
Tragically for you and I, dear reader, that asset class isn’t something that you or I could go out and buy, or synthesise from something we can. It might be possibly in the hedgie world. I am somewhat glad that intuitively I found one of the few assets that sort of comes close-ish. The book also has value in showing that you can compute the optimal amount of that asset class.
Yes, there really is a buried treasure for investors, one that solves our monumental problem by showing that the great dilemma of risk—the ostensible tradeoff between higher returns and lower risk—is actually a false choice. […] We need a more holistic approach; we also need a treasure map to know where to dig.
But just because that buried treasure exists doesn’t mean we will ever find it. The greatest value—more than in the treasure itself—will be in what we gain from the hunt.
I was tempted to issue a refund request, having gotten to the end and being told that the ideal was a chimera, for civilians at least, and since less than 24 hours had elapsed between buying it I would have got away with it. Amazon track how much of a Kindle book you have read, though I don’t have a habit to returning Kindle books so I’d probably be OK.
But after sleeping on it I came to the conclusion that I did learn something, but in a Dion Fortune like way. My mind was trained, not informed. Most non-fiction reading is to inform the mind. So I got my £15 worth, but it wasn’t the £15-worth I expected.
Spitznagel insights – training the mind, not informing it
Take the Saint Petersburg dice game, a single roll of the dice offers
Wotcha going to pay to play this game? The expected value is ($1+$2+$6+$22+$200+$100000)/6=166,705
but I am guessing most people wouldn’t pay that much, intuitively. It seems obvious that with five chances of being largely wiped out you wouldn’t pay the expected value. Bernoulli’s computation shows if you compute the geometric mean of what you end up with, you can estimate what a reasonable proportion of your total wealth you would pay for this wager. If you had £100,000 then paying about £37k or less to take part gives you a better than even chance of ending up better off. It quantifies the fact that you can take more risk if you have more capital that you don’t immediately need.
Reading the methodology gives an analytical solution to the gut feel approach, and is intriguing. However, the training not informing shows, because most risks you take give a return proportional to amount you put in. However, Spitz has only got started at this point, and he uses a sequence of returns that includes a catastrophic loss (to 0%) to show that where you have a sequence of returns that build on each other then risk mitigation can be worth while,
The arithmetic cost of its risk mitigation is more than offset by its geometric effect—such that its net portfolio effect is positive.
Most of us invest in a single lifetime of a specific sequence of returns. I still remember hearing my German great-grandmother describing sequence of returns risk – they lost their (financial) life savings twice. Fortunately most Anglosphere stock drawdowns aren’t that extreme, but Spitznagels view on central bank meddling suggests that this is not an immutable law of nature, particularly in a declining Imperium.
The Spitznagel edge
Spitznagel despises modern portfolio theory, which is the rough assumption that you buy a mix of less volatile but lower-returning assets like bonds and more volatile but higher returning assets like equities. Inherently in that mix is the takeaway that you will give up some return, and Spitz has no time for such milquetoast ambition.
However, to this mustelid reader he spends a lot of his book in search of something that you could replace bonds with, bonds being the most common MPT risk mitigator of choice1.
As one example, say at the beginning of the ISA year I could save that £20k in an ISA, less an amount that I could go to an insurance firm and say here is £x. If this time next year the market falls more than y%, pay me some lump sum proportional to x (but note NOT proportional to the fall, this is a cliff-edge function and therefore non-linear).
He spends a fair amount of time showing how you would compute the right amount to spend on this insurance, and in his examples it’s not very much. I haven’t given enough thought to whether you can do this with options and CFDs, but I don’t know of anywhere you can go to buy this sort of thing.
You can spreadbet against losses, but in general it is always cheaper to simply buy less of the asset and sit on cash. I have spreadbetted against my ISA in times of market turmoil, but that’s not the same as doing this steady state, which is an exercise in futility.
However, to return to the training the mind aspects, one of his key statements is
We experience profits and losses and all accounting ledgers arithmetically; we experience life arithmetically—one thing after another. This is linear thinking versus geometric thinking. It’s a big difference and essential to our understanding of risk and the disastrous impact of losses on wealth. But it is highly counterintuitive. Here you face an inconvenient, uncomfortable but crucial truth:
Your raw, linear returns are a lie; your true returns are crooked.
Bernoulli’s call to map returns through the logarithmic function was thus a normative one, not a positive one. In basing decisions on the geometric average of expected wealth or returns, not on the arithmetic average, Bernoulli was showing us how we should view risk—not how we necessarily do view risk. And this is precisely where economists got it so wrong.
I find this reasonably compelling. It’s not totally new to me but this exposition is good. I have no idea of if economists got this wrong, but we generally experience a particular sequence of risk. In both the housing market and in the dotcom bust I experienced that the crawl back from a double-digit loss is long and slow, and best made up by Saving More than trying to make it back in that market. If you lose 50% you have to make a 100% profit on what you have left to get back to where you were before.
Some of this you can lean against by not being 100% invested in equities – you reduce your arithmetic return natch, as you are less exposed to the equity market. But you improve your geometric return, because you live to fight another day. Spitz gives you the lowdown in the bit on the Kelly ratio, but again, what makes that less actionable for most is that having seen the value of your equity holdings go titsup in the markets you need to get right back on the horse and throw some of your cash into that now undervalued market. Easy to say, not so easy to do. That’s why people have bonds, and I have gold. I don’t do bonds, because I estimate 25 times my net DB pension as a bondholding, and unless I get a fair bit older I can’t manage the right mix.
Theory would therefore point me in the direction of 100% equities. But I have had a pretty decent run, I don’t need to shoot for the lights, and sometimes comfort is more valuable than performance. So while Spitznagel wouldn’t approve, I take a lower expected return, because I can.
The big killer is there is no safe haven for little people
Spitznagel has turned the handle on all the things people typically regard as safe havens and qualified them against his specific criteria of cost-effective safe havens (ie they get your CAGR above the 95% confidence interval of the S&P over a representative set of trial periods)
And the results are in. Little people, you are hosed. As it happens an Ermine does use gold (and there is a useful piece of the Spitz in how you qualify how much gold you should hold, about 20% is right for me) But before you all rush out to buy SGLP, most of the trial periods where gold lifted itself into Spitznagel success territory happened to be in the 1970s, after Nixon repudiated the convertibility of the dollar into gold at a fixed rate. So gold may not be all that after all.
“Gold is pretty darn good. You just have to understand there’s been a lot of noise around it.” – underlining gold’s value as a safe haven, while noting that it performs best when inflation expectations are high, and historically it’s been inconsistent in mitigating portfolio risk.
Obviously if you can buy insurance on Spitznagel’s terms then you are off to the races. But those terms are tough –
Any punter can devise a trade that does well in a crash. The key is how do you do in a crash relative to the rest of time.
“It would be very hard for bonds going forward to provide cost effectiveness. Bonds really represent the canonical case of the mean-variance approach of lowering the volatility in a portfolio, but being poorer because of it.”
No book is ever gonna tell you what to do successfully as an investor.
Well, this one sure ain’t. There’s a lot of good stuff in there, and I am sure I have brutalised the principles from a mixture of a lack of comprehension, not being as smart as Spitzy-boy and the exigencies of making it into a post. Nevertheless, it will probably reward re-reading, though I am almost 100% sure that it won’t give me anything actionable. Training the mind, not informing it…
TIPS is the archetypal risk-free asset class – risk-free, that is, if you believe the CPI inflation index used by the Fed, which is a different matter. ↩