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?

image

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.


  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 

Safe haven by Mark Spitznagel

Try imagining a place where it’s always safe and warm
“Come in,” she said, “I’ll give you shelter from the storm”

2111_safehaven

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

00007

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)

00068

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.

Yeah, quite. From his Yahoo Finance interview via Business Insider interview

“The Federal Reserve is manipulating the most important information parameter in the economy, and that’s the interest rates.”

“I have this expectation of destruction in the financial markets. That doesn’t necessarily mean that someone should just hide away, because that may not be the best strategy either.”

Where’s Clint when you need him, eh? Do you feel lucky, punk?

Spitznagel’s Universa Investments hedge fund returned 4,144% in the first quarter of 2020

An Ermine felt pleased to get out of the first quarter of 2020 with the black tip to my tail intact after selling some crap and shorting some of my ISA. DNFS – bollocks to that. Going for a 40-bagger, now  that’s ambition.

More Spitznagel

Spitznagel’s company Universa

Spitznagel on the FT (Oct 20 this year)

“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.”

Finally

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…


  1. 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. 

Welcome to the Weird

It’s the dog days of summer, the lazy time but late enough that you can smell the change in the seasons, the rich scents of decaying plant matter signalling impending Autumn. The robin seems to have moulted and is now a bright orangey-red and singing again.

There’s a fractious feeling about. The Ermine thinks back to my mid-teens. We didn’t have a TV in 1975, but you could see the iconic photograph of the last Huey out of Saigon in all the papers. Harold Wilson, bless his cotton socks, had kept Britain out of that misbegotten enterprise.

Saigon 1975 and Kabul 2021
Saigon 1975 and Kabul 2021

I’m kind of with Al Jazeera in this particular instance – Blinken may say that this is not Saigon, but if it walks like a duck and quacks like a duck… Looks like Pilger had a point that the wide boys who promoted the Project for a New American Century got something wrong. Rummy didn’t do badly on the limits of epistemology

there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.

but knowing something is the case and acting coherently on that knowledge are different things. “You have the clocks, but we have the time…”

Apparently it was all about whupping OBL’s ass, not all the other stirring sound and fury. It’s a shit situation and there are no good answers, other that perhaps the inference that winning hearts and minds through military means in far-flung places with very different approaches to living is a really tough ask, and probably beyond the capabilities of the Imperium at this stage of its decline.

The Big Short

Markets are weird, too. Valuations are up in ths sky. There’s much froth and excitement about fintech and apps bringing the little guys in to the markets. When was the last time we saw that show – ah yes, the heady dotcom days. Michael Burry, he of the Big Short’s observation

Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360.

seems apposite.

I took a look at the FCA’s Strengthening our financial promotion rules consultation H/T Monevator and thought to myself I am the drunk offering directions here:

“If you want to get there, you don’t want to start from here, mate”

I cast a cynical eye at the attempts by the FCA to save our blessed citizens from the blandishments of bitcoins and the cons of cryptocurrencies and think to myself this is like Centralia, guys. The fire’s burning deep underground and it’s been going for some time. Let’s deconstruct the vexed problem of fixing people who think a 30% annual ROI is only just about remarkable. Continue reading “Welcome to the Weird”

a walk on the wild side

Disclaimer: I won this round. I’m still not sure of the balance between skill and luck, I favour luck. I’m not sure I could do it again, so don’t extrapolate…

Monevator has a lovely little summary of advice for people who opened a share account during lockdown. The recommendation is go invest passively, but that’s dull as ditchwater. Everyone sees themselves as the Wolf of Wall Street

You opened your new trading account for excitement, not something that’s just as dull to do as it sounds – even if it is more profitable.

The markets had a near-death experience earlier this year. Passive investors had an easy life.  Do Not Sell

We only have to do one thing.

Do not sell.
DO NOT SELL.
DO NOT FUCKING SELL.

That was posted three days after I did sell a lot of stuff. March 10th. There was a fellow called Peter Comley who wrote a book about sheeple like me that buy high and sell lower.

If you’re going to sell into a market suckout, do it, do it decisively in the shortest time possible, and if at all possible do it early. Well, I got two out of the three right. A bit before then I also started to short a lot of what I had1 . In a couple of cases I shorted more of the stock than I had in the ISA.

I had been chasing income into the ageing bull market, so I ended up with more FTSE100 and investment trusts than I should really have had. And then I sold into a low, though nowhere near the true low-water mark. I did not sell VWRL, gold, or my HYP from way back when. I didn’t sell any of my index holdings in Charles Stanley, and indeed pumped LGITI up. Among what I saw as crap I sold BWRM which was a  mistake in hindsight. You don’t have to hit zero bum notes, just more high ones than bum ones.

I bought a shedload of gold to add to my existing stash bought before the Brexit vote in 2016, and a few shares, and some VWRL. I was selective about what I sold – mainly UK based stuff and also income investment trusts, though only the excess I had bought in 2019, I have a core holding of ITs that I have had for years. At least TI seems to approve of the selectivity, just about.

9. Invest for the long-term: run your winners, and cut losers

though he doesn’t actually say short the losers

So I am one of those suckers that passive aficionados take the piss out of, I got slaughtered in the bear market, when stocks return to their rightful owners, yes?

Not so fast, passivistas

You’ve had a good war. You did not sell, and you are now sitting on a tidy profit. All around you the smoke is rising from people’s business hopes and dreams, but you stayed passive, and you did not F*ing sell, you kept the faith, and you are up on the year? I don’t want to take that away, well done you.

VWRL. Passive folks are within spitting distance of where you were this January. Sure, it’s been a hairy six months, by as long as you did not F*cking sell you’re sitting dandy

I did F*king sell.  Investing FAIL. Had I done n’owt I would probably be back where I was in Jan at a guess. Oddly enough when I look at my ISA now compared to January it’s not epic fail, but still FAIL. Advantage passive.

Oranges are not the only fruit

Not so flipping fast. I was way too heavy in shares, which arguably is not where I should have been. As Monevator reflected in his comment that I pinched the title of at some point during this bear market I realized that I probably shouldn’t keep doing this I was over-exposed2 to equities at a market high, and I didn’t want to really be so highly exposed. I’ve been grousing about valuations for long enough on here.

Continue reading “a walk on the wild side”

I’ve got a sneaking admiration for Donald Trump

Go big or go home…and The Donald’s going big in opening up America, standing down the coronavirus taskforce in the next few weeks. It’s probably fair to say there’s not an awful lot of love lost ‘twixt the Gray Lady and The Donald. New York is full of, well, t’other side, and it’s just not Donald’s tribe, though it has been his old stamping ground for ages.

Trump administration officials are telling members and staff of the coronavirus task force that the White House plans to wind down the operation in coming weeks

NYT

It’s not unknown for a POTUS to claim a premature victory. We’ve seen this movie before

How did that work out for ya, Dubya?

but there’s a big difference. I felt that Dubya was a bit out of his depth. He probably believed his own hype. It’s all that inbreeding in the presidential families of America. Trump is an outsider. Sure, his dad was steenking rich, we’re not talking the poor kid from the wrong side of the tracks making it to POTUS version of the American Dream.

I’m of the view that Trump is one of a kind – a masterful dog-whistler. Not everybody is responsive to his particular schtick, and it brings an awful lot of people out in hives. But those to whom he does speak, he speaks directly, and they feel he speaks for them. And sure as hell nobody else has been speaking for them since the American Dream started to go down the toilet pretty much since Reagan took office.

The Mule’s childhood was one of alienation and torment. This motivated him to use his powers to get revenge on the Galaxy

He reminds me of the Mule in Asimov’s Foundation Trilogy, someone who almost directly controls people’s minds by making what he says resonate with their lived experience. After years where nobody sounds like they are listening to you that is magnetic – because all humans want to belong and for their pain to be witnessed. The Ermine has recently fired up the TV and paid the goons of TV licensing. I heard Trump on the TV news, and unlike hearing it through my PC on the Web, I heard him on my hi-fi.

The Donald needs to be re-elected

And while he doesn’t speak to me and I know he’s a lying sack of shit, I could hear the magnetism in the way he used his voice and understand the appeal. But the Donald comes with problems. Presumably he had attachment issues as a child, anyway he has a deep seated need to think that he is favoured, and it is really, really important to him to win the election.

Over in London they think coronavirus probably has a low mortality rate and the economy is suffering. Citing various posts from the intellectual right-wing website Unherd, some make a cogent case that Covid-19 isn’t such a big deal for most people. To their credit, Unherd supported their assertion with interviews with experts of similar views  – Hendrik Streek, and Johan Giesecke, and these make a lot of sense. it’s only when you look at Unherd’s content more widely that the focus of their particular lens shows clearly.

Their lens may be more accurate in some areas. I find a lot of resonance in Unherd’s interpretation that a lot of the problems in recent decades stem from a general anomie where by measuring everything in money we may have stripped our world of meaning and knowing what we stand for. I am not clever enough, nor privy to the information that shows whether the truth about coronavirus is closer to the Johan Giesecke end of the spectrum or Neil Ferguson’s. I am less convinced by Giesecke’s, not because I have a way of evaluating it, but from the people that are pushing it, who seem driven by the economics. But the low mortality rate we are all overreacting because what does it matter if this is infectious as hell if it doesn’t kill that many people is popular in London, and it is internally consistent. These are clever people making the case. Human societies do not put life first above all else everywhere – cars, pollution and many other things are examples of drawing a balance where some deaths are part of the price of achieving a greater good.

Mandy Rice-Davies might proffer that Londoners would say that. Londoners are young so at lower risk, on average. It’s unlikely to be a lot of fun being holed up in London micro-flats in a mini-heatwave.  Some are currently not doing a job that brings in squillions. Feeling more squillions disappearing down the plughole due to the shuttered economy must be stressful.

It’s less bad for a retiree in the sticks, where in a bike ride of several miles I encountered four cars once I got out of the town. I saw this

the white handkerchief is a Little Egret

avoided a serious gang fight

Why this field hasn’t degenerated into a swan war of all against all beats me

and wondered how this knot was done

Knotted Willow

While there’s some rumbling going on among the more swivel-eyed Tory contingent about opening up the economy – step forward Iain Duncan-Smith channeling FDR in the Torygraph

After six weeks of lockdown, we mustn’t lose sight of how vital a functioning economy is to our health and wellbeing. Perhaps we should remember President Roosevelt’s wise words in a time of crisis: “The only thing we have to fear is fear itself.”

Iain “I’m all right Jack” Duncan-Smith, who is of the blessed opinion that poor people have a previous monthly salary paid in arrears that they can draw on before they get Universal Credit, writing in the Torygraph 5 May 2020

the trouble is that they are all chickenhawks. What the world needs to straighten out the difference between these courses of action is someone sure of their convictions and with balls of steel and pure conviction. Enter our man of the moment, Donald Trump.

Here’s a guy who knows what he wants, and knows how he’s going to get it. There are two competing ends of the theory spectrum about coronavirus, and sadly we have insufficient data to make a clear call which is right.

One, the London/Unherd view is that it’s not a biggie, most of us have already had it, closing the economy kills people too y’know. The other is that this is so infectious it will let rip as soon as its given a chance, mortality is not low enough that it won’t kill many. The UK already seems to have the highest European death toll, which points me in the latter direction, but whatever.

What we need is strong leadership, somebody who goes with his gut to cleave the Gordian knot in the face of uncertainty. Now strong leadership tends to have rather undesirable consequences of people marching in shiny jackboots and smashing windows in the night, so what we need is strong leadership somewhere else. And in the US of A they’ve got it. They voted for it once, and they’re gonna vote for it again.

Donald’s really keen on getting re-elected. He’s already flung so much Federal Reserve money at the stock market that it no longer reflects reality, even Warren Buffett can’t see where he’s going, the screen is covered with so much money.

But that’s not enough. Donald needs boots on the ground. He’s not going to let a little thing like a global pandemic get in his his way of being re-elected. Not only is he going to ReOpen America, he’s going to damn well Make America Great Again. And for that he needs Americans back at work. lickety-split.  No, not that interpretation of the phrase, though I guess this is Trump…

Now obviously there’s a chance that people might die if the low mortality  view is less congruent with reality than the higher mortality view. But that’s not important to Donald. Strong leaders decide, others take the consequences. Trump 2020 is what matters, so the great engine of American exceptionalism needs to get fired up. As Warren Buffett said,

never bet against America.

Warren’s ADF indicator may be titsup because of the Fed’s wall of money, but Donald Trump knows exactly where he’s going, what he wants and how he’s going to get it. And he’s going to put the pedal to the metal. Real Men accept collateral damage.

Warren scratches head. Which way is up on this damn thing? Trump leans over, smashes glass, sets the needle. That way is up, buddy.

Cheese-eating surrender monkeys and the rest of the world can stick it, lily-livered quislings that they are. But they can hitch a ride on the Trump.

VUSA is your friend. Or pretty much any S&P500 fund or ETF. Never bet against America, because Donald will MAGA. I’m tempted. I am light America. I loathe everything Trump stands for. But perhaps our Londoners are right, and coronavirus isn’t all that. A punt may at least make me feel better when Donald wins again in November. Like Asimov’s Mule, he doesn’t need to make everybody like him – all he needs to do is keep the people who do like him doing his bidding.

This is your captain Warren speaking – it’s going be a long night. Three out of four engines are on fire, the fourth is running rough

I sparked up Warren Buffett’s Berkshire Hathaway livestream, well, the recorded version anyhow. H/T Monevator. Some Ermine tips – start about an hour in, and I had to click n the unmute audio to get to hear anything. It was a funny old feeling. Warren’s sitting more or less on his tod in a massive convention hall with hardly anybody out there. It’s all very 1950’s, there’s no top end in the audio and you can hear the 60-cycle hum and noise in the amplifiers. BRK clearly doesn’t spend money on young media-savvy hipsters to tart up the presentation slides either. This is part of his homey schtick of course, but you’re sitting there watching one of the richest people in the world.

He cut a lonely figure on the podium. And while I wouldn’t go quite as far as to say he sounded scared, the headline sums up what I heard. Sure, you can count on the tailwind of American exceptionalism, but you gotta live that long to get into the upswing. And at 89, in some ways it’s in doubt that he will.

He spent a lot of time describing how if you’d been unlucky enough to buy into the DJIA before the Depression, you would have to be ready to fall back and fall back and fall back to hope that the engines of American exceptionalism would fire again into the low-water mark, and it would be 1951 before you break even. He’s not saying this will happen again, many things are genuinely different now. The intercession is likely to be much shorter, and of course he was quick to state he does not know what the markets will do tomorrow or next year.

But he didn’t give the impression he sees a V shaped recovery. He didn’t even see BRK shares as a good buy now. And he’s dumped airline stocks. I wonder what else?

In some ways I was cheered by Warren Buffett. I dumped a lot of rubbish in the first half of March. In a single hit on mainly one day. I had gotten decadent with the long bull market, and had a significant holding of the FTSE100 in VUKE. ZXSpectrum summarised it well on this Monevator thread

The high street was obsolete anyway, airlines should go bust, the petroleum industry needs massive downsizing. The FTSE is not coming back because it full of crap companies with obsolete business models. The S&P and Nasdaq are not.

I’m also more relaxed about higher unemployment. The UK made a sort of Faustian bargain: low unemployment for high underemployment and low skill base.

[…]

Machine learning and AI is going to make many middle class people unemployed. We might start getting used to it now and stop stigmatizing those who don’t have jobs. A generation or two from now being unemployed might well be the norm.

I was heavily in the FTSE100, and I was buying rubbish because the yield was decent. My main ISA1 is 13% down on what it was in January, so I showed a clean pair of heels in time. I got rid of a lot of other rubbish, because in a decadent bull run shit looks attractive and safe. It wasn’t.

And WB reminded me of that. I had lost my way, and was buying trash. Quality is worth having now. If you are going to buy, buy quality. WB doesn’t forget that, but I did.

Warren’s patriotic American exceptionalism shtick got on my tits. America is captained by a uniquely talented buffoon of the first order, who is a danger to the world and his own subjects. Trump reminds me of The Mule in Isaac Asimov’s Foundation trilogy. Just as Asimov’s psychohistorians foresaw the arc of history but failed to model a mutant intellect, the founding fathers of the United States got an awful lot right. They put checks and balances to try and control the temptations that absolute power brings. But they had no model for Trump’ particular talents resonating against a particular slice of history. There is at least cheer to be had in that like the Mule his particular combinations talents seem sui generis; we will get at least another four years of him, but the magnetic combination will probably die with him. So no, Warren, Americans do a lot right, but not so much as you’re cheering. However, in economics ZX48’s observation support WB’s thesis – compared to the US indices ours are full of crap businesses, and the US appears the only place in town for quality.

But Warren Buffett is a much better investor than me and his point is right. I need to favour quality – companies supplying what people actually want and need. I did well getting rid of the rubbish before it had fallen too far. I am intrigued the WB finds nothing at attractive valuations, because he credits the Federal Reserve with forestalling another credit crunch for companies. He thoroughly approves of the action, compared to the results of inaction, but it has corrupted the signals given by the market because of its indiscriminate behaviour. Noise floods the input, but he prefers that to the deathly silence of no noise and no signal.

And yet if Warren Buffett is saying that the compass spins and knows no North, then perhaps I have not missed the opportunity. My guess is the signals will start to return at the start of November, as we start to enter what is likely to be a long winter low in reserve capacity.

And while it’s all different now are the most dangerous four words in investing. I need to start to challenge some assumptions I have held from 2008. One is I have always been weak on the US – it looked overvalued and as I started to buy a lot of my holdings in the 2008-2014 period. Most of my US holdings are in the half of VWRL, and yes, I was wrong earlier. Don’t bet against America 😉 My market timing scored over sector selection.

In the early stages just after the GFC when I have bought individual shares, I thought more like WB. I still have nearly all those shares, mostly in my HYP. But as an index investor you can’t think like that, because you’re not buying individual shares. And I started chasing meta-parameters like yield, and following stories. The best story is Lars Kroijer, but sadly I picked up that signal late, it was only written in 2015. I still have all my VWRL.

I have been fortunate in being able to shoot the other index crap early enough, but I need to get back to basics. Good quality at the right price – and also perhaps take another line from WB. It is better to buy a great company at an okay price than an OK company at a great price. In index investing that means no FTSE100, not VHYL (which I have never owned) and perhaps I need to suck it up and consider the S&P500, and maybe the CNDX on the NASDAQ100, preferably after Trump has either won or lost and the new administration suckout goes on top of the pandemic recession. In the meantime I will continue to buy little bits of smallcaps which will become more and more bombed out. I am where I want to be with about 2/3 equity exposure now, because I have serious firepower. Buffett gave me the hope that I will have somewhere to aim that in the year(s) to come…

No, Buffett’s message wasn’t quite Bill Ackman’s self-serving Hell is Coming interview, I am glad I sold before he opened his bloody great big gob 😉 But it sure as hell rhymed.

Capt’n Buffett will make it across the water on the one defective engine, but it’s going to be a very long and rough ride to get from here to there. And he seems to believe that there is an outside chance that Dubya’s angle from 10 years ago is a very real possibility, leastways in the time he has left.


  1. My secondary one with Charles Stanley doesn’t revalue in Jan. It isn’t underwater on purchase, but is mainly a DevWrldExUK index fund LGITI, so similarish to VWRL and also about 13% off Jan from its chart 

Musings on misadventure and market madness

I was listening to a young fellow on the radio who delivered himself of the observation that in lockdown the days are long but the weeks are short, and thought to myself there is wisdom in this 24 year old fellow.

It reminded me of Gretchen Rubin’s similar observation, that I watched on my office PC in my last month at work. If only I had seen that in the low-water mark early in 2011, half-way through my dispiriting passage out of the workplace. The half-way point in any long term goal is always tough, for you have committed enough resources to preclude other courses of action. And yet the final destination is not yet in sight. Rubin’s narration is cheesy as hell, as pretty much anything that involves parents talking about children is. But it is fluent. Part of our problem now is that we don’t know how long it will go on for. These days are long, and make for rumination. Such as

Did I err in jumping out of the market?

I jumped out of a lot of stuff in the second week of March. To put it into perspective I still have two-thirds of my holdings in my Iweb ISA. All my VWRL, all my HYP from way back. But I did make tactical errors in continuing to buy a little bit in 2019 despite the high valuations, although a lot of what I did buy was bonds and gold. But I bought some more VUKE in 2019. Bad move.

I sold all my VUKE, and other stuff I didn’t love. I have a Google spreadsheet of those sales, and it updates the current market values with the Googlefinance option. Those sales are still well worth having made, but the notional reduced losses have fallen by two thirds, because I did not account for the wall of money that was created and thrown into the system. This is not a crisis of confidence. It is an exogenous shock to the system. So far that has been rugby-tackled to the ground, in the view of the stock market, by a wall of money. Jolly good for the market, and us as asset holders. It’s a little bit shit for everyone else, though, no?

The hazard has changed from losses to inflation IMO

I am badly exposed to inflation in the long term, because half my income is an annuity, albeit with some inflation protection, but only up to 5% p.a. Any time inflation goes above that, I get permanently poorer for the rest of my life in terms of income.

Now to get this into perspective, there’s only a need for the tiniest of violins. There is some awesomely bad shit going down. Deaths are up, running about twice average for the time of year. As for the living, many people have lost 100% of their income, and there are some poor bastards who are sleeping on the mean streets of London because they used to work in restaurants and live in lodgings. Now they have no job, no money and no home. Half of the world’s workers’ jobs are under threat. The UK seems to be making a particular bugger’s muddle of handling coronavirus.

The John Hopkins tracker currently shows the UK has roughly 10% of the world’s Covid-19 deaths, which is a little bit crap for a country with 0.87% of the world’s population. Let’s hope that the good folk in London who are of the opinion that most people in the city have been exposed but were asymptomatic are right, because if this is what success looks like I hate to think what the face of failure is. At the moment if you’re a confirmed case1 you have the same chance of pushing up daisies as playing Russian roulette. Let’s look on the bright side. You’re likely to join Graham Greene on the side of the living. But the odds aren’t terriffic. Enter a hospital in the UK and they put two bullets in the chamber before spinning it. You really don’t want to see Arnie  in your hallucinatory dreams in the ICU, do you? Continue reading “Musings on misadventure and market madness”

buying into madness

I despise the stock market at the moment, because it seems to be insane. There is nothing good about the economic situation or outlook, presumably the ludicrous rises of late are due to the wall of money flung into the system by central banks. I’m much closer to this fellow’s view. This shit is going to come in waves.

However, in bear markets you need to buy into insanity, so I ask myself, what is a solidly bombed out sector that has no prospects, and UK midcaps looks like it. So Tuesday I asked myself how my automated purchase of L&G mid cap index fund was going.

Hmm, not very well by the looks of it

Computer sez NO. Indeed Charles Stanley seems to be having a hard time in the IT department, because although it’s working now, the response to the login button is glacial, I have to suppress the temptation of the Ermine paw to jab-jab-jabber on the JFDI login button which has a response time of about two seconds before ‘owt happens. It gets confuzzled if you rap on that control, as presumably some tiresome load of AJAX crap rattles around in the background and does its thing. First rule of UI design is at least make the bloody icon change colour locally right away. Oh well. Been slow and crabby like that for the last few weeks, I am glad I didn’t leave it to just before the TY end to whack the lump sum back in there.

Anyway, I got in there and saw the queued automated purchase of that L&G mid cap fund as well as my regular L&G index ex-UK fund which has up to now been my entire CS holding. I stopped investing into the CS ISA a few years ago, but keep it because Charles Stanley is a flexible ISA provider, which means I can draw down from the ISA and put it back without losing the ISA allowance. Monevator’s broker comparison table doesn’t even show Charles Stanley because it’s good for nothing with its 0.35% annual percentage fee. But that flexibility is valuable to me, and indeed the money I put in there is last year’s allowance. I detested stock market valuations in 2019 and stuck the borrowings in Premium Bonds, which reduces CS’s 0.35% fee (because the assets under management are lower) and is safe-ish. As long as you return the wedge over the tax year end/start you can borrow it back soon after the start of the TY which is neat.

My CS holdings are about a fifth of my total holdings. Looking at the account, the best I can say is that it hasn’t gone down relative to purchase cost. That’s index investing for ya, gone nowhere over several years… You have to buy into bear markets, or spend decades to consolidate the slow chunter up at a real return of ~4% p.a..

FTSE250 is roadkill-in-waiting

It’s all the wrong stuff. Loads of these firms are going to go to the wall. Young’uns with enterprise and vigour can look at these and stockpick in there, but I CBA with that. The index clears out the dead wood every quarter. I can’t find any value in the markets at the moment, it’s all way up in the sky and I am just waiting for the second wave of growl to overtake us. There is a genuine problem out there, this isn’t just a crisis of confidence, and there’s absolutely no excuse for the recent rallies, the bear market needs to double down IMO.

A quick look at the key data for this midcap fund shows roadkill-in-waiting

What have we got here then? Bellway PLC FFS. Yeah, right. We really are going to be building lots of houses when people aren’t meant to go within six feet of each other and half the country has lost their jobs, which is going to make servicing a mortgage so much easier, natch. I guess GVC holdings might do better in lockdown, although sports betting is going to be tough without sports. Their CSR report gave me a titter. This is a firm that’s trying to part fools from their money. It really shouldn’t be allowed, in the same way as the National Lottery is a tax on poor people for middle class projects, although I am sure they have a great CSR report too. GVC’s greatest CSR achievement would be to switch it all off and do something else, watching the bright red arrowed tail disappear through  the door. It’s a dirty job and all that. Next up is Pennon. At least they do something useful that people will still need in lockdown.

It’s not looking good. So I doubled down and switched all but £50 of the planned index ex-UK fund purchase into that mid-cap.

the lesson from the last bear market was buy what you feel has no hope

Small companies and the Ermine haven’t got good form. I’ve made more money from shorting my holding of Aberforth Smaller Companies than I ever made from holding the buggers. People say the FTSE250 is meant to be the growth engine of the UK economy, but these companies have already had the living shit beaten out of them by the Brexit madness1, though there’s a bigger war on now.

LGAAJO FTSE250 ex ITs. Suitably titsup and every trace is down. It’s be cheaper ‘ere the year is out.

I failed dismally to catch the bottom because monthly investing is like that, but I don’t have to do that. Leave something for the other guy. It’s tough to believe these guys will ever pick themselves up off the floor, and I am definitely of the opinion that this will be had cheaper before the year is out. But it’s a lot more beaten up than the rest of the market, drunk on funny money. In a genuine bear market you don’t have to be clever with what you buy, you just have to buy. This one isn’t a genuine bear market at the moment, because for the moment some indices have shrugged it off – existential economic threat? What existential threat?

The S&P500. This is not a bear market. A response to such a loss of production of -470 points out of 3700 is bleeding ridiculous.

Hopefully I will look back in five years’ time and be cheered that I got FTSE250 on the cheap. I will probably look back in one years time and curse myself for being a dumbass for jumping the gun and paying 40% over the odds. That’s why I am going to spread myself out buying every month. Buying in bear markets is hard because of that, although at the moment much of the bear market seems to have been cancelled in the main due to irrational exuberance. It’ll be back IMO. In spades… But at least the FTSE250 is still in bear territory. This used to be nearly 60p and is to be had for 41p. In a theoretical and intellectual way there’s a yield of 2.8% to be had there, but that was at the end of February. I don’t see midcaps paying a dividend for a good couple of years yet.

I can’t bring myself to buy into the overvalued general index. It was overvalued by CAPE before and it’s definitely overvalued for todays’ world of a synchronised shutdown of a quarter of the world’s economy. I have no understanding of the madness and hope it will go away soon and valuations will come to good value. But I am not buying at these valuations, if necessary I will return to the original path of running down cash over several years.

I’m not selling gold yet. There be inflation in the medium distance. I am all for printing money in the face of an existential threat, but more money and fewer goods and services = money being worth less. I am still in the market for investment trusts at a discount, however. This is largely why I favoured the FTSE250 ex-ITs, because I am heavy in ITs in the main ISA elsewhere. You have to buy into bear markets, and do it while they are still there. I am sure the boosters  will say this is a V shaped recovery and I’ve missed my chance. Good luck to you, I say – I figure the bears will be back, and if not, well, I’ll run down cash as I was planning back in the halcyon days of late last year.

The market is mad at the moment. There again, many things are mad at the moment. The value of money is looking strange at the moment too. About the only useful thing I did with it this year was get in touch with CAF to reactivate my CAF card, now I am a taxpayer again2.

Thursday clap for carers

It’s all very well clapping for our carers, but if these poor devils are going to take those sorts of chances for us the least I can do is try and buy them some gear, since the public-school eejits in charge of the country seem to be so flat-footed we can’t do that in a timely manner.

Similarly there is a lot of suffering due to the disappearance of many people’s incomes down the U bend and others may help with that. I’m not going to make much difference sadly, I am not  JP Morgan, and charity isn’t always the most efficient way of achieving a goal. But some is better than none, and I am fortunate is still having an income.


  1. The EU hasn’t covered itself in glory in the bigger war – it had to make a formal apology to the Italians for leaving them in the shit while pestilence ravaged their country. “too many were not there on time when Italy needed a helping hand at the very beginning.”   FFS guys, where is your humanity? I used to hold IBGE as a bond holding but switched to gold. There be trouble coming down this pike IMO until the hawks get real on coronabonds. I suspect they won’t… 
  2. The great thing about using a CAF card is you get the 20% basic rate tax back into the account. Normally to get that you have to give your name and address to the charity for them to claim it on your behalf, and then you get hounded shitless for the next 10 years. With CAF you can give anonymously which fixes that problem 😉 CAF do take a rake for it but it’s a lot less than the tax back and it’s a price worth paying for peace IMO. 

Developing a buying policy for the bear market

Wealth warning. I only have a couple of years net accumulation ahead of me. You are most probably younger and have decades of accumulation. Do not extrapolate your situation from mine.

There’s a bear market on. Trouble with bear markets is that it’s tough to say where you are in it. Personally, I’m of the view this one ain’t got its boots on. Not only was the stock market pretty overvalued after a ten year bull run, but there’s also a genuine and unprecedented economic hit. In the UK if you aren’t deemed an essential biz, you ain’t trading. That’s a yes to the supermarkets and a no to Sports Direct, BA flights from London Gatwick and London City Airport, and tough trading if you are a cruise line. That’s a lot of economic activity switched off. It would be quite remarkable if this isn’t reflected in the stock market. Yes, it may look forward a year or so, but it’s not going to be like a three-month shutdown never happened. On the other hand, I am mindful of Anthony Bolton – don’t get more bearish as markets go down.

However, I’ve done my selling a  few weeks ago1. Not gonna do any more of that, although of course my ISA is worth a bit less now than it was last year. Not 25% less, I’ve happy to say, which seems to be about the measure of the drop so far, but it’s taken a hit. I would not be surprised to see a market fall to 50% of January’s valuations, and at this stage there’s a lot of company financial results we just don’t know. If you’re Tesco you’ve probably done OK. Carnival Cruise lines, not so much.

Even some of what I hung on to, I shorted. I wasn’t going to sell ASL again, BTDT with Brexit. l But I have shorted the buggers for a couple of weeks. This is UK smaller companies, there is no end to the pain. Other than a fatter IG account. I shorted half of EDIN as well as selling half my stake.

drawdown or buying income

I hated the stock market last year, because I wanted to buy an income to top up my pension. It’s easy enough to live on and some fine living, but I have somewhere between two months and thirty years of more fine living to do.

Cash is king in a market crash and last year I had decided to drawdown a lump of cash over a few years to top up my income, roughly until when I get my State pension. I was going to add that to the income from my ISA, but that’s lower that it should be because of all the index stuff I have in it. My largest holding is VWRL, which pays2: a yield of  – drum roll – 1.98%

So I stuck that cash in Premium Bonds. You can’t  get any useful amount of interest on cash these days, and with premium bonds you don’t have to worry about the provider going bust3. The great thing about cash is that it’s defined, although in the case of the Great British Pound it’s not that well defined, because the pound has been going down the toilet since the Brexit stupidity, and is going down even more in this crash. That means inflation in the years to come.

Anyway, since I determined that drawdown policy last year it’s got overtaken by events somewhat. Exit bull market stage left, pursued by the mother of all bears.

What do I know?

I’ll start with what I think I know, bearing in mind Rummy’s theory of epistemology.

The markets are about 25% off earlier levels. If you look at VWRL

5 years of VWRL in Pounds Be aware that the Great British Pound is not an honest broker due to its tendency to go south relative to anything else of value. The hit is likely worse in real terms. We just aren’t aware of it yet.

the drop is there or thereabouts. The CAPE in the US is about 29 24 now, and VWRL is 50% US. There are/were arguments to tilt away from high CAPE markets, but a market can tolerate a high CAPE longer than you have patience. The market was therefore overvalued. It’s still pretty damn high

the Shiller CAPE ratio for the S&P500 which is about half the global index. For some reason the long-term average of 17-ish doesn’t show up for me here. Go get the original source for that

so there’s a decent argument to be made that the S&P is still overvalued. I’m using VWRL as a proxy for the market in general and it is my largest holding. You can see from the FT’s Markets at a glance that the chart of the FT All-world index is very close to the SP500. To a first approximation the S&P is the all-world, because it makes such a high chunk of the index.

Takeaway – at the moment the markets are better value than they were at the start of the year, but not outstanding value. Some aren’t as bad – there’s been so much bad news coming out of the UK since 2016 that the FTSE100 is good value at about 11, scaling UKVI’s computation for earlier this year. I’ve used his earnings value, but we can be pretty sure it’s not that good as earnings will be low this year. However, the CAPE averages over 10 years, so I won’t be more than 10% off.

I know that when I add money for next year and what I borrowed from my Charles Stanley ISA earlier this year I have about as much cash-like stuff in the ISA as shares – cash-like includes gold and bonds. I was holding about 25% in that before this crisis, but what I’ve sold and what I will add has topped it up. I am in a relatively good position now to make use of a bear market. Largely due to (cough) active decisions made a few weeks ago. That of course, is only any good if I get back into the market with those proceeds, and it’s only any real good if I launch some of the new ammunition into a market that is lower than it was in early March.

Time is of the essence to get into the market, on a scale of months and not years.

“Stocks go down much faster than they go up, but they go up much more than they go down.”

That one’s easy. A simple alert about 5% off the prices I sold at as an alarm saying

git yo’ ass back into the market, punk

will do. Yes, I risk being whipsawed into a bear market rally, but so far in needs at least a 10% rally4 before those alarms go off. Not unheard of, but not that likely IMO.

Bear markets are much shorter than bull markets. The falls are steeper. It doesn’t pay to hang around, getting back in.

Change in S&P 500 during bull and bear markets since 1970 Source

I need to be back in within a year, and I need to start now, even though I will track down some of the twisted wreckage, and rejoice that I held off over the last year’s overvaluations. There will be more losses, but I figure if I buy in through the rest of this year I will get a 30% discount compared to last year. Unless this bear market is like that late 1980s one.

What don’t I know

Everything else, but more particularly what sort of a hit the coronavirus shutdown will have on companies’ future earning streams. Although they have fallen, markets are saying this is no biggie, things will be back to normal in a couple of years. This is not the 1930s. Yet…

Combined with what I do know, I’m loath to conclude this a V shaped flash crash, even though when you look at VWRL

It could be a V-shaped hit, but seems to be still giving way

a v-shaped recovery is still possible. However, the lack of thrilling valuations and the almost full-spectrum shutdown make that less rather than more likely to my mind. Monevator is right when he says

Lower prices improve expected returns. All those markets everyone fretted were too expensive look a lot cheaper now. For example, Vanguard says the expected return from US shares over the next decade has improved by more than 50%, from 4.4% to 6.8% a year:

but CAPE indicates those US shares are less expensive, rather than cheap. Sure, the expected return is a lot better and there is a simple argument to steadily buy into the S&P every month from now on if your accumulation period is longer than 10 years. But the time to hang out this bunting is not yet IMO.

The fog of war is intense

There’s a limit to what you can draw from charts, because each and every stock market transient is an individual. In an earlier life before the millennium I was into technical analysis, and all that palaver. Let’s just say it didn’t end well. The Escape Artist says it all. When you see lots of courses telling you how great something like trading is, the question you gotta ask yourself is: if this is so damn good then why the hell are these guys pissing around telling other people how to do it rather than locking themselves into a darkened room and knocking it out of the park on their own behalf

But you have to become a wizened old mustelid before that is obvious, though I am happy to say that my younger self retained enough cynicism to eschew overpriced courses and stick with books. So I don’t bugger about with heads and shoulders, Fibonacci whatsits and so on. Some people may be able to make that work for them, I’m not one of them. The art of becoming a better investor seems to be one of elimination – learn what you can’t do, and stop doing it.

But we do know something about bear markets. This one started on the 19th February. The average S&P bear market lasts about a year, and recovery takes about two years.

That means if I am going to do something and get back in I want to have done most of it in six months and be back on my long-term asset allocation to equities by February next year, given I am adding new money to the market.

This is where I cocked up in the dotcom bust. Not necessarily in capitulating around 2002, but not getting back in. Well, until 2009, and that with all-new money 😉

Getting out in time is the easy part of the fight. Getting back in is the hard part.

Because you have to buy stuff that you know is going to go down in the near future. I will instruct Charles Stanley to start buying into the dev world ex UK index that I already carry in there and also to buy into a fund tracking the UK FTSE250. (ex investment companies, if I want to buy investment trusts I will do that myself) Many of these companies are going to go to the wall in the coming months and the FTSE 250 pays ‘owt as a dividend. This is going to get much worse before it gets better. I will do these two 50:50, and divide the cash I have in Charles Stanley into six parts for six months. And let them get on with it, CS has a regular investment scheme.

Update. Having now done this, for some reason that L&G fund of the FTSE250 ex investment trusts was an absolute bitch to find on CS. I’d come to believe it wasn’t available on there platform and had resigned myself to buying the HSBC FTSE 250 fund including investment trusts. But by listing fund managers:Legal and General I eventually found it. L&G is slightly less expensive at 0.22% as opposed to HSBC’s 0.5%, but let’s not sweat the small stuff. There be a great big bear steamroller coming behind these pennies, when I buy will matter a lot more than 0.3% difference in annual fees for a good few years yet.

I am therefore going to buy into the world ex UK, so well over half the S&P500. And UK tiddlers, that have taken no end of hurt due to the arrant stupidity of Brexit. Absolutely everything is wrong about the FTSE250 – pain in the past, pain in the future. I see no hope for these guys.

Which is why I am buying the buggers. Experience has shown me that I am not always right. Elephants don’t gallop, and this is a punt I can afford. I expect to hate myself for it in five years time… But if I do, the big fish of the S&P500 and a few other countries will make me feel better.

That will put back half of the value that I jumped out of the market. Not into the same assets – I shot everything that I didn’t love, and this will be into diversified index boring crap.

With the rest of my cash, and then some gold, I will try and make myself buy back into the market, with investment trusts at a discount. The premium/discount mechanism with investment trusts amplifies price movements, to your advantage as a seller in bull markets or a buyer in bear markets, and to your disadvantage as a seller in bear markets and buyer in bull markets. It also makes shorting these bad guys more interesting in a bear market 😉

Why investment trusts? I ain’t got 30 years of accumulation, where the slightly higher costs add up relative to passive funds. I want income rather than selling units, because I can never work out what and how much to sell, and it feels bad running down my capital at this stage. Income is going to be in desperately short supply over the next year. And it’s already clear that I don’t believe in passive investing, so I don’t have the angst associated with them. Oh and did I mention the discounts? As Monevator said

Discounts can be great for income investors, since the money you spend on your shares buys you more of the trust’s underlying income generating assets. For example, suppose a trust trading at £1 per share – the same as its NAV of 100p – owns a portfolio of blue chips that generates a 3% yield. If the share price falls to 90p to create a 10% discount to an unchanged NAV, then new buyers will enjoy a higher 3.33% yield from the trust. (i.e. 100/90*3).

There’s one small fly in the ointment. I have to make myself do it, in the face of a market that I expect to be screaming at me Wrong Way, Do Not Enter. I have to see the value of what I bought go down for months if not years. This could be a big one, like the runout of the dot-com crash, which was a grinding two-year slip-sliding away of market value. And I must not sell into that. I have seen this movie before, and I know that is tough. After I have managed to get the same amount of money into the market on manual as the Charles Stanley autopilot, I will have vindicated jumping out of the market earlier last month. If I managed to sell some gold and get further into the market, I have the potential to get ahead of myself, and vindicate my view over the last couple of years that the market was overvalued. But it ain’t gonna be easy, and I will only know I have won the fight in a couple of years when the market has recovered to the levels I sold out at.

a zoom out

And let us tip a hat to the dark times that have brought us to this sorry pass.  I would have cheered a bear market that resulted from a crisis of confidence that valuations are just too goddamned high, but not this one because of what caused it.

I may never get to look back from the sunlit uplands or never-ending recession that ensues. There is a slightly elevated risk that I will never see next summer, reminds me of this single5 from my schooldays in 1974, another long bear market during the oil crisis of the 1970s. For God’s sake don’t press play if you are feeling gloomy. They had to strike it from hospital radio playlists back then.

There are hopeful articles saying that the crisis will make people think a bit more about how they are living, and what really matters to them. It is possible, but we thought that at the fall of the Berlin Wall and ended up with thirty years of neoliberalism. This piece of the Wall that I picked up near the Brandenburg Gate when I went to Berlin the year afterward has proven more durable than those dreams

A piece of the Berlin Wall, picked out of the rubble by my younger and more idealistic self

We thought the world would change after 9/11, and it did. I’m not so sure for the better. There are big Spenglerian cycles as the West is surrendering its hegemony and the world becomes more multipolar and the power shifts to the East. But humans are adaptable blighters, and perhaps I am coloured by perspective. Even my cynical mustelid heart of darkness was cheered by people clapping for the NHS.

Of course my head tells me that there is now no effective medical assistance in the UK as it goes into the high-water mark of the pandemic. It’s not a criticism of the NHS and it’s not a criticism of political action or a lack of it. You can’t outrun an exponential, and throwing twice as much twice as fast buys you a lot less than you think.

But the recording is the result of a better use of social media than the ice bucket challenge. And perhaps when we look back on this we may believe less in rapacious managerialism for the NHS and perhaps not charge our trainee nurses student fees, living the values of our grandparents. Perhaps.

François Guizot, apparently

But the world belongs to the extraverted and the optimists. You need to be an optimist to invest into a bear market. I am not, but I can act that way. I think…


  1. It appears I jumped just before the formal announcement of a bear market. I could have done better, but I could have done worse. 
  2. That should perhaps be paid a yield of 1.98%. I would guess dividend distributions will be a lot lower in the year to come 
  3. Yeah, you can only put 50k into PBZ and theoretically you get £85k FSCS protection on deposits. But after hearing how long it took a family member to get his wedge out of Icesave I’m not having any truck with that sort of thing. Icesave was not FSCS guaranteed, but the interest rates on offer nowadays doesn’t justify the risk IMO. There is, of course, the other risk which has just risen which is the Cyprus bail-in style. You can’t outrun ’em all. 
  4. It’s probably more than that. A quick eyeball of the percentages in a spreadsheet of what I sold give a typical 15% drop. To get from 85% to 100% is in fact an 18% lift on the current value. That will probably happen over the next two years, but it’s hard to see it happening in the next two months. 
  5. I listened to this a lot in 1974, I had constructed a FM tuner out of modules, in those days impoverished kids with an engineering bent built HiFi because it wasn’t made in China for peanuts and cost loads. The damn thing hissed like a bag of cats because I hadn’t realised you needed signal strength for FM stereo and a T ribbon aerial wasn’t going to make it, even in sarf London. There was a lot of this track, though it’s really quite disturbing to see what poured into a young mustelid’s lugholes from the charts in ’74

Of natural beauty and interesting markets

It’s important to get a sense of perspective sometimes. We have bigger problems than the markets at the moment. Pestilence stalks the land. Let us be thankful that the fatality rate of it is in low single figures percent-wise. So far although there have been missteps I am of the opinion that the people have handled it well, and I am quite impressed that the fragile just-in time systems of delivering essentials have been adapted quite well. The Chinese managed to keep the wheels running in Wuhan as far as the essentials of life. We do face problems with food in the medium term if Tim Lang is right. Many face more immediate problems with food due to their precarious economic situation. However, so far I have been cheered by the response of the British people. Adaptable bastards, humans, even if deeply stupid in many ways. Good luck to us.

The drop in economic activity makes some things change for the better. I live in a small town so air pollution is low here, but even so the drop in traffic makes one’s sense of smell more acute as Nature blooms. Mind you, I can also smell people (not in a bad way, I’m not saying they are crusties) from further away than 2m, particularly downwind. So social distancing may reduce the likelihood of infection, but given that smell is airborne chemicals interacting with the olfactory bulb in the old hooter it probably doesn’t preclude it. It is what it is – we need to get some exercise to avoid becoming fat as moles.

Birdsong is increasing. You’re likely to have more time to listen to it – our blackbirds are lovely at this time of year.

He will become more mellifluous as he hones his art with practice. I got to middle age before realising this. With time to reflect, it’s a little piece of magic that unfolds each year, and I will try and honour the beauty. As long as one of the neighbour’s cats doesn’t get him first… The National Trust is doing this sort of thing in a bigger way on #blossomwatch.

Enough of that. Jurgen Klopp had the right idea, I have no more expertise in epidemiology than he.

of markets and mayhem

Ah, the smell of excitement on the markets. I have cleared out some of my premium bonds, shunted into Charles Stanley before this tax year end. I borrowed nearly a year’s worth of ISA from them and tossed it in premium bonds, because I couldn’t really bear to invest in the stock market at high valuations. It looks to me like valuations are getting better 😉

I am keeping a leery eye on my Gold holdings, for once I am cheered that the buggers are in my ISA. Gold is sort of like cash but with a vague anti-stocks trend in times of trouble. Apparently the correct way to do this is with long-dated bonds. But I am simple and have seen gold do this job before, twice.

In normal times it’s a deadbeat and pays no income. But Harry Browne had a point, I am roughly back to the same asset allocation I had in 2012. Except that all the numbers are a hell of a lot bigger.

I reckon this bear market has legs, and it ain’t anywhere near done and dusted. Unlike normal stock market crashes when people simply get pissed off with high valuations and look down like Wile. E. Coyote and succumb to gravity, there actually is a genuine out of the blue problem here1, which is going to result in reduced economic activity. When a lot of customers are at home and the workforce is down and it’s a global problem then the velocity of money is likely to be less. Yes, the Fed has thrown a shedload of money at it. I’d say there still be lots of trouble ahead.

In my view this is likely to be a crash and a bear market – months not weeks. I am not an unreserved buy and holder, and I don’t have much reserve to buy in, though I do have a steady income so I don’t depend on the markets.

I am going to stick my neck out. I sold out some holdings on March 10th, to give myself some ammo. I still have 2/3 of my equity holdings, all my VWRL, and all my HYP from 2009. I am happy with these, but I cleared out everything that I didn’t love. Marie Kondo would be proud of me. And I cleared out half of an IT and all my FTSE100 holdings, although they probably aren’t overvalued. I’m just a cheeky bastard and want to buy that back either as income-paying ITs, or simply for cheaper, the FTSE100 seems to have taken an outrageous hammering since I sold. All that oil, oy vey… I have a Google spreadsheet of all that I sold, what value I sold at, and what the current -15min valuation is because googlefinace makes that easy.

Let’s just say it was well worth doing. When the aggregate gain from selling halves, then I should start to consider chuntering back into the market because obviously I cocked up and this bear market will have been shot on sight. However, my heart of darkness wants it to double, because that will also be a good time to buy. Valuations were too high before. I don’t regard the losses as anywhere near enough to compensate for the likely hit.

There is a second-order problem, however. We look at our share prices in GBP. If you look at how many GBP you need to buy the IMF special drawing rights, a balance of currencies, you see the GBP has been having a torrid time of late. You see a similar pattern with US Dollars and with gold, so it’s us, not them. This has an inverse relationship to international stock prices, so the falls in real value are about 10% worse than displayed on our screens.

How many GBP to buy IMF SDRs

Something really dreadful seems to be happening to the pound. ZXSpectrum48k seems to be on the money that the UK is more akin to an emerging market.

Now I’m not one of the people yelling that it will be like the 1930s again. It may be, while it is usually unwise to say it’s all different this time I would say the pestilence stalking the human population  is certainly unprecedented for 50 years.

I’m shorting some of the equities I do own.You can argue that’s barmy, why not just sell, but what I am shorting are my investment trusts. I am shorting half of my ASL, which is pretty much just as well, it’s my worst performer. That’s not that tough to understand, small UK companies are basically roadkill.

I am of the view this is going to go titsup a long way more. If shorting works out I get more working capital to put into my ISA over the bear market, and I can take some solace in the losses in the ISA as they are balanced in the gains on the short 😉 If the market suddenly has a fiery fit of the vapours and skyrockets to UKX=10,000 then I look a right tit and get soaked on the short, and get to sell out of my ISA to pay for my stupidity.

Bear markets are exciting. Things happen a lot quicker in them – spread betting which is my tool of choice for shorting is like an ISA in that there is no tax hit if it works, but has a high cost of carry and high costs of doing anything – it’s a dreadful TER. That doesn’t roll up so much in bear markets because of the faster action, I don’t expect to be in IG for more than a year.

Buying in again

I have some piss-taking limit buy orders in the ISA to buy things like VWRL and also ULVR that’s I’ve wanted for a while. I need to find out if iWeb let me do regular monthly purchases2, because I am also minded to buy VWRL steadily across the next six months.

Obviously I am not a strong believer in buy and hold, and I think valuations matter, and for God’s sake don’t even think of doing that sort of thing because its not passive. Just buy and hold… It does come good in the end, as long as you live long enough.

I don’t have any intention of selling any more in the ISA- the point of getting out of what I did when I did was to give me working capital which I will roughly double with extra cash this year and next. I hold some of that working capital in gold ETFs because I don’t trust the pound to hold value through this. I naturally take a hit on the turn and the annual costs on SGLP.  Bear markets are shorter than bulls. If I wanted to hold for 10 years then I’d sweat about the costs of carry and the opportunity costs, but I am chilled on that.

This needs to start working for me. I have the feeling income is going to be bought much easier in the months to come than in recent years. I want this to be a good bear market. I’ve seen this movie before.

So there. I’m probably going to be excommunicated because I’ve gone against the buy and hold shibboleth.  I learned that I had no stockpicking edge over the years. But I still believe in the importance of valuation, and it’s getting a lot better.

I also got a family member out of 100% equities and into VGLS80:20 favouring bonds at the end of January. She has about five years to go to call on that wedge, and a 100% equity allocation at high valuations felt bad. I am owed a beer in five years time. Mind you, if she buys into the bear market than I will buy the drinks, because that sort of chutzpah deserves a hat tip. I know from experience that it’s incredibly hard to do. I at least now have some metrics from tracking what I have sold 3.

But it still will be gut-wrenching and a bastard, because buying into a bear market still means looking at a potential 30-50% loss after you buy in. I can’t call the bottom, but I can call overvaluation. Bear markets fix that sort of problem within one to three years, whereas bull markets can stay up in the sky for years. I am glad to see this bull market get the order of the boot, though I am naturally saddened by the shocking human misery that was the coup de grace that pushed it over the edge.


  1. there is an argument that things like the GFC were also an out of the blue problem, inasmuch as knowledge of the rot was not widely disseminated. Some crashes are a crisis of confidence, however – October 1987 springs to mind. 
  2. Maybe they do let you do regular purchases, but I sure as hell aren’t bright enough to see how. If you know, please enlighten me! 
  3. I will see if googlefinance lets me scale that dynamically to IMF SDRs, I am tired of having to mentally offset the vagaries in the pound to get a clear picture