Fear and loathing in the markets again

The Ermine household decamped to Wales for a few days, near Saundersfoot. Over a decade ago I was halfway through my three-year plan to gain manumission from The Man. The halfway point of any drawn out goal like that is really tough – you have lost the comfort of the port of departure, and are on the stormy uncertain seas without sight of the distant friendly shores.

I was living on roughly the national minimum wage, in order to maximize the benefits of salary sacrifice. This was greatly softened by the fact we owned a house outright and several acres of farmland which Mrs Ermine grew a fair amount of our food. But it was tough, and for a holiday in that period we took two weeks out, touring south Wales in our campervan, staying on campsites. Mrs Ermine has a penchant for spas, and while we stayed at Trevayne Farm campsite one afternoon she sampled the spa, and in the evening I walked down from the campsite and we had dinner at St Brides Spa Hotel. It wasn’t cheap, but not having gone out to a restaurant for a long time the experience was great. Hedonic adaptation means eating out every week gets ho hum, but if you go big once in a while it really hits the spot.

This time we stayed in a flat in Saundersfoot itself, which is a better experience than having to walk back three-quarters of a mile uphill to the campsite, and I got to see more of the strange heritage of the place.

It used to be a coal harbour, and the train ran along the now rather pleasant promenade along to Wiseman’s Bridge going through some tunnels carved through the dark rock, some of them long enough to be a struggle to see your way in the middle.

King’s Quoit, Manorbier

The Wales coast path had some remarkable prehistoric monuments, and we encountered these bad boys with curved crimson bills. I have never seen choughs before.

Chough, Manorbier Bay, Pembrokeshire
Chough, Manorbier Bay, Pembrokeshire

One downside of Saundersfoot beach and walk is it is dog-infested. Despite the council’s fond belief that dog owners can read, my experience is they don’t give a shit about signs, and assume everybody is as delighted to come across their precious pooch as they are. “Oh he won’t bite” they exclaim lamely when two barking rows of drooling teeth jump up at you.

Dogs not allowed on that side of the beach. Except for these ones, because they are special.

The photo, taken around noon on the 11th May, shows that these dogs were special, and rules didn’t apply to them. Neither the rules saying no dogs on that side of the beach, nor the rules saying keep your mutt on a lead, because it’s so much more fun for Fido to race up and down the beach, other beachgoers be damned. That’s bad on the beach, it’s really quite unpleasant in the tunnels.

crisis, what crisis?

I come back after about a week away and Monevator’s Bonfire of the Vanities seems to indicate that it’s been a tough time in the markets of late. GBP investors’ ability to shoot straight is handicapped by the falling pound, which flatters apparent returns.

Looking at my iWeb ISA, it didn’t look so bad, though of course that’s in falling pounds. I sold out a fair amount a little before the turn of the year, because I had done reasonably well coming out of the Covid crash and unicorn shit is on the rise. There is a lot of gold in there, because I had a plan to sell out gold from my ISA and rebuy it in my GIA, and buy income in the ISA with the liberated cash. Because: income tax and inflation.

Although discharging capital gains is a pain, with a gold ETF I can swap some SGLP for a gold ETF run by Wisdom Tree or SPDR, which would harvest capital gains for the cost of the turn.

As it was, I started buying gold in the GIA, but then Putin switched from exercises to war, and although I had started buying income ITs by selling gold in the ISA, I didn’t sell the rest of the gold for cash, so I rather increased my total exposure to gold. I will continue to hold my capital in the ISA as gold rather than cash, selling gold only just as I am buying. For some reason you don’t seem to have to wait for settlement in an ISA, so other than the £5 transaction cost there’s no advantage to selling it for cash ahead of the purchase.

I will admit to a fair amount of schadenfreude about tech, which I viewed as vastly overvalued before, and other than my exposure as part of VWRL didn’t really have much exposure. I do take the point that this will have given up return although I wasn’t quite as heavy on dividend paying equities as GFF, VWRL is my largest equity holding and pays almost diddly squat in yield. 1.56% isn’t going to make anybody fat. One needs £600,000 to capital in VWRL to earn £10k in dividends. I am some way off that. Continue reading “Fear and loathing in the markets again”

Seeking a new ISA platform

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.

I ended up with Vanguard, but although there’s nothing wrong with Vanguard either, I came to the conclusion that they aren’t the right fit for me. I should have spotted it really in Monevator’s broker table

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

  • Halifax Share Dealing,
  • Lloyds Bank Direct Investments,
  • Bank of Scotland Share Dealing,
  • IWeb Share Dealing, (because I already have this)

To get that protection. Taking a look at Monevator’s broker table, that’s the first three options ruled out right away.

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.

Continue reading “Seeking a new ISA platform”

Dolmens and doldrums

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.

Continue reading “Dolmens and doldrums”

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”