Vanguard’s cautionary tale hidden in plain sight

Opening up Vanguard to add £10k of ISA contributions to buy VUSA, I come across this impressive chart of the amount of moolah a punter could accumulate, had they invested in the MCSI World Index since 1999. Nowadays you can do that easily, just go buy an ISA limit of  VWRP on each April 6th, get on with the rest of your life. I don’t think VWRP existed 25 years ago, but this is what would have happened compared to saving it in cash.

What 25 years of shares ISA would have done relative to the same amount in cash ISAs, according to Vanguard

Now I am old enough to know that tax privileged share saving didn’t start with a bang due to Gordon Brown in 1999, there was something called PEPs (Personal Equity Plans), I seem to recall I dumped some Sharesave shares in one of those back in the day. They were also tax-free, I was a tyro in those days, so I didn’t get the sort of wins I am getting now. Vanguard sell this as a good news story, look at that wicked win racing up at the end.

And it’s a good story, say Maya Millennial has just come of age in 1999, born with a silver spoon in her mouth. She loads up her ISA to the max and keeps on going, across 25 years, she’s 43 now and minted, nearly 900k sods. All jolly hockey-sticks, eh? Provided she has accumulated some of the other trappings of a successful middle class career, she’s in line for early retirement.

Wait but what? Valuation matters

Let’s call up VT in the basement and get them to roll the tape back to Maya Millennial’s 31st birthday. In a distant part of this septic isle an exhausted mustelid calls control for the final approach to retire, in 2012.

Maya Millennial pulls up her Vanguard account and takes a butcher’s hook at how’s it all going. Her BFF Candi Cash won’t have any truck with the stock market – “it’s a casino full of the wrong sorts”. She uses a Cash ISA. We compensate for that fact that the Cash ISA allowance started half that of a S&S ISA because Candi is on great terms with her mum who lets her use her cash allowance too. Apologies for the tasteless use of Photoshop, but this is what Maya looks at. I have estimated the £200k position, but to be honest it’s that shape that matters.

OMFG, what a ride

Years and Years

2003 – Maya is 22 and ~30% down

Four years into her journey, Maya’s about a third down compared to Candi. She tells herself fair enough, I am a long term investor, just a blip on the investing horizon. She’s doing a lot better than this mustelid did, I used to have a Virgin CAT FTSE all-share ISA, great values fees at 1% AUM, Monevator’s TA would rugby-tackle you to the ground for putting up with that sort of usury these days

Why should DIY investors flay costs as if they were the tattooed agents of darkness? Because the last thing you need is to leak 1% in management charges.

Gulp. Those were the days, my friend… We got older and wiser. Anyway, I switched to L&G at a slightly lower fees and a slightly more global outlook, but in the end I sold up. Go on, guess when I sold up, round about 2005 ISTR. Mind you I did put that into paying down some of the mortgage which was in the order of 6% I think, so it earned me a real return of 6% in the interest I didn’t have to pay, plus the tax on earning that.

2007 Maya is 26, and about 10% up

Maya’s feeling chipper about her stocks and shares ISA, got about 100k, she can buy a house for that. Not quite ready for that as she’s just split up with her boyf, the mating game is tough in those years. Candi’s starting to think there’s summat in this stock market casino thing and the market is all over the papers like a rash. Her Dad looks up from the paper on one of her rare visits home and says “Whom the gods would destroy, they first make mad”, and Candi sticks with cash, though she enjoys the free drinks at the party Maya throws in a basement bar in the City, full of raucous finance worker  braggarts. Candi does worry about her bestie’s taste in men at times, but you can’t argue with the quality of the champagne.

2009 Maya is 28, and she’s abut 40% down

This is not a good birthday because Maya is nursing a 40% loss, and it takes the edge off being young, beautiful and in love, particularly when both of them are fearful for their jobs. Maya is feeling a chump for 10 years of loading her ISA giving her a 40% loss, and starting to wonder if she should have spent more on Louboutins and lived it up a little bit. YOLO and all that, you only live your twenties once. Candi buys her a few drinks and tries not to say I told you so.

2012 Maya is 31 and breaks even relative to Candi Cash

The good news is that Maya has reached parity with Candi, so they buy their own drinks. Everybody’s scared shitless of the markets, and Maya looks back  at her twenties and wonders where it all went. In the toilets she looks at the crow’s feet starting around her eyes, and the stress of it all makes her break down. Candi comes in and puts her arm round her, but Maya looks at her friend and observes no crow’s feet yet, and great heaving sobs shake her. She collects her thoughts and the two leave the bar together.

Maya had a tough ride and it’s a cautionary tale

Why did Maya have such a rotten ride? She started in 1999, it was the dot-com boom that was about to turn to bust. Go look at UK Dividend Stocks’ CAPE valuation chart. Maya started investing when the SPX CAPE was literally off his chart. The SPX is the largest proportion of world assets, particularly back then, so it did a lot of damage.

You’re a good little passivista and you say Meh, it’s not like Maya inherited a shitload from her grandfather and invested the lot at an all-time high CAPE. And you’d be right. Assuming Vanguard did the analysis competently, Maya dollar cost averaged into the market, and she still needed Candi to put an arm round her on her 31st birthday because of all the stress. DCA is not a panacea for a shitty sequence of returns. What gives you a shitty sequence of returns? Bad luck and high valuations.

At the time of writing, the Shiller CAPE ratio is on the high side, about 34, that’s less than the 44 when Maya started. Seeking Alpha has a chart showing if you buy the US at CAPE >34 you can expect a return of ~4%, over the next 15 years!

Vanguard’s good news story only came good after the halfway mark

and then it hit it out of the park. But Maya Millennial needed a lot of TLC through her twenties before the rocket boosters fired. There’s a cautionary tale, too, for people starting now. Inspect the Shiller CAPE ratio for the SPX over the last 50 years

Shiller CAPE for the SPX

You can take a little bit of solace from the fact Maya Millennial took a couple of years of the CAPE being much higher than now. Perhaps humanity is getting a little bit more efficient in the art of capitalism that might justify the gradual lift in the CAPE over the years, extrapolate that and it is high, but not Maya Startup high.

Is there fire underground, perhaps?

Now ask yourself if you observe anything rotten in the United States, and arguably in the West in general? Do you think that AI will mean that we can happily live inside our smartphones while the shit piles up in our rivers and the doors fall off our aircraft every so often? What say you about president-elect Donald Trump? We should note he wasn’t as terrible for the stock market as you might think, though other shit was going down in the latter part of his reign to muddy the waters. The CAPE on VUSA isn’t astronomically high like it was at the end of 2021, but it’s still running a bit rich.

The trouble with the CAPE expectations is take a look back over 15 years. The Apple Iphone had only just been released two years ago. We were not to know that a rapacious ecosystem was going to grow that meant we could all be rude as hell to the people in front of us in order to live in a simulacrum of the real world in servers owned by the Magnificent Seven, who would track the bejesus out of their punters and lock the suckers in. It’s a step-change as the world of atoms gave way to the world of bits, and in the world of bits scale is everything and marginal costs are low. CAPE is a measure of what people will pay for future earnings flows. Low marginal costs can justify higher valuations.

I detest this ecosystem with a vengeance and don’t carry a mobile phone tracking cattle tag with me in general, but it sure as hell makes money, at scale. I can afford to take the punt on VUSA.

It’s a new ISA year, and I had to make myself lob £10k into my Vanguard ISA to buy VUSA. That’s only half of the ISA and it’s a small part of the whole. I still hate myself a little bit.

I am going to counterbalance that VUSA outside the ISA with non-USA deadbeats, where valuations will be better. I am therefore making a mild bet that the rush of blood to the head that has made us all dive into cyberspace because it’s better than our normal lives justifies the higher valuations, but that is a riff on the deadliest words in stock market investing

it’s all different now

History shows that it never stays all different now 😉  I am doing this because I am starting to struggle with the capital gains allowance on unsheltered VWRL (or currently HMWO.L, which is the same thing).

I’ve split off the US stuff, if it isn’t all different now and VUSA is at 50% then I may get to pay more tax on the non-VUSA part in the GIA. But I’ll take that risk, because when America catches a cold the rest of the world usually does too, which probably gives me time to think. I will lob the other 10k into the iWeb ISA to rebalance some of that.

Framing matters, Vanguard 😉 You wouldn’t have run that story when I retired in 2012, though you chart shows that wouldn’t have been a bad time for Maya to start and Candi to switch. Ain’t hindsight a tremendous thing…

 

No more income tax cuts

Many years ago, Thatcher made a big song and dance about wanting to cut the headline rate of income tax, which was 30% at the time. Higher rate tax was at a much higher rate, the Beatles who were so pissed off about it they wrote a song about the taxman. Thatcher was right, a top income tax rate of over 90% was probably too high 😉 Notable about post-war Britain was it was flatter in income than today, a lot of money came in the form of the aristocracy, which is still there but somewhat drowned out by the nouveaux riche in the last 40 years. The aristocracy didn’t have too much problem with income tax because their riches came in the form of capital.

Inocme share over time. The bottom 10% have been mullered, particularly since the GFC. Presumably there were no poor people years ago because they didn’t register in the stats

The grocer’s daughter backfilled the hole in the Government’s finances before launching her tax cuts, largely through the free gift of North Sea oil, and selling off anything publicly owned that wasn’t nailed down. The personal finance motto holds – save before you spend on elective nice-to haves, a gracenote that the Liz Truss “I was right all along” tribute band didn’t find the need to play.

In doing that Thatcher established a shibboleth that income tax is in and of itself wrong. In her time, given where she started and these two free gifts, it probably was higher than it should have been.

The first free gift of North Sea oil revenues we seem to have parked in house prices, imagine what we could have done with that otherwise. The beneficiaries of this are primarily Gen X and Boomers¹, and their legacy to their greedy kids as time goes by. Everybody wants to favour their kids over everybody else, this will lead to feudalism as time goes by, hopefully this is will not happen fast enough to be my problem. See the concept of private schools and the bizarre claims that inheritance tax is the most hated tax in the UK. The torygraph gets its knickers in a twist over IHT all the time and comes to exactly the wrong conclusion after acknowledging the rising amounts of dynastic wealth. As for the journalistic flannel of calling it a tax on the dead, if there’s ever an occasion that you can resolutely tell HMRC to eff right off it’s from six foot under. What are they going to do, put your stiff in prison? There’s not enough place for the living as it is.

Don’t let the tax tail wag the investment dog, well, ok, maybe this once…

They say you shouldn’t let the tax tail wag the investment dog, but I would beg to differ in the, er, dog days of the £12300 CGT allowance. It’s probably more important in future as this allowance drops to £3k in a couple of years. Why is this?

First, if you are using your ISA, as I am, then no worries in that particular area. If you aren’t, then Monevator would like to know why the bloody hell not? Only hold investements in an ISA on pension? Stand at ease, as you were.

However, I have concluded that as I can live off my pension then it’s a little bit mad to retain the three years equivalent salary in cash-like savings that was there to prevent me becoming a forced seller into a down market when I was living off savings and then SIPP income with some earnings. The emergency didn’t come, and in Covid that savings crept up to about 5 years, what with spending less, earning a little more. Along with some luck and Covid shorting, so I have unwrapped holdings in a GIA as well as wrapped ISA holdings. It is the holdings in the GIA that exercise me here.

Gold has had a decent run of late.

I decided to give the gold holdings the order of the boot from the ISA, gradually selling them in the ISA, buying some equities in there with the proceeds, mainly VWRL, but at the same time as I sold gold in the ISA I bought that much and a little more in the GIA with some of the cash savings. Gold has had a decent run of late, sufficient that I sold all my SGLP to crystallise about 6k in CGT, to buy SGLN. Slightly over 30 days later I look at the SGLN and observe there’s another 5k in capital gain up for grabs, so I flog that and buy SGLP back. I also collected a profit of £2.7k in BP, which I have decided to get out of now, and find I have gone somewhat OTT on capital gains for this year. Never mind, I am prepared to eat a £500 loss in SMT and a £1k loss on LGEN. LGEN is softened by the £500 dividend paid, but I did time it wrong, never mind. The trend towards a tax free dividend allowance of £500 shows that having a GIA containing dividend payers is not such a good idea in future, but that’s another story.

I liquidated a few minor gains¹ to get as close to the £12300 CGT for this year but just under. Obviously I get to eat the spread in the turn, I am not so sure I can get so excited about the £5 dealing fee in a seven figure total, but the turn is about 10 to 20 pips, and may be wider on actually doing it rather than a soft quote, which is getting on for at least 200 sods, so you don’t want to spin this wheel too often. OTOH the putative CGT saved is 10% of £12300, which is worth getting out of bed for.

Move along now. Nothing to see here, sir. Move along now. Strong and resilient Don’t Panic Capt Mainwaring

Now assuming that the banks really are strong and resilient as they keep telling us, despite SVB, First Republic, Credit Suissethen it’ll all come good. Probably will come good in a couple of years either way. In that scenario I expect that gold to tank, compared to my last purchase price and go down, by about 10k, less some sort of inflation, as equities increase. But in that case, the embodied capital loss is then able to be offset against any gains, so selling it and rebuying now gives me optionality in future. The gold is there as diversification, I don’t want to off it, so the recent gain is purely notional. What the market giveth with one hand, it taketh away with t’other in its own good time. Of course if I knew that ZIRP was going to return again and money would be there for free I would maybe hold off, but you never know. One day the GFC will have to be paid for…

There’s an asymmetry with capital gains, in that losses can be rolled forward for future use, but gains have to be used in the year. This year’s gain was particularly valuable, because it’s more than it will be in future – 6k next year, three after that. A GIA will be much less valuable in future – in a typical scenario of 7% average annual returns (assuming inflation of 2% as it used to be, hahahaha) a £12300 allowance lets you hold £175k before running into CGT on average. In the end scenario of £3k you get to hold about 42k before running into CGT. And, of course, inflation is 10%, though they all say that isn’t going to carry on. We shall see about that.

I will naturally use the £20k ISA allowance coming up, and perhaps the one after that if it’s on offer. After that, well, who knows.

Britain is a poor society with some very rich people in it.

It’s hard to see Keir Starmer weeping too many salty tears about capitalist running-dogs like FI/RE sorts, because as that fellow from the FT said, Britain is a poor society with some very rich people in it. The Atlantic summed it up better in How the UK became One of the poorest Countries in Western Europe

Britain chose finance over industry, austerity over investment, and a closed economy over openness to the world.

There’s a Panorama programme on how the accident happened, although they stop short of asking why it happened ²

the BBC’s Analysis Editor Ros Atkins asks why so many people are feeling so poor.

A: it’s because they are poor, seems to be the conclusion.

And if you think this view is a particularly a lefty wonkery worldview then let’s hear it from the Torygraph – Britain is a poor country pretending to be rich. In particular that fellow wants a word in the shell-like of all you workshy middle aged FI/RE shirkers. So that’ll learn ya.

We have actually seen this movie before, well, those of us of advanced years have. When was that? Way back when, in the early 1970s my German grandmother cam to visit us in London. She was gobsmacked by the number of old bangers on the road then, you could almost see the thought bubble “But I though Britain won the war, what’s up with that”.

I think that sentiment was voiced over a bottle of wine that she had brought with her. Seriously, the 1970s were a terrible time Britain for quality in wine as well as cars, the stuff people drank was revolting. Even Blue Nun is probably better now. My grandmother wouldn’t have tolerated that in the house, never mind brought it over with her own fair hand.

Wonder what else happened around that time, when Britain was known as the sick man of Europe. Ah well, correlation is not causation, so that’s all right then. Like with the banks. Move along now. Nothing to see here at all. Britain is rich enough to laugh off a 4% hit in GDP as a mere trifle.

In particular, since ISAs are a key tool to enable the under 50’s to speed up their retirement then I wonder what the direction of travel will be in a few years’ time?

In the meantime use it or lose it – both your ISA allowance and should you be so fortunate as to have the need and the capability, your CGT allowance!

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1. I was hoping to have enough GIA investment income to defray the increase in power bill but the Buzzard has shat on this idea somewhat with the upcoming £500 tax-free limit on dividends. Though if you are going to pay tax on income dividend income beats earning it or indeed pension income, as dividends are taxed at 8.75% for the lower orders. I was more generally so wrong with that post in its anticipated effect on me :( ↩
2. It seems to be regarded infra dig for the current government to find the BBC asking ‘how did the government fuck this [insert specific aspect of British life] up.’, although asking that specific question used to be the point of the fourth Estate. ↩

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

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.

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.

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.

Ground Control to Major Tom–turbulence ahead

What are the five most dangerous words in investing?

It’s all different this time

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

S&P Composite CAPE (from Shiller)

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

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

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

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

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

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

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

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

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

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

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

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”

I bought Safe Haven by hedgie Mark Spitznagel from a recommendation in one of Monevator’s comments. I’d agree with the comment that the book doesn’t leave you with anything actionable, but perhaps as Dion Fortune said of the Cosmic Doctrine, the object is to train the mind, not inform it. This Spitznagel achieves IMO. It isn’t a long book, I read it in a couple of hours in one sitting, albeit punctuated by watching a movie with Mrs Ermine.

Reading has its systole and diastole, which is why cramming is tough, which is why doing something else midway lets you digest it better – Darwin was a fan of walking for this purpose. I only find that useful for when I originate something creative, but the movie improved the digestion of the book’s 240 pages, presumably by letting something in the background reflect.

Spiznagel is pretty full-on, a reasonable storyteller, and uses metaphor and analogy well. The main takeaway is that many of us  evaluate investment prospects by expected value. Despite the standard FSCS warning that past performance is not a guarantee of future results, that’s sort of what happens. The author disses macro investing, and goes on to make the assertion that managing (tail) risk can be cost-effective. In particular, that it can improve your compound annual growth rate (CAGR) without costing you performance

cost‐effective risk mitigation—or raising compound growth rates and thus wealth through lower risk—is really our comprehensive goal as investors.

Spitznagel, spends the rest of his book showing you how you can recognise an asset class that could do that.

Tragically for you and I, dear reader, that asset class isn’t something that you or I could go out and buy, or synthesise from something we can. It might be possibly in the hedgie world. I am somewhat glad that intuitively I found one of the few assets that sort of comes close-ish. The book also has value in showing that you can compute the optimal amount of that asset class.

Yes, there really is a buried treasure for investors, one that solves our monumental problem by showing that the great dilemma of risk—the ostensible tradeoff between higher returns and lower risk—is actually a false choice. […] We need a more holistic approach; we also need a treasure map to know where to dig.

But just because that buried treasure exists doesn’t mean we will ever find it. The greatest value—more than in the treasure itself—will be in what we gain from the hunt.

I was tempted to issue a refund request, having gotten to the end and being told that the ideal was a chimera, for civilians at least, and since less than 24 hours had elapsed between buying it I would have got away with it.  Amazon track how much of a Kindle book you have read, though I don’t have a habit to returning Kindle books so I’d probably be OK.

But after sleeping on it I came to the conclusion that I did learn something, but in a Dion Fortune like way. My mind was trained, not informed. Most non-fiction reading is to inform the mind. So I got my £15 worth, but it wasn’t the £15-worth I expected.

Spitznagel insights – training the mind, not informing it

Take the Saint Petersburg dice game, a single roll of the dice offers

Wotcha going to pay to play this game? The expected value is ($1+$2+$6+$22+$200+$100000)/6=166,705

but I am guessing most people wouldn’t pay that much, intuitively. It seems obvious that with five chances of being largely wiped out you wouldn’t pay the expected value. Bernoulli’s computation shows if you compute the geometric mean of what you end up with, you can estimate what a reasonable proportion of your total wealth you would pay for this wager. If you had £100,000 then paying about £37k or less to take part gives you a better than even chance of ending up better off. It quantifies the fact that you can take more risk if you have more capital that you don’t immediately need.

Reading the methodology gives an analytical solution to the gut feel approach, and is intriguing. However, the training not informing shows, because most risks you take give a return proportional to amount you put in. However, Spitz has only got started at this point, and he uses a sequence of returns that includes a catastrophic loss (to 0%) to show that where you have a sequence of returns that build on each other then risk mitigation can be worth while,

The arithmetic cost of its risk mitigation is more than offset by its geometric effect—such that its net portfolio effect is positive.

Most of us invest in a single lifetime of a specific sequence of returns. I still remember hearing my German great-grandmother describing sequence of returns risk – they lost their (financial) life savings twice. Fortunately most Anglosphere stock drawdowns aren’t that extreme, but Spitznagels view on central bank meddling suggests that this is not an immutable law of nature, particularly in a declining Imperium.

The Spitznagel edge

Spitznagel despises modern portfolio theory, which is the rough assumption that you buy a mix of less volatile but lower-returning assets like bonds and more volatile but higher returning assets like equities. Inherently in that mix is the takeaway that you will give up some return, and Spitz has no time for such milquetoast ambition.

However, to this mustelid reader he spends a lot of his book in search of something that you could replace bonds with, bonds being the most common MPT risk mitigator of choice¹.

As one example, say at the beginning of the ISA year I could save that £20k in an ISA, less an amount that I could go to an insurance firm and say here is £x. If this time next year the market falls more than y%, pay me some lump sum proportional to x (but note NOT proportional to the fall, this is a cliff-edge function and therefore non-linear).

He spends a fair amount of time showing how you would compute the right amount to spend on this insurance, and in his examples it’s not very much. I haven’t given enough thought to whether you can do this with options and CFDs, but I don’t know of anywhere you can go to buy this sort of thing.

You can spreadbet against losses, but in general it is always cheaper to simply buy less of the asset and sit on cash. I have spreadbetted against my ISA in times of market turmoil, but that’s not the same as doing this steady state, which is an exercise in futility.

However, to return to the training the mind aspects, one of his key statements is

We experience profits and losses and all accounting ledgers arithmetically; we experience life arithmetically—one thing after another. This is linear thinking versus geometric thinking. It’s a big difference and essential to our understanding of risk and the disastrous impact of losses on wealth. But it is highly counterintuitive. Here you face an inconvenient, uncomfortable but crucial truth:

Your raw, linear returns are a lie; your true returns are crooked.

Bernoulli’s call to map returns through the logarithmic function was thus a normative one, not a positive one. In basing decisions on the geometric average of expected wealth or returns, not on the arithmetic average, Bernoulli was showing us how we should view risk—not how we necessarily do view risk. And this is precisely where economists got it so wrong.

I find this reasonably compelling. It’s not totally new to me but this exposition is good. I have no idea of if economists got this wrong, but we generally experience a particular sequence of risk. In both the housing market and in the dotcom bust I experienced that the crawl back from a double-digit loss is long and slow, and best made up by Saving More than trying to make it back in that market. If you lose 50% you have to make a 100% profit on what you have left to get back to where you were before.

Some of this you can lean against by not being 100% invested in equities – you reduce your arithmetic return natch, as you are less exposed to the equity market. But you improve your geometric return, because you live to fight another day. Spitz gives you the lowdown in the bit on the Kelly ratio, but again, what makes that less actionable for most is that having seen the value of your equity holdings go titsup in the markets you need to get right back on the horse and throw some of your cash into that now undervalued market. Easy to say, not so easy to do. That’s why people have bonds, and I have gold.  I don’t do bonds, because I estimate 25 times my net DB pension as a bondholding, and unless I get a fair bit older I can’t manage the right mix.

Theory would therefore point me in the direction of 100% equities. But I have had a pretty decent run, I don’t need to shoot for the lights, and sometimes comfort is more valuable than performance. So while Spitznagel wouldn’t approve, I take a lower expected return, because I can.

The big killer is there is no safe haven for little people

Spitznagel has turned the handle on all the things people typically regard as safe havens and qualified them against his specific criteria of cost-effective safe havens (ie they get your CAGR above the 95% confidence interval  of the S&P over a representative set of trial periods)

And the results are in. Little people, you are hosed. As it happens an Ermine does use gold (and there is a useful piece of the Spitz in how you qualify how much gold you should hold, about 20% is right for me)  But before you all rush out to buy SGLP, most of the trial periods where gold lifted itself into Spitznagel success territory happened to be in the 1970s, after Nixon repudiated the convertibility of the dollar into gold at a fixed rate. So gold may not be all that after all.

“Gold is pretty darn good. You just have to understand there’s been a lot of noise around it.” – underlining gold’s value as a safe haven, while noting that it performs best when inflation expectations are high, and historically it’s been inconsistent in mitigating portfolio risk.

Obviously if you can buy insurance on Spitznagel’s terms then you are off to the races. But those terms are tough –

Any punter can devise a trade that does well in a crash. The key is how do you do in a crash relative to the rest of time.

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…

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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

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.

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.