Sixth pin stuck in the newspaper

 

 Sixth pin stuck in the newspaper

In recent weeks and months some of the most popular articles on the Seekingalpha.com website have been warning of an imminent stock market crash. So we are in the middle of the biggest bull market of our generation and investors get bearish. You gotta love it. 

Let’s insert some comments from Bill Miller’s Q3 2021 Market Letter to put things into perspective. Basically Bill is phrasing it better than Holland Park Capital London ever could;

1.      The US stock market has gone up in around 70% of the years because the US economy grows most of the time.

2.      No one has privileged access to the future so forecasting the market is a waste of time.

3.      Odds like 70% of the time US stocks go up are great. Odds much less favorable than that have made casino owners very rich, yet most investors try to guess the 30% of  the time that stocks decline, or even worse spend time trying to surf, to no avail, the quarterly up and down waves in the stock market.

4.      Bill believes that; “Time, not timing, is key to building wealth in the stock market.”

So basically the mantra is “don’t worry, be happy”. Focus your energy on selecting good long-term investments, buy those and hold those. This is much more productive and efficient than worrying like everyone else in the stock market an inordinate amount of time.

The P/E ratio of the S&P 500 is 27.07 according to the latest reading on the ycharts.com website. The forward looking P/E ratio of the S&P 500 is 21.3 for Q4 2022 according to the ycharts.com website. The average P/E ratio for the S&P 500 has historically ranged from 13 to 15. Historically interest rates were a lot higher than the interest rates are now. With these low interest rates higher P/E ratios actually make sense. Even in the 2008 – 2010 periods the US 30 year Treasury bond rate yield was still above 4%. Now that bond yield is under 2%. So if one compares asset classes and specifically bonds versus equities one could make the case that the forward looking P/E ratio should be double the historical average as the bond yield has more than halved as well. So a two times 13 is 26 forward looking P/E ratio of the S&P 500 would be very fair compared to US bond yields. That would still leave 22% upside for the S&P 500 index for 2022 on the back of an envelope. Double digit compounding returns are not to be sniffed at.

 

Earnings of companies are still all over the place. The earliest we can expect earnings to normalize is in 2023. This year (2021) performance on average has been very good for companies with very bad stock market performance in 2020 and vice versa. It will be interesting to see what will happen with performance in 2022.

It has been almost 2 years ago now that China alerted the world to the new Corona virus. Still some countries are having lockdowns at the moment which will distort supply chains and earnings. Lockdowns are likely to continue in some countries in 2022. Basically the government of the lockdown countries are admitting they are incompetent as those countries still haven’t build proper lines of defense against the virus even after almost 2 full years. Those politicians have probably just been very busy tanning themselves on the beach rather than leading their countries out of the hole.

            Above: Tanning on the beach impression from a six year old....

 

Warren Buffett’s recommendation to just buy the S&P 500 index has been well documented. His 90% S&P 500 and 10% cash asset allocation advice has gotten rather less attention. How much equity exposure does one need to sacrifice for defense going into retirement? This is a tricky question that if you were to ask it to ten different financial advisors, you would likely get ten different answers.

Jim Sloan has a great article on the Seekingalpha.com website called “Why Buffett's 90/10 Allocation Drubs The 60-40 Portfolio - Especially With Rising Inflation”. For the investors that worry this article may be especially useful. A cash holding of 10% of the value of your portfolio does a better job according to Jim than the 60-40 portfolio a lot of retired people are sticking with. Cash can be seen as your insurance. It may be costly insurance but it allows you to take advantage of the great odds of the stock market with the other 90% of your portfolio.

Now it is time for an update in the crayon versus monkey experiment run on the back of the book ‘Beat the Stock Market Casino’. This experiment is run in order to support the thesis of the book that do it yourself (DIY) investors with a good investment plan are more than capable of making money in the stock market.

Holland Park Capital London doesn’t want to look arrogant or boastful with this experiment. This is simply intended to illustrate the investment journey on the back of the book “Beat the Stock Market Casino” for a “Do It Yourself” investor for information purposes only. It also helps Holland Park Capital London to think a little more deeply about some investments considering the investments are going to be written down publicly shortly after that. It focuses the mind. Hopefully this will give better future results.  Cestrian Capital Research does something similar but just phrases it better.

As per Cestrian Capital Research on their blog about Coinbase on seekingalpha.com from the 19^th of November 2021;

“These days we run our own money and we write about it mainly to force ourselves to do the work properly, the way you have to if you run other people’s money. The risk of looking like idiots in our analyst services isn’t quite as motivating as the risk of handing retirement systems losses … but it’s still motivating. And so, we try to do it right.”

It is about time to stick the sixth pin into the quotation page of a financial newspaper and pick a (none $ listed and none £ listed) stock.

First though let’s have a look at how the monkey and crayon portfolio have done so far.

The monkey portfolio is still making money if barely. The monkey portfolio is up $384 according to the Stockrover.com website since inception (on the 25^th of November 2021). Around $32542 has been invested in the monkey portfolio so far on paper. The holdings in the monkey portfolio so far are if anything value stocks. For this bull market though goes that if you pay peanuts, so you get monkeys. The tracking websites do not seem to take dividend payments into account though. The cash level in the tracking website stays at zero and the cost basis per share are unchanged from inception. So the dividend adjusted return is actually higher for the monkey portfolio. Stockrover for example guesses that the current monkey portfolio will pay $1572 in dividends in 2022.

The crayon portfolio was luckier so far. The crayon portfolio is up about $33197 according to the Stockrover.com website since inception. Around $32206 has been invested in the crayon portfolio so far on paper. The real performance difference between the monkey and the crayon is less than it appears as the current crayon portfolio will only pay $558 in dividends in 2022 thinks Stockrover. 

 Because the monkey portfolio still makes money the sixth position will have a new position value of about $5000 according to the “no capital gain taxes growth investment plan” in the book ‘Beat the Stock Market Casino’.

Have you bought the book yet on Amazon?

The crayon portfolio follows where the monkey portfolio leads to keep things simple and comparable. 

The Sigfig website has the monkey paper portfolio as up by 1.2% now since the purchase of the holdings. The crayon paper portfolio is up by 103% according to that same website. The crayon paper portfolio has 3 out of 5 positions that have doubled by now; Ashtead, ASML and MSCI. Not bad. The last two additions in the crayon portfolio are faring worse. Games Workshop is losing the crayon portfolio money and United Health is only up small. The Stockrover.com website has the S&P 500 index up as 73.1% since the 15^th of May 2019. Beating the S&P 500 index would be nice, but first things first let the portfolios make more money than cash on a bank account would be a good start as that is one of the alternatives in the asset allocation.

 

Clearly a portfolio with only five holdings is still way off from a diversified portfolio... So both the monkey and crayon portfolio are still extremely risky, but the plan is to add another holding to both portfolios every 6 months so both paper portfolios will get diversified eventually... Plus both portfolios are being “time diversified” as well and at least that is reducing risk. A combination of the crayon and the monkey portfolio would be up 67.4% according to the Stockrover.com website.

 

The monkey has no opinion and no knowledge. Just sticking to an investment plan and throwing darts at the quotation page of the FT or Wall Street Journal will do the trick of making money. Holland Park Capital London would bet that the monkey portfolio after another 8 years will consistently make money. Time in the market and a diversified portfolio are hard to beat. Put your money where your mouth is. While the monkey and crayon portfolios are paper portfolios, Holland Park Capital London has a holding in all the stock holdings of those portfolios. Just not the same amount of shares per holding as the paper portfolios.

 

For the sixth round the yellow highlighter landed on the French listed stock Societe Generale SA (GLE) of the quotations page of the FT newspaper. For easier tracking the US listing of this stock was selected for the monkey paper portfolio. For the monkey portfolio a paper transaction was added to the paper portfolio of 786 shares of the Societe Generale SA OTC listing SCGLY at $6.34 (on the 26^th of November 2021). That transaction had a value of about $5000. This is the second bank that the monkey portfolio has selected now. Holland Park Capital London is not keen on banks but of course the market cap indexes are full of them. The newspapers are more likely to only show stock quotations of the large indexes so that is the downside of following the monkey way of selecting stocks.

For the crayon portfolio a paper transaction was added to the crayon paper portfolio of Argenx Se (ARGX) in Belgium so also in listed in the euro currency. For ease of tracking the Nasdaq listed ARGX in $ was actually added to the experiment instead of the Brussels listing. For the crayon portfolio 17 shares of the Argenx SE OTC listing ARGX at $285 were selected for the paper portfolio (also on the 26^th of November 2021). That transaction value on paper was about $5000 as well.

Both paper portfolios have 6 holdings now. Slowly but surely the portfolios start looking a little like diversified portfolios. May the force be with both paper portfolios. Thanks for reading this blog.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks in the crayon portfolio and the monkey portfolio. Holland Park Capital London Ltd just doesn’t have the same amount of shares per holding as the paper crayon and monkey portfolios. Holland Park Capital London Ltd is also long the S&P 500 index. Holland Park Capital London has a holding in the stock Coinbase as well. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please. Do your own research. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Your capital is at risk when you invest in stocks. In other words you can lose all your money by investing in stocks. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London Ltd is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.

 

Fifth pin stuck in the newspaper

 Fifth pin stuck in the newspaper & Nanny state rant

There is nothing like a good old fashioned rant. For once it is easy to agree with Andrew Bailey, the governor of the Bank of England, when he said recently that people who invest in cryptocurrencies should be “prepared to lose all (their) money”.

Of course that goes for any investment or asset you are buying and not just for cryptocurrencies.

 There are all these regulations and risk PDF’s (KID and KIID) that investors do not read and just tick the box. Some UK investment trusts are even deemed to be “complex” and retail investors are barred from investing in them. The same retail investors are allowed to buy GameStop shares, Tesla shares, Bitcoin or Dogecoin with only a couple of mouse clicks. It makes absolutely no sense. UK regulators have banned retail clients from trading derivatives on cryptocurrencies as they see that activity as “gambling”. There are plenty of activities in life that are a gamble. Derivatives can be used to gamble, but also to hedge risk.

Let’s have a closer look at what Andrew Bailey said;

 “Cryptocurrencies have no intrinsic value. That doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value,” Bailey said. “I’m going to say this very bluntly again,” he continued, “buy them only if you’re prepared to lose all your money.”

Some cryptocurrencies fanatics could easily rephrase that risk warning with their counterargument;

“Fiat money like the £ does not have intrinsic value. That doesn’t mean to say people don’t put value on the £, because the £ can have extrinsic value. But the £ has no intrinsic value. I am going to say this very bluntly again, buy £ only if you’re prepared to lose all your money.”

 

The FCA (the UK regulator) has a discussion paper out (as per below picture) at the moment seeking views on how to protect investors from harm in high risk investments and the responsibilities of firms offering investments and financial promotions.

Well dear FCA how about getting rid of all regulation in that area and just replace it with an obligation for any firm offering any investment to let the investor read and agree to the following;

“I am prepared to lose all my money in this investment. If I lose all my money in this investment I am not going to whine or complain about it to anyone”.

This is simple to regulate and it is easy to check if the firms offering investments have done the above. Reducing investment choice for investors also harms investors by reducing their returns. This is not talked about enough.

Why are UK retail investors not allowed to buy ETF’s for example that are listed on the US stock exchanges? Because those US listed ETF’s have not written KID and KIID documents (that do not improve anything and do not make any sense) for European investors? Seriously...

In February and March 2020 the stock markets had the biggest crash since 1987. How useful were all these EU Mifid II risk documents (KID and KIID) in capturing the risk for say the Scottish Mortgage Investment Trust PLC (SMT) for example at that point in time? Completely useless indeed...

Money flows to the places that are most welcoming to it. The FCA would do well to keep that in mind.

Risk is in the eye of the beholder. Risk judgements really depend on the childhood, background, personal situation and more factors of the individual investor. The above even applies to financial advisors.

A recent study of Oxford Risk found that in one instance an advisor said a set imaginary client was very low risk, when another advisor judged the client as very high risk. For another, advisors were evenly split between recommending low, medium or high risk levels to a customer. Oxford Risk said advisors gave “remarkable different judgements” on how much investment risk was suitable for clients with the same hypothetical information and asset allocation was a “scattershot”. Even in cases where advisors agree on the suitable risk levels, they disagreed on what kind of portfolio to recommend to clients. All in all, Oxford Risk said advisors’ recommendations “were closer to totally random than totally consistent”. The report of Oxford Risk is called ‘Under the Microscope: Noise and Investment Advice’. The outcome of risk assessments even depended on the current mood of advisors, the weather or how hungry the advisors were. Financial advisors sound like human beings after all don’t you think?

Sam Barker from Interactive Investor wrote a good article on the 25^th of May 2021 on the Oxford Risk study for anyone wanting more information on this.

 

Age is seen as a big risk factor in “how you should invest according to regulations and financial advisors”. The rule of thumb is that the older you are the less the regulators and financial advisors allow you to invest into equities and the bigger percentage of your wealth they will shift into “so called safe” bonds. Bond yield have never been this low on record and even a small reversion to the mean implying higher yields will really hurt this so called “safe” asset class. How much harm have financial advisors’ done by keeping clients too much into bonds and not enough into equities over the last 10 years? How much harm will financial advisers’ do by keeping clients too much into bonds and not enough into equities over the next 10 years?

 

Jenny Harrington quotes a client Betty (in the book ‘How I Invest My Money’ by Joshua Brown and Brian Portnoy) saying;

“I’ve owned stocks since I was a kid when my father bought them for me, then my husband and I bought stocks, and since he died (decades earlier) I have bought stocks for myself. They have always provided me all the income that I need to live on. Bonds don’t grow and neither does their income. Why would I ever want to own anything but stocks?”

Wow. Powerful stuff Betty. Clearly it depends on how well you sleep at night, the value and composition of your stock portfolio and your spending needs and more. Basically it depends on your personal story.....

Maybe the FCA can start by disallowing unlisted investments into mutual funds. Some UK clients are still waiting to get their money back from mutual property funds and of course the winding up of one of the old Woodford mutual funds. There is nothing wrong with unlisted investments, but please put unlisted investments in a closed end fund/investment trust rather than a mutual fund....

 

That is enough ranting on harm and investor protection. Just allow investors the freedom to make their own investment decisions, but make sure the investors also own their own mistakes. No ifs, no buts, no coconuts! No nanny state regulation please. When investors go to the casino and gamble all their money away, investors are also not going to get a refund from the casino either....

 

And on that note it is time for an update in the crayon versus monkey experiment run on the back of the book ‘Beat the Stock Market Casino’. This experiment is run in order to support the thesis of the book that do it yourself (DIY) investors with a good investment plan are more than capable of making money in the stock market. It is about time to stick the fifth pin into the quotation page of a financial newspaper and pick some none $ listed and none Euro listed stock.

First though let’s have a look at how the monkey and crayon portfolio have done so far.

The monkey portfolio is finally making money as well now. The monkey portfolio had been under water for two years. Basically the first monkey investment pick Cisco Systems went south immediately after buying the stock and the second monkey investment pick Lloyds Banking did exactly the same. Only with the third monkey investment pick Deutsche Telekom did the tide start to turn for the monkey portfolio.

The crayon portfolio was luckier as the first crayon investment pick MSCI immediately started to go up after buying the stock. The crayon portfolio never looked back and has consistently been making money since the start. It is better to be lucky than smart.

Because the monkey portfolio now makes money the fifth position will have a new position value of about $5000 according to the “no capital gain taxes growth investment plan” in the book ‘Beat the Stock Market Casino’.

Have you bought the book yet on Amazon?

The crayon portfolio follows where the monkey portfolio leads to keep things simple and comparable. 

The Sigfig website has the monkey paper portfolio as up by 12.7% now since the purchase of the holdings. The crayon paper portfolio is up by 92.1% according to that same website. The crayon paper portfolio has 3 out of 4 positions that have doubled by now; Ashtead, ASML and MSCI. Not bad. According to the plan the doubled positions should be halved now and the proceeds of those sales could be put into something completely different like the Nasdaq ETF or an S&P 500 ETF. Sadly the plan cannot be followed on this “take profits” part as the portfolio tracking websites would not be able to calculate accurate returns since purchase anymore after any sales.

Talking about accuracy the Stockrover website has the monkey portfolio as up $3464 now versus $3491 for the SigFig website. So that is pretty accurate and consistent. However the Stockrover Portfolio Charting calculates the dividend adjusted return as -11.1% for the monkey portfolio. The SigFig website has the return since purchase as plus 12.4% for the monkey portfolio. As a positive $ value return can never be a negative return, that makes the Stockrover Portfolio tracking return calculation in this case suspect. The Stockrover return calculation is probably inaccurate, because it is difficult to track accurate returns on new money coming in and a new position being bought every 6 months...

Clearly a portfolio with only four holdings is still way off starting to be a diversified portfolio... So both the monkey and crayon portfolio are still extremely risky, but the plan is to add another holding to both portfolios every 6 months so both paper portfolios will get diversified eventually... Plus both portfolios are being “time diversified” as well and at least that is reducing risk.

Time in the stock market is the most important friend of the investor. Everyone can make money slowly. Clearly we are humans and we prefer to make money fast so making money slowly is not very sexy. It works though... The book “The Millionaire Fastlane” is about making money fast for those of you that prefer that solution.

A friend recently asked; my pension portfolio is up 15% in 1 year. Should I take profit now?

The monkey and the crayon paper portfolio do not have this problem. The investment plan already has determined these are investment experiments for the long term so profit taking outside of the rules of the plan is not an option. Sometimes it is nice to keep things simple.

People just do not understand why the stock market can keep going higher and higher every decade.

Surely when the S&P 500 index has doubled we should sell right?

Surely it is overvalued then?

This is completely wrong of course. Negative news sells much better, but in the stock markets it is the optimists that make most of the money. Listed companies on the stock markets make (hopefully) a profit every year. Part of that profit is kept in the companies and part of that profit is paid out as dividends. Some companies have high capital intensity and some companies have low capital intensity.

High capital intensity companies tend to have to re-invest the profit in the business just to stand still. If high capital intensity companies don’t re-invest the profit then in a couple of years the competitors have better machines etc and the profits will disappear.

Low capital intensity companies do not have to re-invest the profit. The profit 5 years from now will still be fine. Low capital companies can re-invest the profit in the business (for the same return on investment hopefully) and the profits in the years ahead will grow because of natural compounding. This clearly does not work for every low capital company, but for big enough groups of listed low capital businesses it does. Enter the S&P 500 index; in 1990 the index earnings per share in $ were 42.59, in 2000 the S&P 500 index earnings were 76.74, in 2010 the earnings were 94.25 and in 2019 the earnings were 144.94. In 2020 the S&P 500 earnings dropped because of the lockdowns to 96.51, but the earnings potential of the S&P 500 is undamaged. The long term earnings of the S&P 500 are clearly in an uptrend. If we agree that stock prices follow earnings long term then the S&P 500 should also be in a clear long term uptrend and stay like that for very long term optimistic investors.

Some people say;

“We do NOT need opinions. Opinions are like s***. Everyone has one. We need technical knowledge to make money”.

In fact we need no knowledge whatsoever to make money. The monkey has no knowledge whatsoever and is making money.

Some say you should not invest in what you do not understand. Why not?

The monkey has no opinion and no knowledge. Just sticking to an investment plan and throwing darts at the quotation page of the FT or Wall Street Journal will do the trick of making money. Holland Park Capital London would bet that the monkey portfolio after another 8 years will consistently make money. Time in the market and a diversified portfolio are hard to beat.

The Stockrover website has the $ value of the monkey paper portfolio now as $30.984 and the Sigfig website has the $ value of the monkey paper portfolio now as $31.004. Up is up. The total gain for the monkey paper portfolio is now around $3.439.

The total gain for the crayon paper portfolio is now around $25.073. The $ value of the crayon paper portfolio is now around $52.340. Stock selection and luck seems to have mattered so far....

The yellow highlighter landed on the UK listed stock Lancashire Holdings Ltd of the quotations page of the FT newspaper. For the monkey portfolio a paper transaction was added to the paper portfolio of 551 shares of the Lancashire OTC listing LCSHF at $9.07. That transaction had a value of about $5000.

For the crayon portfolio a paper transaction was added to the crayon paper portfolio of 30 shares of the Games Workshop Group Plc OTC listing GMWKF at $165. That transaction value was about $5000 as well.

Both paper portfolios have 5 holdings now. Slowly but surely the portfolios start looking a little like diversified portfolios. May the force be with both paper portfolios. Thanks for reading this blog.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks in the crayon portfolio (ASML, Ashtead, Games Workshop, MSCI and UnitedHealth). Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please. Do your own research. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.