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 25th 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.
