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.