sometimes you just have to hold your nose and do it

I wrote the first half of this in November last year under the heading “Valuation matters” when I was bored with the stock market, but couldn’t really take it anywhere. Things have improved in the two and a half months since, so I thought I’ll run the post.

Ermine approach to bear markets

There are two big problems with bear markets. One is the general noise and hum of people like RBS yelling sell everything. The other problem is that bear markets are usually shorter than bull markets, but steeper. So not only do you have a shorter time to get into the suckers, but it feels bad too.

past investment performance provides no guide to future performance

Standard FSA text you read everywhere but probably don’t believe at heart

I do have a fair lump of money to move out of cash, even while leaving my SIPP as it is. But what to do with a bear market, eh? I will do roughly what worked the last couple of times.

Valuation matters

Once upon a time, in the late 1990s, I got more and more interested in the stock market as prices rose, ‘cos I looked at the virtual bottom line and thought that it was real. Whereas now I get more and more lethargic as valuations rise, I cast about and struggle to find anything of interest to buy, and occasionally carp about it. Whereas a decent market crash would interest me again…

Let’s take a look at the enemy. Total Return values for the FTSE100 are only available back to 2012, but I got my FT All-Share TR from here, apparently derived from the ONS.

FTAS Total Return, log scale to preserve relative changes. Some big hits and a drop in the rate of increase of TR since the Millennium

The overall trend is up. And yet this is a game of two halves – whatever happened after the dotcom bust seems to have taken a bite out of the annual rise of the FT all-share total return, and given us bigger and more protracted retrenchments. Perhaps the change in annual rise is because inflation was generally lower in the second half period, but there’s no way of getting away from the fact that the retrenchments in TR are deeper and span longer periods. There’s real money to be lost here for significant periods of time.

Whether this is the result of structural changes to the economy, or perhaps the massed ranks of index investors beginning to kill the golden goose is something I am not clever enough to say. Perhaps it’s as simple as the increased financialisation of the economy, in the end somebody has to be paying for all those salaries in London. FirevLondon put it well

Financial services is, er, where the money is. Pay levels here significantly exceed almost all other sectors when you benchmark for responsibility, experience, lifestyle, etc.  The point is that these jobs are not easy to get and are not everybody’s cup of tea.

Just like people working in sweet shops don’t want for sweets, I guess people working in money don’t want for money. The kink in the chart may be as simple as the fact that these pay levels as well as soaring CEO pay have to be looted from the real economy because financialisation is an extractive rather than productive business, looks like shareholders have been getting a bum deal for the last 16 years as well as being shaken down twice. Or is that three times, including now 😉 Whatever it is due to, there’s a good case to support the thesis that it’s all different now, but the trouble is that it isn’t all better now.

If we are going to be carrying the deadweight load of all these spivs and CEO salaries on our backs, we really want to be buying in the suckouts, since the cost of the future income stream is cheaper, cos, well, the price of entry is on sale.

People made a lot about the last bull market being one of the longest on record, which is all fine and dandy, but if the price of longer bull runs is greater humdingers of bear markets that knock you back the odd decade then it still isn’t great news for steady buy and hold. The view post 2000 on the FTAS total return hasn’t been worth the climb compared to the 20 years before it. The slightly lower slope could be explained by lower inflation, but the multi-year suckouts are longer and deeper.

My aim is to long-term hold, and use the dividend income. So I am buying a future income stream, and I want prices to be low when I buy. They haven’t been low for the last few years, that’s the trouble with bull markets, they hang around too long and outstay their welcome, particularly that last one. I’m glad to see the back of it. All it’s been good for the last couple of years is to shift unwrapped assets into an ISA wrapper, rather than put much new money into the markets.

Buying into bearishness with index funds

I have stood next to the open goal of bear markets before, tapping a bit of wedge into it at the same time as buying that Cash ISA, That Cash ISA is still the same one as I bought in March and April 2009, when I also bought the other half as a S&S ISA in April and started hitting AVCs. Cash has lost value in real terms whereas the S&S ISA and the SIPP paid me handsomely.

There are similarities to 2008 in that the stock market and the pound are tanking. The combination of these gave both my AVC funds and my ISA a good heft. This bear ain’t really got into it’s stride IMO, which is just as well for me. I have about 3k worth of ISA allowance left plus about two grand of cash in there. This year in an aberration of common sense I adopted the nice little quarterly regular drip-feeding approach of a good index investor, largely because I couldn’t really get excited about much, but figured I can’t just sit on cash. So for the last two quarters I’ve been buying gold, and in the first quarter I did some racy stuff like buy into Russia, EMs and oil, all of which have tanked faster than the unwrapped assets I sold. I’m taking the Zombie approach to the busted value of the last enterprise, at least the gold is up a smidgen.

However, in a decent general bear market, you don’t actually have to be clever at what you buy. What you have to do is be buying. There’s a hell of a lot to be said for indexing into a bear market. You can sort out the asset allocation later when the rubble has stopped bouncing.

What does a bear market look like, and how do you know one?

A bear market is a fall back of 20% against recent highs, apparently. How do you know one – I spent too much time a while ago trying to formulate a black box determination of a bear market from the price signal. A bear market is not just about the price. It is also about how people feel. You know a bear market from the number of pundits screaming that everything is doomed – indeed I’d go as far as to say a bear market is much more about how people feel about the market that the price signal the market is giving, it’s the sizzle, not the steak.

The trouble is that the depth and duration of the retrenchment is unknowable at the start. Is this like 2008/9? Is it like the dotcom bust? The 1930’s? Is it the final denouement of capitalism culminating in a war of all against all, or maybe a modest wobble like 2011?

This unknowability means I don’t want to be buying all in one go, a good bear market happens across a year or more, the 2011 wobble was a few months ISTR, but the trouble is you can’t know where the bottom is. So I want to be getting in steadily over a few months, perhaps a year. The five grand for the ISA is easy enough to do, buy £1000 of VUKE and do it again over the next few of months. VUKE because it’s the FTSE100 that’s getting much of the stick at the moment. As well as that I have about 8k left in a cash ISA, which I can now deploy into the stock market. Unfortunately, having tried with Charles Stanley, it appears that I can’t actually open a S&S ISA by transferring in a seven-year old cash ISA without opening a new ISA for this year, which I can’t do 1. I could, of course, transfer the cash ISA into my TD Direct ISA which I already contributed to this year, but I don’t want that any bigger, I need another two S&S ISAs to bring the value of my shares ISA down to the FSCS compensation levels. This gets more relevant in times of market turmoil, MF Global is the poster child for what can go wrong here…

So I guess I am stuffed until April on moving that cash ISA, which probably isn’t so bad. If this is a big one, the bear market will be just getting its boots on by then, I should imagine we will still all be thinking it’s financial Armageddon. In time for the new ISA year 😉  I am pretty sure that buying VUKE now will look like a terrible idea by then. As will buying it in February. And March, May and June. But I can’t know, and that’s why sometimes you have to hold your nose and buy into bear markets anyway. It’s a dirty job, but somebody has to do it. I can’t call the bottom of a bear market. But I don’t have to, all I need is get in while the sale is still on.

It’s a lot more interesting than steadily socking away a few hundred pounds a month into an index fund in a bull market, even if the interesting is the same sort of interesting as living in interesting times. It’s the drama of bear markets that I like, well, and the fact that valuations get so much better. Despite everybody saying valuation doesn’t matter and you can’t time markets etc I can recognise a hissy fit when I see it. 2009 was good. 2011 had its moments. Perhaps 2016 will be up there as well. Of course, it is entirely possible that that kink in the long run TR of the FTSE100 is indicative of a deeper malaise – after all the suckouts seem to be deeper than they used to be and getting deeper, and despite the great celebrations when the FTSE100 crawled above the peak sixteen years ago it still seems to be walking wounded. I’m happier buying it at 5700 2 than 7000-something, although I am sure it will test 4500 sometime this year. I wonder if this will also be the year the Greeks default just to double down 😉 Let’s hear it from iii’s Rebecca O’Keefe

With every upturn being followed by deeper falls, investors are increasingly wary as it becomes more and more difficult to determine what might happen next.

We know the rough outline what’s going to happen next. Shit is going to go down, and keep going down. Until it doesn’t go down any more. The dotcom bust went down for three years straight, most of the other bear markets were two years or less. You shouldn’t have money in markets you will need in the next five years, so it’s likely you’ll be at least a year or two into the bull that follows the bear before the five years is up. Buy, not all in one go, and forget about it for five years. If the suckout lasts longer, well, you got different problems, bud.

If there is a deeper problem of returns then the value of some numbers on my TD Direct/CS screens which would be visible on the internet if we had any power and broadband while the zombies fight in the streets aren’t going to be a big problem for me, compared to the marauding zombies and preppers like some Cormac McCarthy novel. But if that doesn’t happen then we will still be using oil in ten years time and I’ll wager we’ll be paying more than $30 a barrel for it. People will probably still be buying things made out of stuff that somebody is going to have to dig out of the ground. We probably won’t have given up eating and Facetweeting. I can’t be bothered to try and work out who will be providing this. That is the nice thing about bear markets. They are absolutely made for the mindlessness of index investing, because a synchronised gloom grips people and they flog everything off cheap. You don’t have to be smart about what you’re buying. Just buy something reasonably diversified.

I’m not a fan of steady index investing across time. But I am a fan of indexing into market swoons, and then sitting on the spoils of war. Later on I will buy some individual shares/ITs once I feel there is an upturn, which of course will only be detected after the event. But on the way in, it needs to be like a slow-motion supermarket sweep contest, repeated regularly and paced out over months.

It’s never a good feeling to buy into something that’s tanking. And to do it month after month. I know what that felt like in 2009. But compared to the feeling when you look back afterwards, well, that isn’t so bad.

Pound cost averaging into a bear market isn’t smart and its not clever. But it’ll work, I’m happy to take the punt because I’ve been here before. Which is why I started buying yesterday.



  1. I have since asked them, and they have given me explicit dispensation for that
  2. that should probably be 5200 by the time I post this
25 Aug 2015, 10:04am


  • February 2016
    M T W T F S S
    « Jan    
  • Archives

  • This correction ain’t all that much yet…

    be careful what you wish for. You may just get it


    The Grauniad sets us right: On the sea of red v sea of green debate, the answer is, of course, that red is an auspicious colour in Chinese culture, indicating wealth. Thanks to Tom Phillips, our man in Beijing.

    All around there are headlines of market corrections and doom and mayhem, plus the curious fact that the Chinese seem to use green for falling prices

    So an Ermine takes a look and wonders, hmm, is it yet time to pump up the old HYP with a bit of cheap stuff? One of the shares I could use is Unilever, I recall being a bit sore when I read UTMT had got in at about £24 and I was already well behind the curve. So I sat on my hands, there’s always be another day, plus I’m not really that keen on a desultory 3.8% yield… In an HYP it is crucial to get a decent yild when you buy, because one of the corollaries of a HYP peortfolio tends to be that these are established companies, and Slater reminds us that elephants don’t gallop. So you must. not. overpay.

    UTMT has described the firm’s strengths and weaknesses well, notable is a fair sized exposure to emerging markets, and investors really hate anything to do with EMs right now, and so the company should be down the toilet, right?

    UTMT would still have the edge on me

    UTMT would still have the edge on me

    Well, not so fast. Now it could certainly get there, it depends on whether this market rout has got legs. I feel it does, but others don’t, and what do I know. However, it does highlight the need to have a clear target of where to be prepared to buy at. For HYP shares (usually in the FTSE100) I start to get uncomfortable paying more that the long-run market PE of about 15 for the FTSE100 although many of these big brands tend to be high-ish, which is why I hadn’t got in with UTMT. I was spoiled by building a lot of my HYP in 2009 and 2011, there is some hazard that that makes me overcautious buying in normal times, and to totally go on strike in heady times like the last three years.

    memories of this being in on the radio in the lab in the heady dotcom days of 1997, when buying dotcom shares was going to make me my fortune, though work was good enough I had no thoughts of FI/RE

    So I’m all for a market rout, but let’s face it, what I really want, what I really really want, is a bear market – 20% off recent highs at least, and half of that fall is to get to fair value IMO. And so far, sadly, none of the trigger values for stocks I actually want to buy has been reached, despite all the excitement. There are, of course, areas of temptation. I really want to buy JII, but it’s just not really there yet. So far, this seems to be a rout, not a market capitulation, and the starting point had been from outrageously lofty levels. We’re back to late 2012 on the FTSE100. I want the Summer of 2011…

    So in the absence of anything really worth buying I’m drip-feeding into my existing holding of Vanguard Lifestrategy 100. Not because it’s terribly exciting, and the price is only back down to what it was at the beginning of this year, but because the cost structure of funds on TD are made for drip-feeding. I’d hate to look back if this turns out to be short lived and to have done nothing in the swoon. That’s the trouble with trying to use downturns – the hardest part is actually buying in the fog of war…

    A distant sound of thunder

    Ah, the lazy hot days of summers are conducive to all sorts of rumblings – here in East Anglia there is a strong predilection to thunderstorms. But there’s another sound of rumbling in the distance, and that’s the sound of distant promise in the markets…

    thunder and lightning, very very frightening...

    thunder and lightning, very very frightening…

    You start getting people talking about global plunges (though bear in mind it’s silly season and news is thin, so this may still not stick yet) and running pictures like this –

    1508_tradersand the ermine feels the slightest waft of a breeze across the whiskers, and the snout twitches to point in the direction of the interesting scent of fear… I have been bored shitless by the markets these last couple of years, I’ve made some desultory purchases like HRUB and a bit of EM stuff, but they didn’t really feel right (and weren’t right) but not enough of them to make any big hit, indeed the time may come to add to these. Most of the time I’ve been selling my own stuff back to myself to get it wrapped in an ISA – that sort of tedious business is what markets hitting new highs are for. But these new straws in the wind seem to indicate things could start to get interesting again…

    When I left work in 2012, I transferred my entire AVC fund into cash, because I did not know when I would have drawn down the cash I had saved, and would need to draw my pension early. At the same time I would have needed to invest this AVC fund, saved specifically to compensate me for the loss of taking it early. It looked like the market was on a high at the time, which turned out to be patently not true.

    I only have the choice of these two finds in my AVCs and cash

    I only have the choice of these two finds in my AVCs and cash (the FTSE100 isn’t as bad as it looks since I would get dividend income). The blue one already served me very well 2009-2012

    Okay, so I sold out at a local high in March 2012, but it then proceeded to make half as much again. I can be sanguine about that because there’s a lot more than this in my ISA, the overall value of which has tracked up by more than the blue line 1  Obviously had I a decent crystal ball I’d have held on and sold three years later, but I don’t regret this, because I have learned one thing about shares, and that is

    be no forced seller

    The rough rule of thumb here is that money you will need to call on within the next five years has no business being in the stock market. I did not know in 2012 what the future held. At the time, before Osborne’s changes, I believed I would need to draw my main pension and spring this cash tax-free, possibly to backfill any money I’d had to borrow in the meantime, alternatively to invest it. So cash it was, I accepted the 8% loss to inflation over that period. The insurance of cash against market turmoil has a cost, life is like that. If you’re a forced seller caught on the hop, you could get to eat a 50% loss and have to make a 100% gain to be back where you started. You really don’t want to do that.

    But now I will get a lump of this tax-free and have a steady strategy to pull out a personal allowance-worth each year. Unfortunately I’ve already contributed 2/3 of this year’s ISA allowance selling my own unwrapped shares back to myself to use this year’s capital gains allowance, but it starts to look like there will be a stronger case to commit new money to the market if there is a decent rumble. I can do that in my SIPP and with the remaining part of the AVCs – these in particular I know I won’t touch for another five years. I would have been windy of committing them to the markets in the recent highs, but some of that objection is falling away. Five years is a long time in the market – even if I were so unlucky as to buy the FTSE100 at the peak before the financial crisis (6730 on Oct 12 2007) I would be at 6487 five years later (and would have received five years worth of dividends). The odds improve no end in market swoons, and this one starting seems to be a general worldwide across the board throwing in of the towel, so something nice and boring like VWRL seems to be worth buying into in moderate monthly amounts across the next six months with the rest of my ISA allowance.

    Extracting the AVC money seems to grind like the mills of God, exceedingly slow, but hopefully the market won”t have recovered by the time I get a definitive answer as to whether I can transfer part of it as opposed to the whole lot. If part I can shift the residual AVC fund into that L&G 50:50 global index because I know I won’t be needing that for 5 years, if not then I will do something with VWRL in my HL SIPP. It looks like the markets are set to get a bit kinder to me, and all the other net buyers out there. Now that I know my time horizons I can use the information to allocate more money to the markets.

    So I raise a glass of summer wine to fear and loathing in world stock markets. Of course, it could be the final surrender as capitalism gives up the fight in the face of shocking government debt, Chinese overhangs and falling productivity. Or it could be the second shoe dropping of the financial crisis – all the stuff desperately batted into the air by governments who didn’t want to face the facts. But in that case we’re all stuffed anyway, que sera sera.


    1. note that this is not because I am an ace investor, the share uplift has indeed been most decent when I unitise, because over the last few years it didn’t matter what you owned, you were going to do relatively well. But of course over those three years I have contributed three years of ISA allowance too.
    17 Jul 2015, 10:21pm
    personal finance shares


  • February 2016
    M T W T F S S
    « Jan    
  • Archives

  • Windfall for tourists as Carney trails interest rate rise

    The Grauniad tells us it’s a good time to be a British tourist, all thanks to that Carney chap trailing an interest rate rise. I can’t help feeling that empty promises of  rising interest rates are just like a lasting solution to the Greek predicament, this is a movie that we’ve seen before and will see again – announcement of interest rate rise only to welch on the deal when push comes to shove. But a lot of people seem to buy it. Or perhaps they’re pissed off with the Grexit shenaigans. Either way, we’re back in 2007 again in relative terms to the Euro, though we are all still flat on our financial backs with stars going round in front of our eyes. And that’s before you even think of Greece.

    1507_eurogbpNow an Ermine could take the opportunity to hit Eurotunnel, duel with the myriad desperados and striking Frenchmen, and join the massed ranks of British wage slaves on their annual family two weeks in the sun, or I could think to myself maybe I’ll pass on that. I’ve always avoided school holidays for travelling anywhere because it’s damned hot and the price goes up and, well l’enfer c’est les autres avec leur fractious rugrats on public transport in the heat of summer. After 30 years of avoiding this sort of fun I’m not about to start now.

    Nevertheless, perhaps I could take some of my ISA for a summer holiday. Last year I was a forced seller and sold IDJV 1 for about £16 because it had fallen to what I had paid for it. It was unwrapped, I’d already maxed my CGT allowance so I couldn’t sell any of the rest of my holdings at a profit even though I needed the cash, hence I had to borrow some. Now it’s still a bit higher than that at £16.91, so I’ve told TD to let me know if it falls to a bit below what I sold at, because then I can effectively bed and ISA this over six months.

    All sorts of other foreign stuff will get cheaper. Now the other side of the coin is that all the foreign stuff that I already own will go down the toilet a bit. As it is this isn’t a hugge issue for me as I am hopelessly unbalanced worldwide

    Ermine total equity distribution

    Ermine total equity distribution

    because my HYP is the largest lump and it’s UK biased. Index True Believers would sell off half of that and pump up that devxUK and EM. I’m okay with buying EM and have done some of that already, and it bleeds now of course 😉 I’m not touching the US at current valuations but I would quite like to see some of that IDJV, in my ISA this time thanks very much. I’m not in a great hurry – 1550 would do me well. I should probably knock it off on the EM and lift some bombed out dev world. The problem is that as the ISA gets larger the annual steering wheel of new contributions gets smaller compared to the overall size. Since I don’t sell and I bought a lot of the HYP in the bombed out years of 2009 to 2011 I’m going to have a hard time balancing this out a bit. But a high pound and a low Euro helps…

    So you can keep your sea, sun and sand. I’ll get my summertime kicks on the market, particularly if the Greeks go and scare the horses a bit more. I like hot lazy summers of snarl in the markets.


    1. IDJV is basically Eurozone big fish.

    China doesn’t really seem to get this stock market thing

    While our eyes are focused on the slow train crash that is Grexit, over on the other side of the world there is an interesting example of King Canute seeking to hold back the waves. In China they seem to be of the opinion that their overheated stock market, having gained over 100% in the last year, is supposed to stay there. If you’re one of those capitalist running-dogs that is going against the story looking to sell, well, you can stop what you’re doing right there. Hardened Western investors who went through the dot-com boom might ask themselves what the good reasons were for last year’s 100% heft in a generalised index 1

    from Bloomberg

    Shanghai Composite Index from Bloomberg

    So they stopped people with a 5% or more stake selling, and the government lends money to people to buy shares :) There’s something about the point of this whole stock market thing that is being missed here. The Chinese stock market is also a young market, it seems compared to other world markets there are a lot of retail investors buying shares on margin – what on earth could go wrong? This is classic New York 1929 bucket-shop trading. Maybe in a few decades they will  become sober index fund passive investors, but first they have to get the momentum-chasing speculator out of their systems.

    China’s investing culture remains backward and immature.

    Howard Gold

    Markets elsewhere have been on a roll of a long time, and while Grexit is unlikely to hurt too much outside Greece this one could be the second shoe dropping. There seems to be a lot of ruin in China as it tries to reorient itself from its early 2000s economic model to something that matches the post Lehman-crash world. There’s a lot of ruin in most economies, and it doesn’t necessarily lead to trouble, but by its sheer size China could have big knock-on effects.

    Better to be a dog in a peaceful time, than to be a man in a chaotic period 2

    There haven’t been tremendous buying opportunities in the markets for two or three years now. But interesting times lead to interesting opportunities. There’s still too much zombie puffery inflated by easy money after the 2007 crisis. Emerging markets are probably where it’s at in 20 years’ time, and perhaps we will have more opportunities to pick ’em up cheap in the next few years if this sucker goes down. Of course, associated with that will be all sorts of other misery. I’m not doing a Dubya and saying ‘bring ’em on‘. China has big challenges ahead with the whole get rich before getting old thing, and I personally have avoided investing in it 3 because I have no feel at all for the country – my preferences in emerging markets lean towards India, Latin America and Africa from a demographic point of view. Howard Gold is quite right to describe EMs as having gone down the toilet, but I’ll be surprised if they stay there for the ten years he is calling out. I don’t have enough EM exposure, because in the years after 2009 I was building a HYP. And I don’t want to be a dog…


    1. this question being, of course, the one they failed to ask themselves in 1999 – ain’t experience and hindsight a wonderful thing?
    2. May you live in interesting times is a good line, but not Chinese, so it’s not right to to use it for China ;)
    3. other than in generalised index funds
    25 Feb 2015, 6:11pm
    economy shares


  • February 2016
    M T W T F S S
    « Jan    
  • Archives

  • others are greedy and the Ermine is fearful

    You want to be greedy when others are fearful. You want to be fearful when others are greedy.

    Warren Buffett

    Much brouhaha about the FTSE 100 at last closing above the level of its 15-year old dotcom high in December 1999. The rational investor will tap a copy of his efficient market hypothesis, sigh and wonder what all the fuss is about. Trouble is the market isn’t efficient, it’s all about the madness of crowds in the short term. And it means they’re greedy 1. I haven’t worked out what the hell we are doing up here for a couple of years now, and I’m still puzzled. As for the Americans, they’re drunk on it.

    And I can’t help a shiver go down the spine, because unlike whippersnappers like this, I was there in the early days of the Web, with an ESI account (eventually bought out by Charles Schwab and then bought out by Barclays). A group of us late thirty-somethings  dreaming at work – I still remember the welcome note the young Ermine sent out when I set up the internal company share discussion board

    “The aim: to make us rich. Very very rich”

    Asshole. Sorry young Ermine – you were at least circumspect enough to not risk money you couldn’t afford to lose. There was a heady and peculiar feel about it all. One fellow did do very well in 1999. Which was a bastard when it came to paying the capital gains tax on that lot the next year and his total portfolio was worth less than the CGT bill! Time to remortgage – it’s not meant to be like this… I was a timid Ermine, mucking around with no more than about £10,000 in total so I was spared that sort of slaughtering. £10k cash is worth about £15k nowadays. It was also worth more to me then because it was a larger proportion of my salary than ten years later.

    Looking back at the paper records of that time, the Ermine wasn’t as hammered as much by the dotcom bust as I thought, because I withdrew a lot from my trading account in ’99. I’m not sure why. It felt rough because I knew Mr  CGT cock-up personally – I was awestruck by the total abount of money he was trading but didn’t have the balls. It was a stupendous amount of money  – only fifteen years later have I seen that amount of valuation in an account summary of my own 2. So I knew a few people who got hurt big, whereas I just had the black tip of my tail pulled in comparison.  I’d really like to be able to claim I saw the denouement coming but I probably wanted to go on holiday with DxGF and also to start funding my ISA, which does show the classic dotcom story (I don’t have all the portfolio valuation statements but I put £7100 into this over a couple of ISA years before losing interest)

    The Ermine dotcom ISA - £7000 into about half that over three years

    The Ermine dotcom ISA portfolio valuations – cash in of about £7000 into about half that over three years

    I got good value out of the experience, because I learned what not to do. Do. not. Churn. For God’s sake, just don’t

    bunch of contract notes from two years of my dotcom days

    bunch of contract notes from two years of my dotcom days

    One of the great things about investing in those days is that it was so much more tactile – you got contract notes in the post each time you bought and sold. I filed mine, and spread the suckers from two years out. One of the obvious failure modes of my early investing days is right out there in plain sight – each one of those tickets cost at least £10 I think on the turn. Yes, volatility was shocking in the dotcom tech days and you could cover the cost of churning in the runup to the bust. But to be honest it didn’t really matter what you held then, so why trade all this shit when it notched down and buy something else that was racing up. These days if you want to trade over days and weeks go spreadbetting young man. Better still tune out of the wall of noise and chill. I keep these contract notes as a memento mori. Do. Not. Churn. If you’re not a daytrader then if you aren’t prepared to hold it for six months then don’t damn well buy it, and if you are a daytrader then you are Frankie and The EscapeArtist wants a word in your shell-like.

    On the other hand, like a good little regular index investor, I started investing in a virgin Tracker ISA ( I believe it tracked the FTSE All-share but could have been FTSE100. Had a good-for-the-times TER of 1%)

    Virgin tracker ISA

    Virgin tracker ISA

    I was buying until 2000 (the dotcom ISA took over from then 😉 The pattern is not shockingly different – everybody got hurt in 2000 and may of us quit investing by 2001. From the looks of these charts I guess learning that cost me about £5000. When you look at the cost of numbnuts trying to charge you for sure fire courses on how to be a top trader the cost of attending investing school at the University of Life isn’t so bad. The lessons for me were –

    If you’re gonna stop investing regularly in the stock market, go on strike at times like 1999 or maybe now, don’t go on strike in the bear markets. That’s easy to say but still hard to do. It gets easier to do after you’ve seen it work. It’s one of those gut things.

    Do not churn. If most of your holding periods are less than a year you are a churner 3 A lot of your return is in the waiting.

    Don’t chase momentum. If it all looks high, look for something low. And still check the bastard out – sometimes it’s good to sit tight. Unlike chuck Price you don’t have to get up and dance, and at the paltry levels of interest these days holding cash in a S&S ISA (or even in a Cash ISA, not that that’s really worth the candle either) is a reasonable thing to do. Low inflation/deflation is the cash-holder’s friend. It’s not gonna last

    Note from my index investing career that index investing will still not save you if you are Dumb Money and chase momentum. Index investing is a method, not a solution.

    So what is it about now? Look all around you and the highway is littered to the horizon with cans kicked down the road by politicians eager to make it all go away for another five years. There is stupendous wreckage in the eurozone. The Chinese, Japanese and everyone else seems locked in a deadly embrace to trying to outprint money and make it some other sucker’s fault. Trade has slowed to the extend that we have overcapacity in world mining, commodities of all sorts and the oil price had tanked for  lack of demand due to a lack of economic activity. Warmongering sociopaths from Putin to the vexatious nutcases all over the Middle East are working out their childhood traumas on unfortunate legions of their fellow human beings. Grexit has been postponed, not resolved.

    Apart from that everything is dandy. I know that you shouldn’t be a doomster but that doesn’t mean you have to empty the Kool-Aid in one go. The valuations of the developed world seem mad given the state of the place. Let’s hear it from Citi’s Chuck Prince in 2007

    When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

    All those damned kicked cans littering the highway, too, piling up and getting under people’s feet and making things more complicated. The ermine is fearful. Not fearful as in 2001, having lost a shitload of money and wanting to sit out the next dance. Fearful as in 2015, trying to work out what the hell to do with the coming years of ISA allowance because all those other blighters seem greedy.

    The market can stay irrational for longer than I can hold out selling my own stuff back to me. I only have another three years of CGT holdings to liquidate, and then I am going to have to start putting real money into my ISA as opposed to selling my unwrapped holdings back to myself, I hope this one’s gonna blow before 2018…

    There’s also a sneaky little corollary to that. If an when it does blow, don’t just load up my ISA. Load up an unwrapped trading account too, to sell back to myself in the Kool-Aid euphoria years like now. What did that fellow Greenspan call it? Irrational exuberance. His countrymen are doing that right now IMO.


    1. well, it also means our govenrments have printed a shitload of money that needs to stick to something I guess, and in the UK housing and equities is as good as any.
    2. I am lucky this is largely in an ISA
    3. There’s nothing inherently wrong with churning though your costs start to rise. But I have learned that I am absolutely crap in that mode. so I don’t do it – I favour being catatonic when investing.

    The incredible lure of day-trading

    Ah, day trading, the ultimate signal of feel-good in the markets 1. It’s the harbinger of doom, because it is a signal of irrational exuberance. A bunch of day-traders were on the telly a few days ago, hat-tip to Under The Money Tree who flagged up Traders – Millions by the Minute as an object-lesson in what not to do.

    There are two fundamental approaches to trying to make money out of the stock market. One is to regard it a way of purchasing a selection of productive assets, and then becoming a rentier, sitting back and taking a slice of those productive assets without having to do any work. Don’t knock it -that’s the way the super-rich are getting richer. They’re not saving from income, that’s soooo 20th century, dahlink. You need to have inherited wealth or stupendous good luck. The latter is how Russian oligarchs get rich, the former is how Paris Hilton and the Ecclestone daughters got rich. You don’t get to have a pad at the Odeon Tower Monaco if you’re on the side of income no matter how clever you are or how good a footballer.

    Capital, not income will get you here

    Capital, not income will get you here

    Half a billion is doable as income, but you need a turbo-charge from the stock market to keep you there. CEOs and the like have managed to get into this area by getting on the side of the stock market, but they don’t day-trade.

    The second is to regard the stock market as a casino, and to attempt to pick a smidgen of signal from the noise the market throws off. In Traders-Millions by the Minute the punters were taking this line, using spread-betting. The Ermine has indeed had dealings with spread-betting. I’m a fan of it in dealing with sharesave, because you can lock-in profits.  Though I lost money on that side of the trade I achieved my goals. Every year I get on the wrong side of the trade with my house insurance too, and lose money. I am cool with that.

    WTF? The Ermine is a fan of trading and spread-betting?

    Sometimes you have to hold shares for a particular period. Sharesave and Employee Share Incentive Plans are a classic case, particularly the latter. You have to be a special kind of mug to lose money on Sharesave, but on ESIP you can, because you purchase the shares from pre-tax income but have to hold the shares for five years from purchase, else you get to pay the tax and NI you didn’t pay to buy the shares.

    So say you buy 100 shares of Megacorp at £1 a share using £60 of your hard-earned cash post-tax. The £100 only costs you £60 because the taxman doesn’t thieve £40 from your income in this instance. But you have to hold those shares for 5 years. If they go down to 60p at the end of those 5 years you break even, less five years of inflation.

    If you short the number of shares you buy, then you will cancel out any gain or loss on the shares, though it will cost you something to do that. But you do get the benefit of the 66% tax bung. Why 66%? Because you forgo £60, but you get £100. Thus a profit of 40/60 or 2/3 = 66%/ Less three years of inflation, say about £10, so you come down to 50% up.

    I used this towards the end of my time at work with ESIP and Sharesave – to protect myself against significant falls in The Firm’s share price. As it was The Firm’s SP went up, and I got to pay IG about £1000. I was easy with that – it was worth paying to insure myself against losing a lot of what I had gained already.

    Social Trading and Trading Superstars, a new development in the trading universe

    Apparently you can now track some other trader’s trades if you can’t be bothered to do the legwork yourself. It really puzzles me whyit’s not obvious what’s wrong with this. The long-term rise in the stock market is roughly 5% p.a. real 2 , though you have to be invested for long periods of time (about 20 years) for things to settle out like this. It’s one of the reasons why I believe index-investing’s studious ignorance of high CAPE/valuations is am issue. But that’s something for another day. So traders, every day, are exposed to  1/7300th of their stake on average in real stock appreciation if they go long, less the cost of the spread on every turn which applies going long or short.

    Now trading tends to be a short-term activity – that daily gain from the stock market going long isn’t going to speak for much there at 0.01% per day. So you profits as a trader have got to come from somewhere, and it comes from either the punters or the casino your spreadbetting firm. Seen any spreadbetting firms go bust recently? Nope. So it’s coming from the punters. In theory it could come from the markets, because the SB firm presumably hedges any major shifts building up over time, but the programme seemed to indicate most of the profits were from the spreads on the trading, which stays within the system.

    And therein lies the rub. If all the punters start getting ahead, the odds will lengthen. Particularly in spreadbetting, where you are running on a model of the real thing, not the underlying market.

    The trick with day-trading is to quit when you’re ahead

    Over a dreary telephone conference at work way back in 2010/11 an Ermine extracted £400 from IG index on gold, trading per tick, and gave up £350 of it by the end of the meeting. It was sheer luck. Some while later I dabbled in forex trading, using a VAR spreadsheet to control risk. After a few months 3 I looked at the results, observed how much risk it was necessary to pay the fees. I experimented with IG’s automated trading system, where you try and craft a black-box strategy based on the previous charts price history, and back-test it on historical data without using real money.

    I could find no strategy that permitted risk to stay bounded as time passed – everything seemed to trend towards a martingale situation where you can always win – if you have infinite wealth and infinite time. If you have infinite reserves of wealth you don’t need to piss about with spreadbetting, cos you don’t have infinite time. I was never tempted by the breathless folks offering courses and training to learn how to trade xyz because of the natural suspicion – if you can make me rich then why the hell aren’t you in some darkened room making yourself rich, dude? Cut out the middleman. I guess it’s the gonzo version of the active fund charges.

    I was Frankie, although I derived the result in a different way from The Escape Artist, by observation and hypothetical experimentation. So I took my £800 gains plus the £1000 stake, and stopped doing that, because it was the logical thing to do. MMM has a nice post on get rich with science. It’s harsh, but when you see the statistics tell you that this is more luck than judgement you can either ignore the results or take the insight offered. If I want to make money out of a spread-betting firm, I will buy their shares. I did learn from this, however, and applied the knowledge to my investing. Trading costs you money. So I stopped selling, and made it a priority to sit on my backside and take the dividends.

    That, fundamentally, is the trouble with day-trading. In the end you are part of generating the wall of noise – for you to gain, somebody else must lose. This does not necessarily hold with the stock market over the years – because in aggregate returns accrue to capital. But those returns accrue very slowly. To actually get rich from a 5% p.a. real return you need to live frugally and ideally you need to take a multi-generational view. If you have talent and/or cunning, you are much better off leveraging your capital with a business and then selling it.

    How do the rich get rich?

    Take a look at the top 10 of the  Forbes Rich List There are more Mark Zuckerbergs,  Bill Gates et al than there are Warren Buffets. If you look through the top 10, the sources of wealth are typically from running or selling a business, followed by ancestral wealth of some sort. Four are self-made, and six are inherited wealth. Forbes trumpets this as saying the American Dream is hale and hearty. I’m not quite sure I want to imagine what it looks like when it’s poorly – holders of old money outweighing new in the top 10 shows maybe the rags to riches isn’t quite as easy as it’s made out. But it can be done. Something else of note is: no actors/actresses. No musicians. No sportspeople. None of the ways teenagers hope to get rich. Something else of note is that most of these are no spring chickens – it’s the greybeards who have all the money. And they’re not a pretty bunch, eh, indeed some of them probably can’t have intact mirrors in their homes.

    Of those ten, only one  ‘made it on the stock market’. And curiously few in the top 25  ‘made it day-trading’ 😉 Mind you, Sheldon Adelson comes in at #12 from running casinos. There’s nothing wrong with casinos as a way of making money. It’s just that most people go the wrong way about it! Don’t walk through the casino  doors. Own them.



    1. I wrote the first draft at the end of September. The feel-good doesn’t quite ring true now – exciting times ahead?
    2. this comes from the BarCap Equity study
    3. I had a similar temperament to the timid trader in the programme, if in doubt I did n’owt. This is apparently not the route to success in this field
    27 May 2014, 5:35pm


  • February 2016
    M T W T F S S
    « Jan    
  • Archives

  • Hello Mr Putin, fancy meeting you here?

    It’s not an experience you get that much in the UK with its short distances, but when air travel was dearer, in the 1970s, it was worth travelling by train in Europe. You’d get off the boat at Ostende, and after some interminable shuffling, end up at the railway station, where you had trains that went to different countries, which looked really exciting to a young ermine. Sometimes the train would have a destination of two countries, depending on which end of the train you boarded.

    Unlike air travel, the train stops at many places, and different people would embark and disembark at the waystations. As you approached your destination you’d get a sense of the place you were going to by your fellow-travellers.


    So in my ISA I found myself waking up next to this fellow with hard gimlet eyes. You get the feeling he’s not a chap who is unused to seeing a dead body that was alive not so long ago. It’s not a friendly face, eh? And you get the feeling the old boy’s known some troubled times. Here’s a fantastic album of Vlad doing all sorts of derring-do –  not bad pecs for a geezer who’s getting on a bit.

    Vlad, a word in your shell-like. If you don't like what's on TV you can switch the darn thing off. Chill, bro'.

    Vlad, a word in your shell-like. If you don’t like what’s on TV you can switch the darn thing off, particularly if you’re Prez, they ain’t gonna stop you. Chill, bro’.

    Exactly why he’s so bothered by the existence of Conchita Wurst is presumably something that’s between Vlad and his shrink, if they indulge is such effete decadence in between all the huntin’ and fishin’.

    However, it’s not so much Vlad himself but Russia in general I’m interested in.

    A lot of people have lost a shitload of money in Russia. It’s a different country – they do things differently there. The term ‘ownership’ and the general rule of law has a more fluid meaning, as the odd oligarch has found out to their cost. Smarter people than me indeed have had Russia cost them dear – the rocket scientists of Long Term Capital Management who believe that risk could be abstractly quanitified discovered to their cost that

    In times of stress, the correlations rise. People in a panic sell stocks — all stocks. Lenders who are under pressure tighten credit to all

    Crikey. No shit, Sherlock? That’s the trouble with being a rocket scientist, you haven’t spent enough time with people to realise that scared humans (or dogs, or wildebeeste, or pretty much any living thing) do not scatter preserving their individual independent calm assessment of the situation. They run like hell. Mostly in the same direction as everyone else. Dunno what the maths of that are, but it buggers up your kurtosis and fattens your tails. And drains your wallet.

    So why do I want some of this? Well, I’m not going to go stockpicking in Russia. But I’ve been toying with the idea of getting some exposure to Vlad’s country despite his sabre-rattling and raising the uncomfortable topic formerly known as ‘living space’ in a previous context. After all, that nice man Tony Blair wasn’t averse to making other people live as he wanted them to live, though it’s still not an attractive characteristic in a world leader. Like it or not, Europe is going to have to cut deals with Russian companies, unless a large part of Europe would like to freeze its rocks off this coming winter. Even if they do, the Chinese might like some too.

    Unlike the traditional view of investing for retirement, where you liquidate on retirement to buy an annuity, I will use the income from my ISA over the coming years, and that terminal horizon is still several decades off possibly. I expect the financial and political power of the West to decline relative to other regions of the world for a range of macro reasons, as well as the Spenglerian thesis that cultures grow old and tired as they become more distant from the shared values that invigorated them. That isn’t to say that I believe Russia will stand towering above the early/mid 21st century like a Colossus. This long-range section of my ISA is small, and it includes a bit of  Asia, a little bit of Africa and now a little bit of Vlad’s domain in the form of HRUB 1 . I can take a long time over buying these areas, because the aim is to hold these for many years. So I try and pay as little as possible. The pound is relatively high at the moment, so it’s probably a year for looking for foreign assets, and Vlad’s been pissing a lot of people off which also seems to scare the horses a bit. The index is a funny old thing, too, being the MCSI Capped Russia index – basically Russia is about Gazprom, energy, oil, Sberbank, energy, more oil, mobile, commodities. And the chart looks fantastic – full of absolutely everything you don’t want in a stock chart – nose-dive-tastic, if this was an aircraft and you’d lost 30% heading for the ground hail Marys wouldn’t really be enough to give you hope.

    Crashing nosedive - all-time low. Time to buy?

    Crashing nosedive – all-time low. Time to buy?

    So I couldn’t resist – a P/E of about 5 and a yield of of a gnat’s under 3% I figured I’d have some of what my old mate Vlad is having. It was the devil’s own job to get data on HRUB – I had to sneak in to HSBC and pretend I was a professional and then look for HRUD and switch currency to GBP. I favoured it over the db-x trackers flavour of the same thing (XMRC) which seems much more popular (or heavily advertised) because that is a derivative with Deutsche Bank as counterparty, whereas HSBC was physical replication.  Physical replication isn’t all it says on the tin, though, because they still lend stuff out, turning physical into synthetic-lite.

    But to be honest, if you’re going to invest in Russia then you’re not of the most nervous disposition, and you gotta be prepared to let it all go. This isn’t a huge part of my ISA 😉

    Actually buying it on TD was no fun either. They swore blind they didn’t have any of it, I have to look up HSBC, page through pages of cruft, click on the HRUB link, upon which they still said they still didn’t do it, but a crafty Ermine observed that they could run a realtime quote 2 and were actually prepared to sell me some. Which they did.

    TD. We don't do this, but since you're a crafty bastard we do.

    TD. We don’t do this, but since you’re a crafty bastard we do.

    Now if a company was on a P/E of 5 and a yield of 3% I’d pass. but most of Russia’s stock market is companies doing real stuff with Real Men digging crap out of the ground. OTOH my mate Vlad could say he owns the lot and the Ermine is unlikely to launch ICBMs to get my stuff back. It’s gonna be a case of back away quietly from the hard man, eyes to the ground and then beat it ASAP. Indexes don’t usually go bust but the Russian stock market does have form on that, I hear 1917  was a pretty rough year on the St Petersburg stock exchange…

    But in the meantime, the Ermine will ride with Vlad, though still looking nervously at those gimlet eyes…


    1. HRUB is the GBP denominated version of HRUD, but it’s easier to find charts for HRUD (dollar flavour) so I’ve used HRUD, so there’s a forex shift
    2. when the market was open, it wasn’t when I went back to get a screenshot of the crappiness of their interface

    Vanguard Lifestrategy has a lot going for it. Shame you have to buy it all at once

    One of the places the lazy index investor gets pointed to is Vanguard’s Lifestrategy – a sort of all-in index fund that tracks the whole world and rebalances automatically, without all the stress of doing it yourself. Buy regularly every month, sit back and forget for 20 years. I was looking at this for Mrs Ermine’s ISA.

    Trouble is, at the moment 30% of LS is made of highly priced stuff  like the US , that is on exceptionally high valuations at the moment and unpleasantly high by CAPE, and along with another 30% composed of the UK which looks like this

    As Clint would say, do you feel lucky, punk? Well, do you?

    As Clint would say, do you feel lucky, punk? Well, do you? Remember that money was worth more in 2000 so its’ not quite as good as it looks, but one would clearly be buying high

    The UK and the US together  makes up over a two thirds of Lifestrategy so it would be a nasty headwind to buy into now. On the other hand, a portfolio roughly diversified like Lifestrategy is where I’d like to be in about 8 years time. An evil thought comes to mind – what about buying the cheaper parts first 😉 Let’s lift the lid and look at what’s in there.

    Vanguard Lifestrategy isn’t the MSCI World

    I’d always assumed this is a worldwide index from the way people talked about it, but it turns out this is not the case. The US flavour of this is quite different from the UK version – if you take a butcher’s hook at the geographical spread of the latter

    Vanguard UK Lifestrategy 100% Eq geographical allocation

    Vanguard UK Lifestrategy 100% Eq geographical allocation

    There’s a long tail but I’ve caught about 90% of the allocation. And it’s not what I expected, which would be more something like the MSCI world index.

    MSCI World composition

    MSCI World composition

    To be fair, MCSI World is still about 80% developed world at least. The very heavy UK weighting of VGLS100% – presumably comes from the view UK investors will typically show a home bias. As shown in my portfolio – I’m easy with that. I am surprised that the UK is as much as 9% of the MCSI investable universe, whereas the US being more than half doesn’t really surprise me that much. Lifestrategy has the advantage of being a recipe for a diversified portfolio which comes along with a handy benchmark. There are lots of other ways of thinking about diversifying, but taking Lifestrategy to bits is a lazy win.

    Let’s take a look at what it’s made of (straight filched from Trustnet)

    Note: I had the bad luck to post this just as Vanguard made notable changes to Lifestrategy, so the exact values are incorrect. Take a look at the comments for the latest lowdown – thanks for the heads up!


    Total 100.00%

    Lifestrategy 100 – diversification roughly where I want to be in ~ 8-10 years’ time

    So this is the sort of balanced asset allocation where I want to be in 8-10 year’s time. That’s when I will have stopped contributing to my ISA. Obviously it’s a moving target. The world of 10 years from now may have a larger EM allocation, because, well, some of those markets may have emerged and therefore be that much bigger. I’ve ranked these components into high-level categories and roughly summarised the balance of VGLS from it’s components. There are inconsistencies – Developed world ex UK is polluted with a lot of US. However, since some of my aim is to steer the long term balance towards something like VGLS using some of those Vanguard funds that make up VGLS that data error doesn’t matter so much.

    So where am I now (uk l is UK large, FTSE100 big fish, UK m s is medium small UK shares). FWIW I didn’t design it to be this unbalanced. Some of those big UK fish just grew. They’ll probably shrink in years to come, looking at the current valuations…

    where I am now. I'm skewed somewhat by The Firm that I can only sell off in sub CGT lumps

    where I am now. I’m skewed somewhat by The Firm that I can only sell off in sub CGT lumps, but I’m also skewed by the HYP that also holds UK big fish

    It’s easy enough to add up ten years worth of ISA savings and estimate what the target value is (added to what I have already, which will be the foundation).

    Where do I want to be (this is my estimate of Lifestrategy’s composition)

    an esitmate of the current Vanguard Lifestrategy allocations

    an estimate of the current Vanguard Lifestrategy allocations

    And the standard index investing mantra is go like a good little indexer and buy VGLS100A every month, and hold. But I haven’t got where I’m now by indexing, I’ve got there by buying what people hated. Two thirds of the composition of VGLS100 it is on or near all-time highs! Not only that, I’d have to sell off my HYP. I don’t want to buy high, I want to buy low. At the moment, f’rinstance, that EM index is a lot cheaper than the US index fund

    EM versus US index fund prices

    EM versus US index fund prices

    Kinda makes sense to go buy that wodge of EM first, since it appears to be on sale at the moment, whereas buying the US index at the moment seems to be like going to Harrods? I’m going to aim for what’s cheap – well, to about 3/4 of the ISA allocation. And I’ll dial back on buying the VUSEIDA for the moment – sometime in the coming years there’ll be a market swoon in the US, and that will be the time to go for that. That will probably be at the same time as a general developed world market rout. So loading up on EM isn’t a bad, and the Pacific ex Japan VAPEJPA:ID has also shown lacklustre performance of late. I don’t currently have anything in that space, either

    Strategic Diversification over several years – buy what people hate :)

    It’s often said that the FTSE100 gets most of its earnings from abroad, so it is more geographically diversified than non-UK indices 1 which I’ve relied upon to feel easier about such a shockingly heavy home bias. I also don’t suffer the sectoral swings I’d take from the FTSE100’s varying composition because I choose the HYP shares, and I have tried to sector diversify these

    The aim is to end up with roughly the same asset allocation as Lifestrategy once I’ve reached steady state – I will have enough income to live on but not enough to invest fully into the ISA after I’ve shifted my pension AVC fund into it over quite a few years. To actually achieve Lifestrategy’s asset allocation I’d have to sell off some of my HYP. I’m not going to do that, so I will always be more UK-heavy than Lifestrategy. But I will try and build a more balanced  Lifestrategy-like portfolio, buying the assets I don’t currently have when they are cheap. I am lucky in that I bought the current UK stuff when it was cheap, I wouldn’t want to try and do that right now. Taking a look at the performance of the individual  components that make up VGLS

    The Lifestrategy constituents.

    The Lifestrategy constituents.

    In this comparison it’s clear that you can buy VIEMKT 2 for the same price as a couple of years ago. Now obviously it may still tank, but reversion to the mean indicates it’s less likely to do that than something that has been riding high. If I want to own a certain amount of this in a few years time I may as well buy it when it is on sale :) The Japan fund also looks a bit sick, I guess Abenomics isn’t quite as good as the FT makes out here. If there’s ever an asset that deeply scares me, it’s anything to do with Japan, it’s been in a permanent tailspin throughout my working life. It’s the investing equivalent of Montgomery’s

    Rule 1, on page 1 of the book of war, is: “Do not march on Moscow”. Various people have tried it, […] and it is no good. That is the first rule.

    Field Marshal Bernard Law Montgomery

    And correspondingly, throughout my working life, you could say

    Rule 1, on page 1 of the book of investing, is: “Never invest in Japan”. Fortunes have been lost in the quicksands there

    Fortunately the calculated Lifestrategy weighted equivalent of what I want on this index isn’t too bad. If I can find a way to drip-feed that I can live with the expected loss. I don’t expect this to do other than go down the pan, but that’s one of the conundrums of diversification and trying to buy low. You have to buy stuff that looks bad at times, just like those income trusts did in 2009/10. Even stuff that looks bad and has always looked bad for my economically active lifetime – I suspect Japan is diworsification.

    Nothing shows you quite like this the opportunities you might get to buy things when they’re on sale if you take a few years about it.

    Callan's Periodic Table of Investment returns - see how EM has gone from hero to zero to hero to zero

    Callan’s Periodic Table of Investment returns – see how EM has gone from hero (2009,2010) to zero (2011) to hero (2012) to zero (2013). This is US biased, but 2013 was the year of the developed world

    Now the thesis of Lifestrategy indexing is you buy a vertical slice, weighted appropriately. Repeatedly, over many years. I want to buy a horizontal slice over about 8 years. From the lower half of the Table :) If you look at Lifestrategy, a good two-thirds of the weighting in US and UK, throw in dev xuk and you’re running at three-quarters developed world. All that is riding high at the moment. So if you buy Lifestrategy now you’re buying a lot of stuff that’s at high CAPE valuations. I don’t need to do that.

    That high valuation doesn’t matter terribly much if it’s one year out of 40 – you’re only buying 1/40th of your total capital savings at a high valuation. One of the other years could have been 2008, when everything was down the toilet, and you’d have got a great deal 😉 The next time within the next 10 years when the developed world is in the pits again you’ll get good value too. Indexing is great if you invest the money as you earn it, over decades. Which most people do.

    But I’ve only got another eight years of contributory investment life ahead of me, because I have absolutely no human capital left, so I am not generating income myself and investing that. I don’t want to  buy Lifestrategy now, because it means buying 60-75% of dear assets and highly correlated with what I have already. It isn’t right for me, and general index investing isn’t right for me either because of my short contributory time horizon and existing asset spread. However, selective indexing I haven’t got an objection to, I’m not going to go stock-picking in non UK markets. VGLS100 is a pretty good model of a diversified portfolio with free benchmark. I just don’t want to buy all the bits at the same time.

    I don’t buy the US at the moment because I focused on winning income from a UK HYP. As a comparison of the Vanguard US and UK components shows there is notable correlation between the two, at least over the last five years.

    Vanguard US and UK, rebased to GBP

    Vanguard US and UK, rebased to GBP

    I’m not going to buy the UK index either (because my HYP is plenty enough) and it looks like my UK bias has been standing acceptable proxy for the US market because of this dev world correlation. It’s a pleasant surprise – remember the dark days of 2009 when the developed world economy had been destroyed and emerging markets were going to charge over the parapet and eat all our lunch 3? The trouble is that people tend to overestimate what will happen in the short term and underestimate what will happen in the long term. Popularised by Bill Gates

    We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.

    It made him rich, though I do recall the Internet caught Bill napping. Anyway, I suspect the developed world’s lunch is still being coveted. And I wouldn’t like to be lulled into inaction, and kick myself five, ten years off for having failed to buy some EM exposure when it was going for a song. Obviously if I’d started in July 2009 then I’d have got it 40% cheaper

    40% cheaper in 2009...

    VFEM still 40% cheaper in 2009, though we had over 10% inflation since then

    I’m not going to buy it all in one go, but I will  spread myself out across the year. VFEM is an ETF in this space, and TEMIT seems to be on a 6% discount at the moment. Emerging markets seem to have a history of currency crises and market train wrecks, though that’s kinda rich given the near-death experience the First World went through recently.

    I favour actively passive. Not passively active 😉


    1. according to that study revenues for the French CAC and German DAX are similarly overseas-derived
    2. or some equivalent, like the ETF VFEM. I can’t see VIEMKT on TD Direct, though their Vanguard fund choice is weak. Interactive Investor seems to offer it for sale
    3. I’m not asserting second sight here; I felt that way too!

    Beating the market is really hard…but is it actually what you want to do?

    Beat the market – it’s what everyone wants to do. And there’s an increasing counsel of despair, that the market is efficient and you can’t do that. It will consume you and spit you out penniless. Settle for indexing, and it’ll all be all right.

    We’re all running around after the Holy Grail – we want to beat the market. Why, FFS? It’s okay if you really are a hedgie, I guess that’s your job. For the rest of us, shouldn’t we just take a step back and ask ourselves what we want to do?

    Most private investors are in the market for a range of reasons. Some of us find finance fascinating in itself. Some of us look at the daily grind and think to ourselves is this all there is – it hits people particularly in their forties, part of the thesis that human happiness follows a U shaped curve through the lifestream 1. And we want out.

    Some of us, like your scrivener here, carry on insouciantly through life/career and then take some hits. Discovering along the way that they have fallen asleep at the switch, and want out ASAP but at least past the two-thirds mark. Some of us try and get ahead of the curve and plan their early retirement strategically. Some of us are a little bit more situationally aware than I was and see the marks left by the hand writing on the wall, and perhaps look around and see there are few 65-year-olds in our workplace 😉

    I don’t see ‘I want to beat the market‘ as a goal in any of those. These are human beings trying to navigate the tides of life in a rich First World country, and if there’s any one thread running through these it is a desire for financial independence – aiming to become an aristocrat,  gentleman of leisure or more simply not having to sell your time for money. At the base of this is a simple goal – that of freedom of action, from work that usually consumes over half of the typical adult’s waking day because they sell their time for money.

    For an ermine, it’s seeing the back of the workplace, forever 2. Some people try that and find they aren’t so happy with a life of leisure, so they take on work – but on their terms. Which is also good – there’s a big difference between going to work but being able to walk away at any time, and going to work because otherwise you will end up destitute. I’ve never tried the first option. It all boils down to the message of A Man With Savings

    The Pleasure of Walking Tall (cringe)

    A Man With Savings…can afford to give his company the benefit of his most candid judgements.

    Freedom is one of the ultimate goals that a sentient being can pursue. It’s right there in one of the self-evident truths the Founding Fathers of the United States declaimed

    We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

    It’s a curious fact of consumerism that it seeks to persuade you to prioritise the pursuit of a narrow form of Happiness at the expense of Liberty – the freedom to do with your time as you see fit.  That’s one of the great things about freedom, you choose, and if you want go enter Max Weber’s iron cage for the middle class lifestyle that’s your call. Exactly how I got to my late forties before I realised this was a choice is a matter of some concern to me, if only because it showed a shocking lack of reflective thought, but I’ve tried to make up for it since.

    Monevator brings us a counsel of despair along the general lines of laws of Thermodynamics, you can’t beat the market, you’ll be lucky even if you match it etc. I note he doesn’t  eat his own dog-food. And since a lot of what I learned this time round comes from there I take some heart from that 😉 I studiously note, but ignore for now, the official line that has developed, because I found the takeaways of three and two – years ago far more useful to my specific temperament.

    In the dark days of early 2009, when all around was falling and much damage had been done to the finances of my then employer, I saw that I was short of money and outta time, because I was unlikely to make it another 12 years to retirement age the way the company was being managed. Working there would piss me off so much that it would do my health in. I couldn’t play the game much longer.

    I’m glad that I read the inspirational article that lit a way in the storm, because, really, honestly, going out and buying index-trackers wasn’t gonna cut it for me. I’ve been there. Money is crystallised power, and to commit some of that to a path, the story has to sing to you else you just won’t start. We humans are just like that sometimes.

    Wealth warning – I’m not saying index-tracking doesn’t work. It wouldn’t work for me at that time because when I was looking for an express way to get a modest income top-up, buy and hold for the next 25 years isn’t an inspiring message. I was lucky to start in the middle of a storm, though it’s arguable I had to start because of the storm’s effect on The Firm

    It would probably have worked – most of the message is basically get your ass out there on deck in the storm and BUY when everyone else is selling 3. It probably didn’t matter what you bought as long as it had some basis in reality and not too much to do with US real-estate. As proof of this I bought a shedload of L&G 50:50 FTSE100/Global fund in my pension AVCs, nearly half of which was money that thieving barsteward George Osborne didn’t get to steal from me in tax. That appreciated too, so index tracking does also work in bear markets. If you have the taste for it, it’s not an easy one to acquire.

    this bad guy is your friend. No, really, he is. You wouldn't think it, eh?

    this bad guy is your friend. No, really, he is. You wouldn’t think it, eh?

    What is beating the market, anyway?

    For me, beating the market is getting ahead of the FTAS, for the simple reason that through my abortive attempt to index-track from 2003-2007 that’s what I chose – it is a broadly-based UK index, and not a bad one to choose for someone living in the UK. There are good cases to be made for choosing something wider, and if you like that sort of thing then Vanguard’s Lifestrategy100 isn’t a bad place to go.

    I have beaten the FTAS (in the form of a Vanguard accumulating fund) 4 since the inception of my ISA in 2009 and Vanguard Lifestrategy100 over the last couple of years. I only have two years of data for that as it’s presumably only recently been crafted. Lifestrategy (VGLS100A) is of interest to me as I may switch future funds to it now my HYP pays me enough dividend for the target income (after this year). But it pays no dividend, being an accumulating fund. At the moment my ISA is an accumulating fund too because I reinvest dividends. Unfortunately I am not sure how to unitise/track an ISA if I draw from it. I haven’t bothered to get my head round that because it will be a good few years before I do.

    So there is a philosophical issue in choosing the market you want to beat. Tracking these two funds, and the performance of my ISA, isn’t enough. I have to turn the knowledge into wisdom. It’s easy now as I am doing better than the FTAS, given my purchase history. But if I don’t – does this mean I should pack it in and buy the FTAS instead?

    Why do you want to beat the market?

    Now if you’re starting  saving over a period of thirty or forty years for a pension then yes, you’d probably like to beat the market. That’s because you have a massive integration time of four decades, where, if you save into pension you won’t be allowed to get a hold of your money until 55. That’s the flipside of the tax breaks, because the youthful you might spend it on fast cars and holidays. A project like that is straightforwardly about building wealth, that wealth being about 20-25 times the amount of annual income you want to have in retirement. Because you aren’t allowed to touch the money, the performance of your portfolio is irrelevant to your day-to-day finances. So you can look at the sort of 50% loss in capital value that the stock market can do to you in one year with sanguine disdain, knowing that your net-worth will very likely recover from the suckout in five years time.


    Or you can take inspiration from the poster and bugger up your returns. If you are investing over decades, tragically you have the time to try and be clever, but you’ll only ever know if you were clever by the end. And if you weren’t, then you have no Plan B. So that’ll be you on Tesco Value beans and dry bread, huddled in a coat in front of a one-bar electric fire.

    That doesn’t sound so nice, so you go with the index. The fundamental premise of index tracking is that equities reflect a representative subset of the aggregate value (not just price) of the goods and services in the economy which gradually drifts up over time. The equity proxy tracks this in secular time-scales, albeit with some hair-raising year-on-year switchbacks. Integrate them over decades, and divest over a few years at the end if you need to crystallise the lot to buy an annuity, and you’ll probably do okay. Building your pension capital is a long-term project that’s on a much bigger scale than what I am doing, which is building a top-up for my pension to compensate for retiring early. I am older, wealthier and can eat more risk than the nearly thirty-something younger me that joined The Firm’s pension scheme over a quarter of a century ago.

    If I were saving for a pension for 20,30 years I’d buy VGLS100A every month. The downside of screwing up is too high on a project like that, and there it really is total return that matters, because I would sell the lot in stages over the five years running up to retirement to buy an annuity – or hopefully something else by then. I wouldn’t give a toss if the total return comes from capital gain or income reinvested. That’s irrelevant to that kind of project, whereas the difference between capgain and income is very relevant to me. I need some capital appreciation to fight inflation over the years, but an income matters to me in a way it just doesn’t to someone saving towards a distant pension.

    Not everybody wants to beat the index – some keep an eye on the dividend income…

    I can say that because I am beating the indexes I would otherwise buy at the moment – the FTAS over all the time my ISA has been in existence (from 2009), VGLS100A for all the time it has been in existence, the young whippersnapper. If I weren’t, indexing pundits would say I was a sourpuss loser trying to hide all sorts of cognitive failings. Nevertheless – some investors have other priorities than beating the market, and a need for income without making sell calls is one very valid exception. Young folk saving in a pension do want to beat the market but they probably shouldn’t try, because of the risk of those beans and that electric fire if they aren’t as good as they think they are. And I’m not beating my benchmarks so much that I expect Lloyd Blankfein to rock up asking for a cup of coffee and inviting me to join him in doing God’s Work.

    not that sort of Klingon

    not that sort of Klingon

    After all, when I started investing this time 5 in April 2009, my aim was simple. It appears I – and my boss were one of the FT/Grauniad‘s Cling-ons, presumably that The Firm was trying to evacuate itself of 😉 My boss had just had a child in his early forties with his second wife 6 and therefore was desperate for money and prepared to do what it takes to please his boss in a feverish environment where profits were plunging.

    I wanted to be in a position to tell my boss to piss off and stick his precious newly created micromanagement objectives where the sun doesn’t shine. For that, I needed money. Fast. I had capital, but did not have the knowledge of how to turn that into an income without running it down. I wanted an income I could half believe in – I didn’t want to beat the market, just turn some savings into an income. It was a revelation to me that the variation in income from a diversified portfolio would vary so much less than the market value of its components. For instance, as a percentage of purchase cost my yearly dividend yield across the ISA has been

    2.5%, 5%, 4.9%, 4.9%

    for the years 2010-2013, looking back over the previous year. The first low figure is the result of some random trading daftness, and the current slow fall is because I’m finding yield harder to find as the economy improves, though capital appreciation is increasing. Although capital appreciation isn’t particularly what I want, part of the art of investing seems to be going with the flow. Yield was easy to have in 2009 and 2010. Capital appreciation seemed the order of the day in 2013, though I contributed no new money to my ISA, simply shifted an ISA-worth of unwrapped holdings because I felt unable to make a purchase that was worth the money. It made more sense to live off cash and shift investments because the cash gives me a 4% p.a. increase in pension by not drawing it a year earlier.

    This ISA year seems to hold potential opportunities in emerging markets and a generally less gung-ho attitude, which is good for net buyers though it makes all the papers and CNBC  a lot less excited. Some of that capital appreciation will disappear, probably, ‘cos the stock market is just like that – what it gives with one hand it takes away with the other, just a teeny bit less over the decades. Unlike the ephemeral capital gains, however, I have a steadily increasing income from all this lot. It’s not guaranteed, but it’s a helluvalot less volatile than the capital value.

    I now prioritise geographical diversity over yield, and that seems to shift returns more in terms of capital gain. But I’d actually prefer to forego some capital gain for a higher yield 7

    I had a lot of luck. I started just after a big market crash. That’s luck – you can’t make it. But you have to see it when it’s there, and even that’s not good enough. You have to fight part of yourself to get out there and do it. And then you have to keep on doing it when the opportunity next presents itself.

    People after income sometimes prefer the steadiness of income to rip-roaring capital appreciation – after this is the theory behind having a mix of equities and bonds that favours the latter as you age. The young pups of equities give better historical returns integrated over decades but far worse volatility. Bonds give a piss-poor historical return but can vary a lot less. If you retired and were fully invested in equities in 2009 you were stuffed. Whereas if you had switched over time to a mix you’d not have been hit as hard.

    Now I have a total blank spot when it comes to bonds. I don’t own them, I don’t touch the buggers 8. That’s because I have a deferred pension which gives a very bond-like proposition, so I don’t need more assets with that nature, though I am very glad to have what I do have.

    So provided I can get the income I want I’m not hugely fussed about beating the index. Say it’s the FTAS – the FT all-share currently yields 2.8%. If I want 4% income from the FTAS I’d have to sell of 1.2% of the units this year – ie take the divi and sell off 1.2% of my capital. Over time you expect a positive total return over inflation, that isn’t an unreasonable thing do do. As long as you don’t sell too much. Therein lies the rub, how much is too much?

    The whole point of investing for me is to become a gentleman of leisure, to avoid that dreaded w*rk word. Or more to the point, to avoid jumped up pipsqueaks and tosspots telling me what to do when it has no meaning in the grand scheme of what the company is trying to do, it’s just because some bunch of oiks have dreamed up some targets to get their bonuses/save their jobs. No. Bollocks. The world is far too interesting to be unable to stick and inquisitive snout into all the various wrinkles of it, and I’ve only got one life to live, and it’s too short to flush it away one day at a time doing someone else’s bidding.

    If you don’t sell your time for money/work for a living you need to look after your capital…

    Becoming a gentleman of leisure means I start to think like old money. Old money never sells the family silver, it doesn’t sell land, and it bloody well doesn’t run down its capital. In a theoretical and intellectual way I can see buying a FTAS index and selling off (4% – that year’s yield) at the end of the year is one way of doing it. But I’m not old enough to start running down my capital like that. My investment performance improved no end when I took selling out of the equation.

     I don’t need to beat an index. I want an income, at about 4 or 5% of the capital I can muster, with some tracking of inflation 9.

    Don’t get me wrong, I am happy to have beaten the FTAS and Vanguard Lifestrategy 100 so far. But the slow fall in yield does disturb me. Yield was easier to buy in the hell-hole of 2009 than it is now, whereas capital appreciation seems to rise to the fore. I will continue to try storm-chasing and buying the unloved. That’s unashamedly market-timing. I don’t have to shoot for everything – I miss some and I take some and some I cock up altogether (AGK).

    Of purchases – I still aim not to sell 10. Stock plungers like Jesse Livermore did well on the selling side. He had far more talent and operated in a far less sophisticated market. However, fear and greed haven’t changed that much in 80 years. I have a suspicion that it’s hard to be good at timing both long and short trades, you need such a different mentality when doing one compared to the other. I am pessimist enough, so short trades would always have too much of an attraction for me. Short selling is much more geared by definition, so I have only shorted assets I already own or have a claim on. I’m just not hard enough to do otherwise.

    The trouble with that is you can’t predict storms,  and it’s still bloody hard to overcome the fear and buy into them. It doesn’t get that much easier with time, sadly. In many ways if I am going to be active, I need to be opportunistic. I’m not trying to set up a black box trading system. I’m not smart enough nor have enough information to do it. But I have observed human nature in storms. The market is efficient most of the time, but people still panic in market storms.

    Because I can afford to make mistakes in my ISA I’ve run towards storms – in 2009 after reading this, through 2010, a pause in 2011 until the Summer of Rage, a bit of opportunism at the Direct Line IPO which stitched me up in adding cash to my ISA though it was profitable enough 11 and a motley collection of housebuilders and infrastructure ITs that were looking peaky.

    So it is hard to beat the market. But so far not impossible. Of course as the years roll buy there’s opportunity for me to crap out. With a no sell rule the amount of screwing up I can do in any one year becomes lower. Yes, I lose on the opportunities that selling dogs and investing in bulls offer. However, when I was on iii I tried one simple thing. You can run multiple virtual portfolios on there, and every time I sold a stock I added it to a ‘sold’ portfolio at the date, price and number of shares I sold.

    When you look at a portfolio like that and see the portfolio aggregate value rising over time, you learn something unique and insightful about your ability to call good sales points that you can’t get in any other way. I observed my talent for that, and took the appropriate action. I stopped selling. One of the attractions of a high-yield portfolio approach is that in the canonical variant you don’t sell. Sometimes not selling will turn out to be the wrong thing to do. But in general, for me, it will save me from myself 😉 It also indirectly makes me more careful on buys.

    I think Warren Buffet or Charlie Munger said something about buying and holding as if the market will be closed for the next few years. It’s one of the fundamental premises behind a HYP and Robert Kirby’s 1983 paper on the Coffee Can Portfolio – that’s the original 1984 article, but if you Google The Coffee Can Portfolio you can get the whole PDF without paying :) There’s something to the idea of being actively passive, whereas the whole indexing scenario is based around being passively active.

    How do you know if you are beating the market?

    You choose your index (FT All-share in my case). Then you forget about it, and go find an accumulation fund that tracks it, because you need to take the dividend income into account. It’s kinda nice if the TER is low, so if you can find something from Vanguard that’ll usually be great. For the FTAS this Vanguard fund will do. Then unitise following these instructions.

    That does my head in, so I run a calculation using the simplistic method. I assume the new money I put into the ISA for the year 2013/14 all goes into the index fund at the price in January 2014, it’s easy enough to calculate the number of units I’d get. To this number I add the number of notional units I had last year, and then calculate the market value of the total notional holding at January’s price

    If you’re beating the index your market value is bigger than the index simulation’s market value, rescaled in this exercise. If you aren’t, then ask yourself if there is a good reason – wanting to take your investment return as income without selling shares or units is one.  If you are saving for a pension then after a couple of years if you are falling behind then switch new money to the index, if after five years you are falling behind switch the old portfolio to the index – you’ll at least have given it your best shot, and you’ll probably avoid those Tesco value beans. In the simplistic calculation I use I simply look at what I’d have if I’d bought that index fund. I will start to unitise as of this April, but the simplistic method is fine if you never draw from the ISA. You are losing some information because in theory you should do the purchase at the time you contribute cash to the ISA. Most of us spread ourselves out across the year, because most people save into an ISA from income.

    I track the FTAS because it’s the obvious choice for a UK retiree, but I also track VGLS100A because an equally good case can be made for the global diversification though with some UK home bias of that fund. Indeed, for Mrs Ermine’s ISA I use VGLS100A because much of the argument about younger people saving for a pension applies. I don’t market-time, I do shift sectors at times, but otherwise it’s canonical index investment…because Mrs Ermine is not using it to boost her current income, so she is interested in total return, yield is irrelevant. And just as nobody gets fired for buying IBM, one has responsibilities not to deviate too far from orthodoxy when investing for other people.

    ISA relative ot the simulation

    ISA relative to the simulation. The chart is zero based, and while it’s easy enough to work out the vertical scale from knowledge of the ISA limits I’ll thank readers not to post that specific information in the comments 😉 Note the missing ISA cash issue with the 2011/12 data – I started tracking properly from then on because of the whole index One True Way heavy sell which didn’t square with my experience up to then.

    The chart shows the relative performance of my ISA relative to the benchmarks. Note this is not a stock chart – at this early stage in my ISA most of the year on year change is due to putting more money in. Unfortunately the 2011/12 value for my ISA only shows the value of my holdings, not the cash, because 2012 is the year I discovered that I have to print out the damn statement every January. In 2012 I moved from iii and discovered there is no long-term memory in online sharedealing, so the value is backworked from my holdings. The cash shows in the fossil record of the ISA though, because I used it to buy stuff which shows in 2012. I have initialised the benchmarking assuming I liquidated the existing contents of my ISA for the January 2011 market value, when I was fully invested, because I don’t have the printouts from then. The UK flavour of Lifestrategy didn’t exist on January 2011 or Bloomberg just won’t show it to me so I’ve just replicated the Jan 2012 value. That’s probably a bit unfair to it, I’m not sure how to correct for that, because of the lost information on the cash in my ISA in Jan 2012.

    Initialising in Jan 2011 obviously loses the 2009/2010 activity. However, most of the ISA is from money since then, so it shows I’m not being absolutely slaughtered relative to the benchmark

    I learned something about my investment beliefs here

    Writing this helped me clarify some of what I’ve grown to believe about investment – or at least a snapshot of what I believe now. Some of it will no doubt turn out to be wrong. Life is like that. I am more idiosyncratic than I’d thought I was. I started this post because everywhere seems to tell me indexing is the One True Way. Maybe it is, but it bores me shitless, and I need some passion and some hope to forego the spending in order to invest.

    • I am a market-timer. I didn’t realise this, but running towards fire implies a hidden assumption – that other people are dropping value on the ground in their rush to flee. There are years that just doesn’t happen (2013), but it’s happened a lot in recent times. The market is cyclical, and has euphorias and swoons every few years. Euphorias are hard to find value in, swoons can offer rich pickings.
    • I have no investment knowledge edge – it’s true that engineering underlies a lot of the FTSE100’s composition and a HYP tends to draw from that pool, but I don’t use any detailed knowledge of what these firms do to say one is better than the other. I do use some financial metrics to try and weed out the hazardous. I am numerate, but not an accountant.
    • I do not sell – with the single exception of The Firm, purely until my holding of The Firm is a reasonable proportion of my ISA. This seems to be unusual, but that iii sold portfolio showed me my talent for calling sells, and I’m just not playing that weak hand any more. Why it’s weaker in me than everyone else I have no idea.
    • Stock-picking is not an edge. I could use index funds or investment trusts, aiming for unloved sectors. I have aimed for unloved (at the time of purchase) firms in unloved sectors, and getting financial metrics on a sectoral index is very hard which may be why I’ve favoured stocks. CAPE10 may offer a way and RIT does a great job with that. I like investment trusts because of the whole premium/discount thing. And I don’t buy them at a premium :)
    • I don’t really like OEICs. I don’t let that prejudice stop me – I have great respect for VGLS100A as a worthy opponent and own some of it from a period when I started to believe indexing was the One True Way. The no-sell rule means it’s still there, there’s little point in booting a valued adversary out of my ISA.
    • I don’t do bonds. End of.
    • I don’t do residential property, other than own my own home, which I don’t regard as a financial asset. I was seriously hurt by the UK property market in my late 20s, and I clearly don’t understand it. I don’t do BTL, I don’t buy houses and do them up. I made an exception for the rank stupidity of Help to Buy because if the government’s going to dish out free money to try and win the next election then I’ll have some. But unlike everybody else in Britain, I have no taste for housing as an asset, because I don’t understand it.
    • I have no taste for stock day trading. I haven’t got the youth, I don’t have the temperament, what I do sell tends to go up, I don’t have the Bloomberg terminals and the Level2 and what have you. It isn’t what I want to do with my time. I can therefore close my IGIndex account once my shares in The Firm have fallen to an acceptable portion of my ISA (I used it primarily to short them to manage the risk 12)
    • Online ISA accounts have no long-term memory. In my dotcom days I’d get a paper statement every year, and I stopped when I got the annual statement in the dotcom bust. I know – it was the wrong thing to do :) I have to actively recreate this by the primitive action of taking a screenshot of my ISA and saving it every January. III were just as bad as TD in this respect.
    • I keep my own records of sales and purchase – I have a spreadsheet of my ISA purchases and sales year by year, which conveniently supports the yearly index benchmarking. It would be nice to automate this, but I don’t trade so much that it’s a chore. Presumably online trading accounts have no long term memory in the hope you trade more often and remember your successes more than your failures. In the screenshot I trust…
    • I’d like to say it was all skill, but that’s bollocks. There’s been a fair amount of luck. Indeed, if there is any difference between the dot-com days and now I was far more sure I knew what I was doing in the late 1990s, and the more I learn about investing the more I feel I don’t know enough.
    • I need the benchmark to remember sic transit gloria mundi. I am not invincible. Indexing is useful for that – it’s the road not travelled for an active investor

    If I end up not beating the benchmarks for one year I’m not going to pack it in and index. But if I drop to the level of what the FTAS/VGLS100A would have done for me over all time I will start to move new money in the direction of my favoured benchmark, probably VGLS100.

    The desperate but opportunistic ermine beat the market in two other ways, though I don’t count them in my ISA performance. The largest win was in my AVC fund – I started buying in April 2009, along the compelling logic of that inspiring post. Although that’s all sat in cash now it was invested in a L&G 50:50 FTSE100/Global fund. I suspect most of the performance boost I got there was holding 50% non-sterling denominated equities during the rapacious devaluation of the pound after the 2007-2010 financial crisis. My AVC fund is the 25% tax free lump sum that will take over the heavy lifting of funding my ISA for a good few years once I run out of cash on my zero income and draw my pension. The cash is of course depreciating but I don’t mind leaving behind some  of the value as the boost outweighs that by a long chalk.

    The second way was buying The Firm’s shares in sharesave at a low-water mark in 2009. You just can’t lose with sharesave, well, you’re a twit if you do. It’s an awesome one-way bet, if it’s available at your workplace JFDI. At least the crisis  that indirectly terminated my working career had a silver lining. Both of these are luck, though the first had a fair measure of desperation too. You can  take a stinking amount of risk with tax-sheltered pension savings from income as you come up to retirement – 42% as a higher rate taxpayer. If I’d lost that much but get it out as my 25% tax free lump sum I’ve still broken even, which favours taking the risk if you start in a stock market rout 😉

    Second wealth warning – I am not saying you should do anything I am or am not doing. You are not an ermine, you have a different temperament and a different set of strengths and weaknesses. Becoming a better investor is as much about knowing yourself as about knowing the market – the biggest stock market risk for you is the face you see in the mirror every morning. Index investing is a way of avoiding all that aggravation. But it bores me to tears, the indexes I find reasonable for my situation don’t generally provide a 4-5% income unless I were to sell units, and I can afford to take the risk of underperformance. This is a narrative, not financial advice 😉


    1. it’s a generalisation – not everyone will follow it so if you’re enjoying your 40s good on you :)
    2. Work is vastly overrated as a source of meaningful life as I currently see it, over a year and a half after checking out of the workplace for good. But I’m not dumb enough to say I’ll never consider working, even as an elective choice. The way companies manage people might move back from digital Taylorism. But if I were to do that, I always want the FU option, so I can’t inflate my lifestyle that much, in which case what’s the point?
    3. that’s called market timing. You aren’t meant to do that and it apparently doesn’t work
    4. accumulating because then it factors in dividend payments, something that is otherwise the devil’s own job to add to an index
    5. I’ve had three phases of stock market investment – one in my early twenties with the BT flotation, which was okay and one crap period in the dotcom boom where I researched a lot of ways to lose money, followed by some lacklustre indexing
    6. I didn’t know this backstory at the time, else I might have taken a different line, after all, I was a Man With Savings
    7. you can of course always exchange capital gain for yield – sell some shares – but which ones? I’m not good at making sell calls, and very good at sitting on my backside doing nothing, so selling shares is a decision I don’t want to make.
    8. with the exception of some bank preference shares that have bond-like properties
    9. even dividend paying stocks provide some inflation protection through capital appreciation over the whole business cycle. They are usually at the staid end of the market in terms of capital appreciation, because as Jim Slater said, elephants don’t gallop. If you want racy returns, AIM is where you want to be. You just need to avoid buying the duds, of which there are many. I use ASL to somewhat lean against the big-company bias of a HYP – but that’s only because they were cheap and yieldy at the time
    10. I make an exception for The Firm because I acquired a shedload of shares in The Firm through sharesave. I need to sell some of these for the sake of diversification and CGT utilisation
    11. I had to offer to buy more than I expected to get, which means I had to keep a lot of ISA allowance clear. In future I will do IPOs in a regular trading account
    12. If you do short employee share save schemes then note some firms have anti-shorting terms built into their terms of employment. The Firm didn’t, to the best of my knowledge when I searched for this on the Intranet, at any rate for pleb grades like me
  • Recent Posts