28 Feb 2014, 12:37pm
economy housing personal finance
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  • A cautionary housing tale from a quarter of a century ago

    It’s the last day of February 2014- a notable date for me, because twenty-five years ago I read this date on a form I signed to take out a 25-year mortgage as  I perpetrated the biggest personal finance error in my entire life. Of course my twenty-something self didn’t know that. It dwarfs any stock market losses I took in the dotcom bust, and it hit me earlier in my working life. I bought a house – a two-up-two down, at a four and a bit income multiple, with a 20% deposit, half of which was an interest-free loan from a credit card 1.

    Ten years later I ate nearly a 50% loss on that house. Some of it was poor house maintenance, but most of it was buying at the wrong time, in the Lawson boom of 1989. And that 50% loss is slightly offset by the rent I would have otherwise paid. So when Millennials hear that the older generation had it easy on housing etc etc – well, not all of us did. It’s a cautionary tale

    The UK housing market can be irrational for longer than you can stay solvent

    three years after I bought, paying a standard variable interest rate of 6.5%, I was paying a mortgage interest rate of 14%. I froze in that place in winter because I didn’t dare run the inefficient gas fires longer than I had to, and made friends with Sainsbury’s packets of mixed beans for cheap eating. However, I didn’t stop going out with pals drinking beers, so maybe hold on the violins ;)

    Colleagues at The Firm did highlight the macro picture, that Lawson was going to axe MIRAS for couples and that this was pushing up demand. But I was already running from high house prices in London, leaving the city of my birth and where I had grown up and started work. The crux point was when I was in the Broadcasting House bar, slowly drinking Fuller’s E.S.B. until the pain went away from all the people taking about how much their houses had gone up in value and all the yuppie consumer shit they were going to buy with the proceeds. All I had to look forward to was to get on the tube back to Television Centre, and then get on my bike and cycle up the A40 Westway to Park Royal, to go back to my bedsit with the salt round the outside so the black slugs didn’t invade and to shovel 50p pieces into the meter to heat up something in the Baby Belling pie heater. And I thought to myself there has to be a better way, and that was the day I realised that I was too poor to live in London. So I left.

    In running from that experience I ran into trouble here. I was lucky, that I kept my job, I have never defaulted on the mortgage. The 25 years I had signed to looked like an endless amount of time – I had only been on this earth for a few years more, and economically active for a fraction of the time. The way we do housing is really horrible in the UK – the expectation that people have of buying a house in their 20s – when life is changing, careers and life stories are changing – it’s nasty, but the ramping upwards of house prices to earnings pushes people to get a foot on the ladder when they are not yet experienced enough to understand a financial market or have experienced that markets have cycles. I started at a peak, because of my inexperience, I extrapolated the upswing that was all I had known into the future.

    There are three messages from this cautionary tale. One is that the cycle time of the housing market is shorter than a typical mortgage period, so as long as you don’t suffer a calamity that makes you a forced seller without rebuying 2 it comes out in the wash.I sold in the late 1990s, but immediately bought the same sort of asset with the proceeds and a bit more. I benefited from the upswing since, that compensated for my losses, so integrated over 25 years I am probably a slight beneficiary of the housing market.

    For what it’s worth, shares have done me much better. My shareholding net-worth – even evaluated at the low-water mark of the 2009 of half the value now is more than my housing net-worth. That’s because though I suffered losses at the beginning, they weren’t leveraged losses like a mortgage is, so I could start again with the learning and get ahead. Whereas housing losses set you into negative equity – you soullessly pour half your salary into a money pit and have nothing to show for it. And you can’t move until you have backfilled that hole.

    The second is that rent is not wasted money – not if the alternative is negative equity. Now that is wasted money – you pay into a black hole that stops you moving.

    Lastly, there is some hope. Even after a rotten start I discharged my mortgage in 2008, after about 20 years. It felt good, and it was about 20% short of the original term of that first house. All starting from a 5 times single salary house price multiple and a market crash. It looked as horrible to me then as it does to many people now, though I do acknowledge that middling jobs were better then than now.

    It doesn’t necessarily turn out as bad as it looked at the start. But try not to buy a house at high valuations. I have no idea if houses are valued high at the moment – if there is an economic boom in Britain as we crawl from the twisted wreckage of the financial crisis then perhaps they are at fair value.

    On the side of the young is that the Baby Boomers will start to become decrepit and die off in the coming couple of decades; this should release some family homes back onto the market. Against that there is increasing polarisation and jobs flow to London.

    I think the London market is a lost cause for the young and impoverished – in the end London will probably have to become an independent city state. As a mark of what’s gone on there even now I would have to commit nearly all my capital resources other than pension to buy my mother’s house in London – the aggregate value of my career doesn’t match the capital value of what my dad managed to buy forty years ago on a single blue-collar salary. But that’s London for you. It’s a different country.

    I don’t know why Britons love the housing market so much and yet are so fearful of the stock market. In my experience the bite of the housing market is far worse, and it’s responsible for far more human misery than the stock market. The housing market hurts poor Britons in its rapacious rents and dead hands on the lifetime earnings of people even if they own, whereas the stock market tends to hurt mainly the well-off. And yet housing is much-loved, whereas the stock market is considered a fickle mistress. There’s n’owt as queer as folk, as they say up north.

    Would the young Ermine have recognised his future self, playing the role of the Ancient Mariner and the young Ermine as the Wedding-Guest? Probably not…

    Notes:

    1. MBNA got all their money back, on time, and didn’t charge me a bean
    2. if you sell into negative equity you will usually not be able to buy again because of an excessive loan to value of > 100%
    26 Feb 2014, 7:29pm
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  • Stockpickers and indexers alike – aren’t you a little bit fearful…?

    Think back to 1999 – World + dog was going to make a shedload of cash on the stock market. No idea was too barmy to fly. Videologic – to become Imagination tech. Rage software – to become nothing. In the US Webvan – the idea was good, the time was wrong ;)

    Martha Lane-Fox, founder of Lastminute.com and now in the House of Lords

    Martha Lane-Fox, founder of Lastminute.com and now in the House of Lords

    Boo.com and closer to home, Lastminute.com, in a last hurrah before the dotcom era imploded as the dream died. We were all going to be rich, you, me, and the taxi-drivers of Britain. We bought high, on the greater fool theory. Then somebody turned the lights on, and we were that greater fool.

    Go on, admit it - just a teeny bit fearful?

    Go on, admit it – just a teeny bit fearful?

    The party was great, but the hangover stank. Every stock market rally carries with it the seeds of its own decay. We had seven years of relative plenty since the year 2000, despite the lean years soaking that I and many dotcom investors had – the general public had a blast. remember the Goldilocks economy?

    As I have said before Mr deputy Speaker: No return to boom and bust

    UK Prime Minister Gordon Brown, 2006

    Since the seven fat years the Great British Public have had seven lean years, and we can survey the twisted wreckage of the 99%’s hopes of a middle class life. The feeling now is very different to that Millennium eve – there was hope and opportunity, Stuff was getting cheaper and we hadn’t yet opened our eyes to the driving forces, that were going to wash in and suck the middle-class jobs out of the developed world. Now we can see that power-shift from labour to capital written large across the economy. Allister Heath of City AM tells us we’ve never had it so good:

    OK, we have a cost of living crisis – but life is so much better now

    To most people, the UK’s 6pc or so national pay cut to date remains a price worth paying for having access to the convenience, goods, services and jobs delivered by the economy of 2014

    Hmm, Allister, exactly what part of cost-of-living crisis do you not get? Allow me to remind you of Maslow’s hierarchy of needs

    1402_Maslow's_Hierarchy_of_Needs.svg

    the clue is in security of body and employment – the cost of housing is being pushed up and some people seem to have trouble affording to buy food. Your consumer goods and iPads are up in the esteem section – you need a roof over your head and ideally a job before the convenience, goods, services and jobs delivered by the economy of 2014 become worth having. The sex and family part also seems hard in the first years of the century too, at any rate for those who want to have children, which seems to be increasingly out of kilter with the rest of life. That’s not to say I particularly want to pay over the odds for other people’s lifestyle choices, but I don’t think making such a common life aim harder than it has to be is a great step forward in the pursuit of human happiness. In a conclusion that rivals Marie Antoinette

    The digital revolution is creating a lot of free value that is accruing to consumers, making them better off, but that isn’t appearing anywhere in the official GDP, productivity or real wages statistics, despite the best efforts of our number crunchers. In fact, new technologies are often having the opposite impact: in some cases, they are actually reducing reported output and thus purporting to show that we have become poorer, even though almost everybody is in fact being made better off.

    The ‘let them eat cake’ approach of denying that shit is happening because you can now afford to pave your rented flat with cheap TVs seems flippant.

    Now you can make a good case that current valuations of the FTSE100 aren’t that high – after all, fourteen harsh years of inflation have rolled by, and the Bank of England tells me that 6933 (estimated) December high-water mark would be 10174 now. So we are a long way off the peak in real terms. But there’s the whole animal spirits thing that is going to hit a bump in the road here and in the US.

    When we look at the big picture from 1985 it’s clear that the engine of capitalism turned over and misfired twice- once in 2000 and again in 2007. And it has slowed, at least in its FTSE100 manifestation – look at the way all the action is in the 1985-2000 part. So the question is whether industrial capitalism is running into resource limits, be they natural, or simply that the power shift from labour to capital is now starving the engine of fuel – after all, somebody has to be buying all the value. I don’t know who that somebody is going to be in the years to come. That’s the bit that Allister is missing – it’s all very well producing all those iPods but they can’t all be bought on ever-extended credit. Where are the firm foundations to this – is the final dream of Reagonomics coming to pass? It appears that two thirds of the income tax revenue comes from about a third of the taxpayers in the UK. Perhaps the 33% has reached critical mass, and can keep the engines running while the 66% peck from the swarf that trickles down.

    Maybe this is how the 66% will realise Keynes' 1930s vision of Economic Possibilities for our Grandchildren

    Maybe this is how the 66% will realise Keynes’ 1930s vision of Economic Possibilities for our Grandchildren

    I got no idea of where to now. It wouldn’t surprise me to hear the resounding bang of yet another misfire as the engine demands more than it can be supplied with. there will be opportunities there. Or maybe there will be another party like it’s 1999 all over again. Or perhaps we are at a paradigm shift, when people will recognise what Enough looks like, and eschew consumerism in search of value.

    Once again I heard the Last Post sounded for Keynes Economic Possibilities for our Grandchildren – where increased automation would lead to a world where the four-hour work-week was a reality. The closest we seem to have got is the TV show Portlandia. (Hat tip to Mr Money Mustache – I’ve never seen the show. Or Portland itself)

    Whats’ actually wrong with young people going somewhere to retire? Previous generations had this as dropping out, or bohemian living. It doesn’t seem so easy now 1. Tim Worstall tells me I got it all wrong, that we live in that City-AM world where everything is hunky-dory and Keynes got his Economic Possibilities. We just can’t see it, like all that digital value that consumers got, at the price of decent jobs… And other stuff down the bottom end of the pyramid, like, er, food

    food banks

    food banks

    Our Tim has an fairly hard-line answer to that too. I think I might find a few people that may disagree with the ‘let them eat cake’ version of how it all panned out ;) Somewhere there’s the sound of the engine of capitalism running low and lean under the load. I suspect I hear the pinking that precedes another misfire – I’m a little bit fearful. But it’s just a number, and the high-water mark is a long way off in real terms. Maybe it is just the echo of the dot-com bust and the seven years of plenty and the seven lean years that ensued ;)

    Notes:

    1. Obviously I’ve done it. But a) I’m not young, with the peculiar fire of creativity and single-mindedness that burns brightly in one’s twenties. And b) I’ve done my time serving The Man for thirty years…
    24 Feb 2014, 12:53pm
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  • 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!

    21.9% VANGUARD US EQUITY INDEX ACC
    21.6% VANGUARD FTSE DEVELOPED WORLD EX UK EQUITY INDEX ACC
    16.7% VANGUARD FTSE UK EQUITY INDEX ACC
    11.6% VANGUARD FTSE DEVELOPED EUROPE EX UK EQUITY INDEX ACC
    11.1% VANGUARD FTSE U.K. ALL SHARE INDEX
    8% VANGUARD EMERGING MARKETS STOCK INDEX ACC GBP
    5.8% VANGUARD JAPAN STOCK INDEX ACC GBP
    3.3% VANGUARD PACIFIC EX JAPAN STOCK INDEX ACC GBP

    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 ;)

    Notes:

    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!
    20 Feb 2014, 5:36pm
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  • 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.

    1402_panic_and_freak_out

    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%, 4.6%

    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 ;)

    Notes:

    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
    13 Feb 2014, 11:41am
    rant:
    by

    7 comments

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  • Owen Paterson: GM science good, Climate Change science bad

    Our Environment Secretary, Owen Paterson, is a corporate GMO shill. Now it itself that’s no surprise, the previous occupant of the role, Caroline Spelman, ran a firm, Spelman, Cormack and Associates to lobby on behalf of GM firms.

    Anyway, our friend Owen is dead keen or rationality and science and all that good stuff.  Owen says people who don’t like GM are humbugs, and if we don’t have GM in Europe WE WILL ALL STARVE. Obviously we don’t want to do that. 1. To wit :

    An aide to Mr Paterson said: ‘He wants to have a national conversation about it, based on scientific evidence, and the Prime Minister supports that.’

    Now it’s probably a good thing to have somebody in charge of public policy who is prepared to listen to the science – at least as far as knowing what is going on is concerned. Trouble with Owen Paterson, is that he likes to pick and choose his science. GM science is good, because there’s money in it for his chums so Owen likes that sort of science, and indeed his general assertion that safety is okay with what we have had so far is probably right, according to the science. The sort of science that our Owen doesn’t like, however, is anything to do with global warming. As Greenpeace rather wittily pointed out

    Owen Paterson has ignored all expert advice warning him of increased flood risks, choosing instead to cut funding and flood-preparedness staff. Instead, he claims that "[climate change] is something we can adapt to over time and we are very good as a race at adapting" People are suffering - and we owe it to everyone to get an environment secretary who is serious about climate change

    Owen Paterson has ignored all expert advice warning him of increased flood risks, choosing instead to cut funding and flood-preparedness staff. Instead, he claims that “[climate change] is something we can adapt to over time and we are very good as a race at adapting”
    People are suffering – and we owe it to everyone to get an environment secretary who is serious about climate change

    Indeed, since dealing with the effects of rotten weather is something that falls in the remit of Owen’s department, it’s interesting that despite his fondness for the scientific method in regard to GM, Owen hasn’t bothered to get briefed about climate change for 14 months. Presumably because he knows in his gut that it’s all bollocks, and also presumably because the good people that wine and dine him would be financially inconvenienced if he were to go along with the scientific consensus and try and do something about carbon emissions.

    wouldn't want to spill your drink now, Owen?

    careful there, wouldn’t want to spill your drink now, Owen?

    The chief scientist of the Met Office indicated that Owen might be off on his assumption that climate change is a load of bollocks. Presumably scientists know about science, in their area of expertise?

    “But all the evidence suggests there is a link to climate change,” she added.

    “There is no evidence to counter the basic premise that a warmer world will lead to more intense daily and hourly rain events.”

    Owen’s of the opinion that “the weather’s been changing all the time”. So that’s all right then, nothing to see, move along now.

    Fer chrissake, Owen, we have 100mph winds, Eton Prep school is under water and shit’s coming out of the sewers and swirling around the drawing-rooms of the Home Counties but it’s nothing particularly out of the ordinary? WTF? It appears that Owen won’t even read a briefing if it contains the words climate change. That, Owen, is not a canonical example of the scientific method. Now it’s a perfectly rational thing to say that we feel the cost of reducing carbon emissions is too much, or than it needs qualifying and estimating before doing anything. A fellow called Nicholas Stern commissioned by the last government did a report something along those lines. The BBC has a summary here. Of interest at the moment is

    There will be more examples of extreme weather patterns

    Extreme weather could reduce global gross domestic product (GDP) by up to 1%

    so even if Owen’s gut is absolutely right and the fact that people are up to their necks in water has nothing to do with global warming it’s perhaps an example of something that the UK will have to be dealt with more often. Even Bjorn Lomborg doesn’t say climate change is not happening, just that it might be cheaper to adapt. Which may well be true for the rich world, but the do nothing option doesn’t seem a particularly clever response. Cutting back on people in the Environment Agency dealing with flood risk doesn’t seem to be the obvious way to go here.

    What stinks about Owen is the way the mendacious little twerp is all for science where his paymasters like the results – like GM. But if they don’t, like with climate change, then he’ll go with his gut. That’s not cool, that’s not clever, and though I’m not always the greatest fan of Greenpeace who have their own agenda they’re absolutely right. Owen’s gotta go, and please, Mr Cameron, can we for once have somebody at the Environment Agency who isn’t a panhandler for the GM lobby? Maybe even have that national conversation, based on scientific evidence, about the Met Office’s Chief scientist telling us we have to face this increasingly often, and not just Owen’s gut saying it’s all gonna be all right.

    Notes:

    1. I used to have a problem with GM from a fear of frankenshit charging around the environment killing us all off but I don’t any more. It’s the lack of regulation and control of the monopolistic barstewards like Monsanto who scare me. GM would probably be okay if it were open-source and unencumbered with ‘intellectual property rights’ – an awful lot of agricultural research used to be done and the national and government level, up until the 1980s and therefore didn’t have the tendency to screw farming into hard commercial lock-ins. You can choose to do without most things associated with IPO which means the market can set a price for it and price gougers get stuffed eventually. But it’s really, really, hard to stop eating…
    6 Feb 2014, 5:01pm
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  • how much work can you withstand?

    I’ve already had the rant about how The Man is gamifying the office and turning it all into a Kafka-esque numbers game. But you can eventually buy your way out of The Man’s filthy paws.

    However, it appears that The Man is not the only bad guy in getting the balance between Work and Life right. The enemy is embedded within us, according to this NYT article on mindless accumulation. (hat tip to Monevator)

    “[earning more than you can use]It’s a waste of effort,” he added, “But once people are in action, they can’t stop.” [...] Dr. Hsee said strongly suggested that both groups were driven by the same thing: not by how much they need, but by how much work they could withstand.

    I’d have berated the good prof in an earlier life, goddamn it, I need to work to earn all the money to…

    buy things I don’t need with money I don’t have to impress people I don’t like?

    Damn. I was that guy, and heck, I didn’t even have the need/want for the yachts of the Wolf of Wall Street 1

    Till one day, in Tesco as the picture in front of my eyes shimmered and dissolved into a jumble of meaningless lines as for a second the thin line that keeps the delicate fire of reason alight failed. Slowly I gathered my wits and drove back. Really slowly. And then asked myself WTF just happened – and the short form of the answer was basically ‘wrong way, do not enter, turn back now‘. I was lucky, some colleagues discovered they had taken more than they could withstand when they wake up in hospital from a stroke or heart attack. I had to form an exit plan. I was happy as an engineer and with what I was doing, but the micromanagement, targets and bullshit I grew to really hate.

    The prof is right. I haven’t earned any notable amount of money for over a year and a a half. And yet I could still go into any Ipswich car dealership and buy a car, new, with cash 2. Because of the paradox he hinted at – I needed the extra cash when I was working to compensate me for the bad experience and the way it stopped me following my own interests, hopes and dreams. Now I can do that, I don’t need the cash – I’m already six months into extra time from when I thought I would run short.

    Nobody will listen to the good prof though. Michael Norton put his finger on the problem at the end of the article.

    Still, he said, choosing happiness or leisure over earning is challenging, in part because accumulation of money — or candy — is easier to measure than, say, happiness. “You can count Hershey’s Kisses,” Dr. Norton said. Being an involved parent or partner is not so quantifiable. “Most of the things that truly make us happy in life are harder to count,” he said.

    Well that’s a bastard then. We are losing our complex values to the simplicity of one-dimensional numbers. We are becoming number-savvy and value-blind.

    I walked away from working before the strokes and heart attacks. But I haven’t recovered all intellectual facility. I still occasionally look at things and feel shit-for-brains as I think to myself when faced with a task that once I would have been able to do this easily. I find concentration and focus hard to hold for more than a few hours, though it is slowly getting better – but the recovery time is measured in months and years, not days and weeks. It isn’t all bad- I find it easier to see the big picture and not dive down ratholes of detail. It’s one of the things that helps with not spending badly – I don’t mind spending more for something that I use every day. Or means something to me, but a lot of advertising and a lot of overspending is because the customer doesn’t stand back, ask themselves whether they need this class of thing or service in their life, and if so, do they really need the best or will cheap do. Often the best and dearest is the cheapest – if you use it often, this is the Vimes Boots theory why the poor pay more for many things.

    Vimes Boots happens in other areas too – Adnams had an offer on beer, it wasn’t a huge saving, but since everybody seemed to be both skint and on the Carol Vorderman misery diet 3 and beer keeps, I’ll save the tenner. We buy coffee from Garraways in London by mail order as beans and grind these, rather than getting itty-bitty bags from Tesco. I take higher insurance excesses to keep premiums down.

    So back to The Man – now that’s a problem you can do something about. But the enemy within, who blinds us so our values compass spins and knows no north as we focus on the countable at the expense of the valuable, against this there is little defence. You find out how much work you can withstand by discovering how you can’t withstand and easing off from there. If you’re lucky…

    Compared to the enemy without, the enemy within is a trickster. Reining that one in comes down the the old Gnostic maxim, ‘Know thyself’. Getting to do that usually takes two qualities that are in very short supply in the modern world – reflective introspection and time.

    Know Thyself in Greek in a stained glass window

    ‘Know Thyself’ in Greek in a stained glass window

     

     

    Notes:

    1. What’s up with this yachts thing on Wall Street – and where are the customers’ yachts anyway
    2. we don’t have any Lamborghini or Ferrari dealerships in Ipswich, it’s not that kind of place
    3. Why the hell do people do stupid things like that – you’reb etter off drinking 10% less all year than nothing for a month and then going on a bender in February, which seems to be the way people deal with the end of the 28-day detox, from observation
    24 Jan 2014, 3:33pm
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  • More Interesting times in the markets, oy vey…

    No sooner does Under the Money Tree comment to the effect of steady on – not so fast on my interest in Emerging Markets then he’s proved right and the Argies are in trouble (again) and there’s another bust-up in the markets. Is this Global Financial crisis part II or the backwash from GFC I. I’m sure Argentina has been here before in the late 1990s

    Looks like no end of, er, fun :( On the upside, looks like 2014 could be the year of emerging markets, for those with strong stomachs and intestinal fortitude. Not in the results department, but I have very little EM in my ISA, because I started it when emerging markets were going to be the saving of the world. Now that people have forgotten all that and really hate emerging markets it’s probably one for drip-feeding.

    I can take a breather until the next ISA year in April, then start to learn how drip feed investing works over with those people at Charles Stanley, as I have far too much with TD given the limited FSCS compensation limit. I don’t want to go into another financial crisis with shields down ;)

    So let’s take a look at what happened last time it all went titsup in Argentina.

    their economy went down but didn't stay down

    their economy went down but didn’t stay down

    Now there’s a case to be made that they had it easier then, as the world started to pull out of the post-dotcom recession, and the price of some of their key exports went up. Argentina has a bad rep already for defaulting. Nevertheless, it’s been damn tedious in the markets of late, and 2014 was a bad year for actually buying anything new because everything was up in the sky. I’m all for interesting times in the markets, and we seem to be heading for some of that now…

    22 Jan 2014, 5:28pm
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  • empty metrics are strangling vision and leadership

    I’ve spent the last year and a quarter trying to avoid anything that smells like work, but stood in for someone who fell ill at the last minute at a conference on how to leverage the private sector and the third sector in Suffolk. There’s no money in local government, hence the absence of the public sector in the roll-call…

    Some things are clearer when you stand back and look at them from a distance. I listened, and much was about ‘collecting evidence for metrics’, and somewhere in the back of my mind a refrain was building. It reminded me of all the stuff on performance management instead of inspiration, and I realised that what has gone wrong in much of business is that process is being elevated above common-sense in an attempt to make things more transactional, so that interfaces between companies and business units can be defined with greater precision.

    Precision without accuracy means you may always miss – every time

    It is the mark of an educated man to look for precision in each class of things just so far as the nature of the subject admits

    Aristotle

    The trouble is precision and accuracy are not the same thing. It’s too easy to end up precisely getting not what you want…

    you can be precise but not accurate

    you can be precise but not accurate. In most things accuracy is what you want, rather than precision. You don’t want to be always shooting the wrong guy ;)

    Metrics emphasise precision rather than accuracy, particularly when implemented by people without a scientific background. The Guardian has a wordy version for people who prefer narrative to visuals, but basically in the battle between precision and accuracy precision is easier to assess but accuracy is what you want. You’re better off generally shooting the right guy even if you take out the wrong-un every so often rather than always shooting the fella to the right of the bad guy.

    The tragedy is that it’s really, really, easy to tell if you are precise – you always get the same answer, or at least the spread is small. Whereas it’s a bugger to know if you are accurate, particularly if you are trying to find out something unknown. If your spread is wide you may well be centred on the right target but your opposition will holler the place down yelling out at your inconsistency. So in practice we focus on measuring things that tend to be consistent, even if the answer is wrong because we had to ignore too many pesky variables that throw the accuracy off.

    Process makes us focus on metrics, and thus we easily end up with a culture with

    The endless search for evidence nobody needs, to tick boxes that shouldn’t be there, to impress people who don’t really care.

    There’s an answer to this. We used to know what it was. And we desperately need it now. It’s called leadership.

    We humans live in an uncertain world, and yet we still have to take decisions. We will get things wrong sometimes. Some things are amenable to analysis and science, and these should be assessed that way. Engineering projects often have a lot of this – nowadays we can determine if the bridge will stay up given the likely loading, unlike the Victorians, who often had to over-engineer some of their great works after they discovered the hard way than erring to over-engineering was preferable to under-engineering.

    1311_Tay_bridge_down

    Not everything to do with science is amenable to exact analysis, particularly when it comes to the unknown unknowns, which is part of science’s core business. Sometimes the balance of probabilities is the best you can do.

    James Delingpole is absolutely right. It’s perfectly possible that global warming doesn’t exist and/or if it does then it’s not anthropogenic. It’s just not incredibly likely given the data that has been collected.

    Many things in public policy are a balance of opposing forces. There’s never enough money, never enough time, there’s always more than can be done, and sometime alleviating one thing can lead to unintended consequences. There is no right answer, and cod metrics and getting your tickboxes in a row won’t help. All they will do is deflect the blame away from you and into the ‘Lessons will be learned’ catch-all refuge of last resort.

    Nowhere was this clearer than in the health and environment session. Britain seems to suffer from an appalling level of mental health problems, and one of the proposals was to get children to experience the natural environment before they were 12 – apparently the period before 12 is when a lot of attitudes and predilections are formed 1. There is significant anecdotal evidence that exposure to the natural environment and exercise are favourable to good mental health.

    Now I had the assumption that this is why every child has parents, in the case of a species such as humans that has a long period of dependency. However, it doesn’t seem to happen often enough in today’s Britain, and so the job falls to the schools in loco parentis

    After several proposals on how to measure the success of the result if something were done along these lines, I couldn’t hack it anymore, and told the assembled folk how this had happened for me. I grew up in New Cross, in London, in this area, and the primary school was also there.


    View Larger Map

    The teachers did not rely  on metrics. They relied on something older, something that has served humanity for thousands of years, mostly for good though sometimes for ill. It’s called

    Leadership

    The teachers knew they were teaching a bunch of city kids. So one spring, when it was sunny, they took us to Telegraph Hill, I believe, which is to the southwest of this map. I still remember lying on the grass and looking at the deep yellow of buttercups as they explained flowers, and how been pollinated them, and the cycle of nature 2. There were no metrics, no customer satisfaction forms to fill in, no key stage whatever garbage. The school headmaster knew his school, its intake, and led from the front. Resulting in a memory that stayed, even after four decades have rolled by.

    Curiously enough the Ermine seemed to carry people with the idea. Leadership did seem to matter, and indeed several other delegates recalled their schools doing this without funding, using local resources. Despite that the challenge was countered with another issue  as people said that schools have no funding to go into the natural world.

    Now if my inner city primary school could find green space within school crocodile walking distance then I have difficulty in believing that this is insurmountable, but I let this failure of leadership be – I was primarily as an observer, this isn’t my problem. I suspect the perfect is being the enemy of the good here. That’s again where leadership trumps box-ticking. Sometimes good enough is good enough, and it’ll do – you do the best you can with what you have to hand and then move on ;) It would be nice to have the money to do it at Minsmere, but if the local rec or the town park is the the best that can be offered then it’ll do. I can show you sparrows, blue tits, great tits, robins, blackbirds, starlings, black-headed gulls in the rec near my home. a couple of hundred yards away in the town cemetery there are jays, crows, squirrels, green woodpeckers, chaffinches, greenfinches, great spotted woodpeckers, song thrushes and sometimes fieldfares. It really isn’t hard.

    Leadership is what we seem to be sorely lacking now, in many areas of life both corporate and political – the courage to have convictions. Its handmaiden, initiative, seems to be a little bit in short supply too, run out of town by the processes and procedures that seem to gum up the works. Where decisions can’t be avoided, we now often try and hide behind precision without accuracy, meaningless metrics collected without awareness of sample bias.

    We establish processes and systems so that faceless and distant bureaucracies can micromanage the operation from afar, maximising their metrics and results, run by vapid caretakers in systems designed by committee. When something goes titsup in such a system, it is never anybody’s fault, and inquires are held and ‘lessons will be learned’. Colour me unreconstructed, but sometimes a good honest apology along he line of ‘we really screwed up there, sorry to the people affected and I will do my damnedest to avoid this happening to us again’ would be a good deal more convincing than the mealy mouthed ‘lessons will be learned’ bullshit. Who will learn the lessons, and if they were hired to do the top job, then why the bloody hell are we paying them all this money to duck and dive their responsibility for this SNAFU rather than taking it on the chin?

    Every organisation should have the equivalent of this

    We need more of these signs

    We need more of these signs

    “If we’re going to be damned, let’s be damned for what we really are.”

    Picard, Encounter at Farpoint

    At work these spurious metrics seem to be what Farhad Manjoo calls the ‘Gamification’ of the Office (hat tip to Monevator for this one). I saw that first hand at The Firm and it did for me – it robbed working for a living of everything worthwhile. The Firm contracted a company called Successfactors to implement a software system where quarterly you’d have to gather evidence on what you were doing, how you were doing, get SMART 3 objectives.

    And with this endless measurement and metrication, the fire began to flame out. I found it alienating and hateful. For over twenty years I hadn’t had any general problem with the annual appraisement process  – I was assessed by people who knew what I was doing and its setting. I didn’t always agree with everything but  the overall process gave a fair balance between short term delivery and long-term improvement of one’s craft. Above all I could respect the people, their competence, skill and judgement.

    Successfactors and the American HR consultants turned that on its head. I am introverted, and to some extent a loner, I believe in achieving results through understanding and learning. I do my best work on  my own or with one or two others. I’m perfectly happy to present things once I have enough results to present, but what I don’t respond well to is endless interrupts. I could live with that, but the stupid performance management stuff, quarterly, with metrics of people giving 5 minute seminars and how often they used Instant Messaging that counted for 25% one one’s score drove me nuts. People ended up taking up massive amounts of time on all hand events giving 5 minute seminars on stuff that could be better learned from Google.

    There’s no point me detailing the particular problems of implementation. Farhad Manjoo did that far better than I can – I recognise every one of the ills he cites – The Firm was there ahead of time.

    Too much energy, resources and time are being spent on the worship of false metrics, in an attempt to avoid the difficult business of leadership – the art of taking decisions in the face of uncertainty, and knowing that sometimes you’ll be wrong. It’s often better to be wrong 20% of the time than to be right 20% of the time and paralysed by analysis 80% of the time. Micromanagement does that to people, and the worship of false numbers leads to micromanagement, and so the cycle turns and starts anew.

    Numbers have their place – it is knowable whether the bridge will stay up. It is knowable whether cheap Poundland batteries are actually cheap or they just look cheap. There are places where you have to run with the balance of probabilities. there are other places where it’s good to ‘fess up that you know that you don’t know – the classic Rumsfeldian treatise on epistemology and the known unknowns and unknown unknowns. A lot of economics seems to fall in the latter category.

    This is because systems with feedback mechanisms in them are the worst of all – they are often susceptible to chaotic behaviour that cannot be known other than in terms of probabilities, and then only if you can characterise and model them properly. Social sciences have a lot of this, where individual humans are adaptive creatures all trying to maximize their experience, with different time lags in the information flows. It’s why the stock market has such a shocking volatility, as all of this is worked out between independent actors, it is the analytical principle that underpins the efficient market hypothesis behind passive investment. The fundamental presumption behind passive investment is the myth of continual growth – it’s worked so far and has given a reasonable long-term trend. You are buying a slice of that and going along for the ride, with diversification averaging out company and sector volatility and decades long accumulation of holdings integrating the temporal volatility against the desperately low 4-5% or less real over inflation trend. 4

    However, systems involving humans aren’t perfect – it leads to old hands acknowledging that the market is not efficent, albeit not inefficient enough to get ahead using that awareness. Or perhaps yes, but the opportunity is temporal – we humans are prone to collective mania and the madness of crowds where everyone decides the world is ending ;) This human capriciousness applies across the economy and across the social sciences.

    Something else I heard at the conference, for instance, was that there really do seem to be an awful lot of young people who have been deprived of, what in my day would have been called competent parenting, which is why it falls to the schools and/or society in general to try and compensate for the lack. It amazed me that everything seemed to be about identifying the problems without asking the fundamental question how the bloody hell did we get here?

    In my inner-city London primary school which had a single class of 32 of each age group, there was only one pupil that left unable to read and write. In relatively affluent Suffolk, forty years later, a fifth seem to struggle 5 Something has changed, and not for the better. One common theory is that the standard of teaching has fallen.

    However, an alternative could be that the economic cost of having children is not as devastating as it used to be, partly due to Gordon Brown’s misguided war on child poverty – where poverty was determined in relative terms. You aren’t normally allowed to even think that because it’s everybody’s right to have children, innit? Well, I don’t know, not really, not when you bail in everybody else to help clean up the mess you make and screw up the poor bastards that you invoke into the world by not giving a shit. I’d lob having kids on the responsibility side of the balance as opposed to the rights side, but obligations are unfashionable it seems.

    Or it could be something else completely different. Whatever the cause, Britain doesn’t seem to be a happy place to be young for a lot of  people, which seems rough for what is one of the ten biggest economies in the world. You’d have thought somebody would be on the case of trying to unearth the cause of this problem and nutting it at source, so that people don’t end up wringing their hands in similar conferences in 20 years time about kids that don’t seem to be getting adequate parenting… Once again, however, it takes leadership to dare stick one’s head up and ask these awkward questions about how we’ve ended up down this hole with a shovel in our hands.

    We humans aren’t logical brains on a stick and yet we have to deal with an uncertain world somehow. We need hope, grit and determination to prevail in the face of uncertainty, and what we don’t need are false numbers precisely measuring the wrong things, because measuring the right things is either impossible or it’s too hard. Better to know we are whistling in the dark; knowing that you don’t know is better than believing that you do, when you don’t know the right thing. If we applied the resources we applied to getting false metrics to actually trying things to solve the problem we’d get there a lot faster, and the third sector in particular, though well-meaning, seems terrified of being seen to have screwed up.

    Screwing up is part of life. There are no guarantees. Let’s do some real investing in people and empower them to acknowledge that known unknowns exist along with their demon spawn the unknown unknowns. To pinch another line from the fictional Jean-Luc Picard

    Sometimes, you can make no mistakes, do everything right, and still lose.

    Picard

    We’re richer than we ever were. We want for a lot less than we used to. But we’re not putting this to good use, because we seem to be building a system that existentially pisses a lot of people off. It dangles futile distractions in front of their eyes, while making essential things dearer and non-essential things cheaper. We measure the stuff that doesn’t matter because we can, and give up trying to qualify things that do matter because it’s all just too hard. That’s no way to make a better world.

    Notes:

    1. there was some supporting evidence asserted, I have to take that on trust
    2. my parents had already shared some of these essentials with me, to give them their due :)
    3. Specific, Measurable, Attainable, Realistic, Time-bound
    4. In a bad year you can eat a 50% fall year on year from temporal volatility. That’s ten years worth of the roughly 5% real terms assumed up trend, worst case, which leads to the old rule of thumb that you shouldn’t commit to the market resources that you will need to call on within the next 5 years. Alternatively, if you are in the market but will need to raise a lump sum, eg on retirement and buying an annuity, you should pull yourself out of the market gradually over the 5 years preceding the lump-sum payment
    5. I’m not exactly comparing like with like, there were no key stages and all that malarkey. It is possible that the bar for being considered able to read and write is set higher now than it was then
    13 Jan 2014, 7:04pm
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  • Dividend tax credits count for Gift Aid

    Note – to avoid potential confusion while dividend tax credits are ‘paid by’ the Government, this is credit for taxes already paid on dividends. High-level view here, detailed HMRC lowdown here. They are nothing to do with what many people know of as ‘Tax Credits‘ in the UK

    HMRC seem to have been messing about with the Gift Aid system whereby charities could reclaim some of the basic rate tax that people pay on their income, or indeed Capital Gains Tax for those people who are fortunate enough/screwed up somewhere to pay it. Seems to be to the detriment of all concerned – you now have to give something over and above the cost of entry. I blanked Gift Aid for the National Trust Roman Villa I visited way back, because I was under the impression as an impecunious Ermine with zero income I don’t get to claim Gift Aid, natch, and so seven degrees of Hell would break out should HMRC check. I was also being a tight bastard and didn’t like the heavy upsell for the ‘additional donation so we can giftaid it’.

    SWT don't actually deliver wildife to me personally, so subs can be giftaided without increase, unlike the National Trust entry, which is considered services rendered by HMRC

    Suffolk Wildlife Trust don’t actually deliver wildlife to me personally, so SWT subs can be giftaided without increase, unlike the National Trust entry, which is considered services rendered by HMRC

    I’ve already checked the ‘I am not a taxpayer’ box on the Gift Aid declaration for Suffolk Wildlife Trust along the same principles 1, but another organisation sent me a ‘check your Gift Aid status’ just now and I figured it was time to get some facts behind my assumption with the NT that

    I can’t really fill in the giftaid ticket with integrity, as a non-taxpayer though I doubt HMRC tests them

    And it appears that I was wrong. In RE1835 – Gift Aid relief: the requirement to pay tax HMRC speak thusly:

    The individual must have paid at least as much income tax and/or capital gains tax (at any rate) as the basic rate tax the charity will reclaim on the Gift Aid donation, for the year of the donation. Tax deducted from investment income, including dividend tax credits, can be used to cover donations.

    They also repeat themselves here

    Making sure you’ve paid enough tax to use Gift Aid

    You can use Gift Aid if the amount of Income Tax and/or Capital Gains Tax you’ve paid for the tax year in which you make your donation is at least equal to the amount of basic rate tax[...], you will need to consider the tax you’ve paid on each donation on an accumulative basis. If you don’t pay enough tax you will need to pay any shortfall in tax to HMRC.

    You don’t necessarily have to be working to be paying tax. Apart from tax on income from a job or self-employment, the tax you’ve paid could include:

    • tax deducted at source from savings interest – nope – in R85 I trust
    • tax on State Pension and/or other pensions – nope – no pension no dice
    • tax on investment or rental income (including tax credits on UK dividends) – BINGO
    • Capital Gains Tax on gains – nope – I don’t do CGT and take steps to avoid incurring it.

    Other taxes such as VAT and Council tax do not qualify, nor does any non-UK tax.

    Dividend tax credits, eh? Now you can argue that you still pay the 10% tax on dividends inside an ISA 2, though there’s no need for a dividend tax credit ticket because ISA income isn’t declarable. I wouldn’t push the point – the value of Gift Aid for my involvement with charity isn’t world-changing enough to take the risk. In general you don’t pick a fight with HMRC unless you have a really good reason to ;)

    However, I hold significant unwrapped holdings, easily enough for 10% of the divi 3 to match 25% of my contribution to charity, so when these letters/subs come round over the year it appears I will be able to fill in the Gift Aid checkbox with a clear conscience. Obviously that is as long as I have unwrapped annual dividend income 0f 10/4 = 2.5 times my total annual charitable subscriptions. I’m okay on that, and I can now stop ticking the ‘skivers’ box on those giftaid forms, and redirect some of my hard-earned non-income away from HMRC with their blessing. What’s not to like?

    Notes:

    1. Gift Aid it’s a lot easier with charity subscriptions, since the services they deliver aren’t specifically delivered to me, so the subs can be giftaided for no extra cost. It’s not like SWT come round and deliver a box of screeching barn owls in return for my payment, whereas with the NT it was a straight payment for access
    2. You still only get 90% of the dividends – you don’t get any more than if you held them unwrapped, but you have no further tax liability even if you are a HRT payer
    3. to be exact it’s a little bit more as it’s 10% of the whole dividend of which you only see 90%, but 10% of the dividend you get in your bank account is a good enough rule of thumb and fails safe in HMRC’s favour
    6 Jan 2014, 1:23pm
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  • Archives

  • What looks interesting in 2014 then?

    It’s still three months to the new ISA year but it’s a good point to take stock. 2013 was one of those years where pretty much whatever you invested in seemed to make money, reversion to the mean indicates 2014 may be a tough year then, and to be honest I still don’t know what the hell we are doing up here. What’s been happening then?

    Developed markets, the US in particular, have done very well. Shame I got no US then 1 – it was too dear when I started looking at it and it’s still too dear. Emerging markets, pretty much anything to do with mining, and gold seemed to be the losers of 2013. Obviously he’s talking his book, but Money Observer’s Thomas Becket socks it to the Henry II in us with

    2013 has undoubtedly been the year to own Developed World equities and avoid everything in the Emerging World.

    which is hard to argue with. Intriguingly he also asserts

    Closer to home, UK mega-caps are cheap and should benefit from a decent year for the global economy; we are currently expecting above trend growth in global GDP next year.

    I own some of these guys as you’d tend to do in a HYP and I’m not so sure I’d describe them as cheap, else I’d go get me some more – in all cases bar one they’re notably dearer than when I bought ‘em. Maybe Psigma has a load of UK mega-caps in the fund too ;)

    Where am I now?

    I pinched the principles of this article on unitising a portfolio and applied it to my own, I’ve stayed 20% ahead of the FTAS over the investing period which would probably have been my index fund of choice. Rather than run a second unit tracking for the FTAS I track this Vanguard FT Allshare accumulation fund which rolls up dividend income into the unit price, and referred it to January 2010 which is the first year I had enough performance data since I started with half a S&S ISA allocation in 2009.

    I don’t think Goldman Sachs will be begging me to come out of retirement to do God’s work for them but it isn’t, so far, the usual slaughtering that seems to be expected of private investors who don’t go by the creed. I was lucky, however, to start in the investing hellhole that was 2009, 2010 and 2011. You probably don’t have to be smart to do okay from there. But you do have to start

    I am about 2/3 of the way to getting the income top-up of 5% of the ISA capital (as measured in terms of cash spent to buy it, not the dreadfully volatile market value) that I want of it by about mid 2015. As it transpires I could probably do okay without the top-up income from the ISA – you only find that out after retiring 2, which is a real bummer for financial planning ;) So I can leave the existing investments right as they are, but maybe look further ahead. After all, if I live as long as my parents I am looking at a 40-year investment horizon from now…

    What does look interesting then?

    Everything that looks crap now, I guess. As everybody looked in the abyss in 2007-9 we projected our hopes and dreams onto emerging markets, and pumped them up as the Western financial model was shown to have feet of clay. We still do have very serious problems, many of which haven’t been fixed, but it survived the heart attack. Although he’s also obviously talking his book, I think Terry Smith’s outlook on the economy is more accurate.

    So we generally think/feel 3 everything is going swimmingly, the only way is up. So now we don’t need those damn emerging markets. The pound is also rising, which makes foreign stuff look overpriced if you bought it before the rise, etc etc.

    The rising pound helps me, as a UK investor and also one with significant cash holdings. The Government has been busy destroying the value of those cash holdings through inflation, but if the pound and interest rates rise then that means I can get more Foreign Stuff for my paltry pounds. Now normally when people talk about Foreign Stuff they thing of imports, like Samsung mobile phones and cheap DVD players, but it also applies to foreign equities, particularly where those currencies are being threatened by Fed tapering.

    For all that, the promise of emerging markets is still good – demographics to die for, many of these new consumers will come of age and start working when an Ermine is old enough to draw a State Pension, should it still exist at that time. 2014 looks like a good time to get to add some of this to my holdings. I only need about 10-20% in total, which will drop the effective return on capital to 4% from the 5% it has been since emerging markets don’t seem to pay dividends to any useful extent. The newsflow continues to be ghastly which is a good sign ;)

    However, Emerging Markets isn’t one monolithic block. Asian emerging markets seem to be different to, say, South American emerging markets, and India, China and Russia are so very different in demography, culture and resources to each other and anything else out there that rudely lumping them in together seems wrong. Demography alone leads me to lean away from Russia and China – people say the demography of the West is rotten but it’s better than both of those.

    Last year I bought a little bit of AAS at a discount, and the SP is slowly going down the toilet, so I should get a chance to buy some more at a discount this year – I will buy this in modest bits. There is a Blackrock tracker mentioned here which looks like a good one to match AAS. Finally I have a small stake in AFMF – basically Africa, which seems to be generally considered uninvestable, but from what I hear from someone I know who works in mobile telecoms out there the beating heart of capitalism seems to be stirring with  African people doing things for themselves. For all my life Africa has been considered an economic basket case, so this is a straight punt on reversion to the mean. I don’t need much EM, but 2014 is probably a good year to build this stake up.

    Then there is the gold and mining conundrum. I’ll leave consideration of the merits or not of of gold to RIT, but one difference to him is that this will be a small part of my holdings, and I will hold it outside my ISA, because I can’t live with a non-income producing dead asset like that in my ISA. If it continues to tank this year I will add to that.

    I don’t know what to do about mining, it might have to be filed into the too hard camp for now. I don’t have to swing for everything. I have a particularly pessimistic trigger alert set on BRWM so I will revisit that if it turns out to be a spectacularly bad year.

    Of course, there are the usual stalwarts – the Eurozone crisis still hasn’t gone away, and there are of course all the unknown unknowns. At the moment emerging markets are good enough to pique an Ermine’s interest.

    Notes:

    1. That’s not strictly true as it appears I have a hefty slug of US in a Vanguard FTSE Dev World ex-UK index fund, although that happens to be outside my ISA
    2. The other half of the retire early fight is reducing the crappy middle-class and work-related spending that doesn’t enhance your quality of life – note that you do increase some areas of spending. The trick is to increase spending on wants that you really want, as opposed to shit wants induced by others that don’t deliver a return in terms of quality of life. Reducing the stress and noise in your head makes discriminating between these a lot easier, but that’s a different post
    3. I’m talking homo economicus – as opposed to the strivers, and the group formerly known as the middle class who are still very pissed off, as Ed Miliband correctly highlights in his cost of living crisis, though I don’t agree that nationalising energy resources necessarily means you can control the total price