29 Apr 2012, 2:25pm


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  • Monkey with a Pin – in a world of chancers and charlatans, is it Game Over for the Private Investor?

    Every so often, you come across somebody who challenges the status quo with gutsy bravado, so when Pete Comley invited me to take a read of his free ebook on Monkey with a Pin (MwaP) about how various trials and tribulations mean private investors achieve nowhere near the returns they are led to expect on the stock market I took him up on it.

    Monkey with a Pin is a well-researched diatribe on the ways that the financial industry fleeces the common man of nearly all of any gains he may achieve on the markets, and where gains aren’t achieved they take fees anyway. Just because they can.

    It’s hard to argue with MwaP as a comprehensive statement of the problem. However, while there were lots of good recommendations in how to reduce the chances of getting fleeced in charges, I did find it lacking in actionable responses to the more general problem of realising a real return on investment in these desperate post-credit-crunch times.

    Pete Comley says that he hopes that new investors should not be put off investing by his ebook. I’m not so sure that would be a rational response from them – the take-way I got from the book is basically for private investors old and new is

    Step away from your online trading account. Very slowly. And observe Comleys Laws of Private Investing, taking after two of the Three Laws of Thermodynamics:

    1. You can’t Win, because it’s a closed system
    2. You Can’t Break Even either, because fees and charges leak away about 6% of any gains to be had. And the gains were only 5% in the first place, so result misery.

    It’s a great read, and challenges many of the shibboleths of investing, in particular the 5% real ROI that is often bandied about, showing that this conveniently ignores all the dead companies littering the landscape. The  finance industry comes in for a good kicking as well along the way as a whole range of nastly little sharp practices are exposed. If nothing else, it will ram home that you need to keep these guys’ hands out of the till as much as possible.  A lot of that is up to you, in how you invest as well as what you invest in.

    You should minimise your churn – I would venture that even the 100% annual churn that Pete Comley warns against is far, far, too high. Mine was 65% in year 2010/11  and 17% in 2011/12, and even those are too high. The first is because of some rank stupidity with BP and reorienting the direction to a HYP, the second due to some minor stupidity with BARC last year 🙂

    I had come independently to his second insight, which is that you should also buy/sell in significant chunks (>£2000 for typical UK broker charges).

    Monevator/TA had already warmed me up to the value of low-cost index funds such as HSBC’s FTAS and L&G’s LGAAAK as a low cost alternative to the ETF passive approach I had initially used, and MwaP reiterated this. I’ve never been drawn to managed funds, though I do favour investment trusts at times. And managed funds of funds looked like a swampy fees quagmire to me, though Vanguard’s LifeStrategy fund is arguably a passive fund of passive funds, which I’m considering for an eventual main index holding.

    Index investing – a different view on why it works

    Comley made a  case for the benefits of index investing which was much easier for me to appreciate than anything I had found before. Although I could see from Monevator/TA the low-cost aspects, the analytical reason why index investing would be expected to have an edge on an investor buying typical index components seems to be that the index automatically kicks out the dogs that go bust, effectively dynamically rebalancing. This ‘survivorship bias’ is meant to be worth about 1% p.a. I hadn’t understood that before, nor had a feel for just how many firms do go bust over the years, and that gives me a  more favourable view of index investing that just following all the other sheeple…

    Am I a typical Pinless Monkey?

    Statistically, I unlikely to have investing ‘hot hands’, i.e. an innate talent greater than my peers lying far outside chance. I’ve learned a lot of the issues in the book the hard way – as a speculator in the dotcom bust I churned, chased momentum, sold low and bought high, you name it. I did learn to avoid those things, indeed I feel a lot of investment success is avoiding the pitfalls rather than finding ten-baggers. Although the story of ten- and twenty-baggers is exciting, the main thing is learning to survive in the investment jungle, particularly if you are a stock-picker rather than an index tracker.

    Over the last five years, I haven’t bought any stocks that doubled in price (with the exception of Sharesave holdings of The Firm bought in its existential crisis in 2009, which don’t count as I haven’t taken delivery of them yet)  never mind went up tenfold, whereas in the dotcom era I did have this. However, I haven’t held any stocks so far that have gone down the pan, which I had in the dot-com bust. None of my current stocks have dropped by more than a third. The liquidation value is about 4% up on the total invested over  two and a half years. It’s hard to know what that means, because of the shocking volatility of the capital value – the 4% has been up to 7% and down to -7% over the last year, and it ignores some dividend income that appeared as cash in the ISA. There’s just not enough data to say anything useful.

    A Different Perspective on Cash

    For various reasons, I hold much more cash than I would like, because the path of my future had a lot of uncertainty in it. It is about 50% of my post-tax financial assets and 100% of my AVC holdings now. I really hate cash as an asset class, silently wasting away every year without so much as  by your leave. At least a good hunk of it is in NS&I ILSCs to which that doesn’t apply. I just don’t have Rob’s equanimity about cash, it’s a wasting asset in my view.

    Some of that hatred is due to the bad press the financial industry gives cash, by not allowing for the fact that private individuals can get better rates than their benchmark, the Treasury rate. I didn’t really understand that beforehand, and it seems to have come as a surprise to Pete Comley too, so hat tip there for the heads up. I still hate cash as an asset class, but perhaps I should look more kindly on it given the rottenness of the alternatives!

    Conclusion – All hope abandon ye who enter here

    I learned a lot and got to see things with different eyes from reading MwaP. However, the overall message I took away was somewhat cheerless, it is basically as far as stock market investing is concerned,

    The takeaway message for me as far as the stockmarket for private investors is the inscription above the gates of Hell in Dante's Divine Comedy - All hope abandon ye who enter here

    Private investors, you’re stuffed, guys. It’s a marginal case at best, and most certainly nothing like this. I’m a glass half-empty sort of guy in general, and prone to gloom and despondency about industrial civilisation at times. Even I didn’t think it was that bad!

    I couldn’t see the up-side. My feeling is that on the whole the reason stockmarket investing should work is because you’re effectively buying a slice of a company, which is a real operation that is creating real value somewhere, and that people will beat a path to its door in search of that. I know, it’s sometimes hard to see where the benefit is in somewhere like MacDonald’s, or Goldman Sachs, but anyway, I’ll pinch the words from Warren Buffett speaking in 2011

    My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See’s Candy meet that double-barreled test.

    It is possible that I misunderstood the thrust of Pete Comley’s work, but he appears to discount the validity of one possible response to the costs he correctly rails against. That is to buy and hold. Unfortunately, Comley comes to the conclusion that we are in a secular bear market (it’s a real pain that you can’t reference an ebook! The best my Kindle says is Location 2827 of 3880)

    Buy and hold is predicated on the assumption that the market will offer a good rate of return. That seems unlikely in future.

    To some extent I agree with him when he modifies that by

    … strategy likely to be effective until the next secular bull market arrives is one of buying shares only when they are very cheap by historical standards and then holding them.

    Cheap in this case is for the S&P to have a CAPE of 5, rather than the current 20-ish which is above the long-run average of 15.

    I entered the market with my AVCs in March 2009, just after I misinterpreted a performance review that I was headed out of The Firm. At the time everybody was down on shares, and indeed I also thought the centre wouldn’t hold. It seemed worth a go, however, because I was otherwise doomed anyway – I hadn’t made enough preparation to retire early. The next week I read this which stiffened the spine somewhat, and I hit the global index fund AVCs hard with over 2/3 of my salary for a few months.

    I liquidated that in March, turning it to cash. It was 20% up (though inflation has eaten 10% of the value of money since March 2009). It is easier for someone who believes that they have nothing to lose to take action in a crisis than someone who fears the loss of all they have in the status quo. My hope is that having threaded my way through the eye of the needle once I may do so again, for instance when the Euronuts finally raise the white flag over the twisted wreckage  and surrender to the tanks of reality crushing their dreams of one single currency to bind them all. In that maelstrom fortune may favour the independent of thought, though as MwaP says,

    such periods are so accompanied by ones of negativity, extreme volatility and downright repulsion for shares that you have to be an extremely well-disciplined and far-sighted investor to take advantage of them.

    Therein lies the rub. To get exceptional results, you have to take exceptional actions. Fly into the storm, when all around are flying away. What does not kill you makes you stronger.

    Perhaps my inner Virgil paused at the gates when my Dante went through the arch and lost his way. I can see how readers might be able to use MwaP to hugely reduce their losses, and that alone makes it definitely worth a read. But I’m damned if I can see how they might be able to use it to improve their gains. If it encourages future victims of the rapacious financial services industry to exit their brokerage accounts and sit firmly on their hands then perhaps that’s good enough 😉

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