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Weekend reading: Many shall be restored that now are fallen and many shall fall that now are in honour

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What caught my eye this week.

Last week I suggested we all remember that bear markets exist and we’ll see one again, so invest accordingly.

But we can invert this with a reminder that bull markets come and go, too.

It’s difficult to recall the pessimism of 2008 and 2009 today, after a 10-year bull run.

But it’s maybe even harder to remember how out-of-love investors were with technology companies.

One advantage of writing your own investing blog that offsets some of the disadvantages (work, trolls, looking silly in retrospect) is that it enables you to track your thinking.

Often this is embarrassing. Occasionally you get a signal that you’re doing something right.

I did vast amounts of reading when I began investing nearly 20 years ago. Real-life lessons are more valuable, though.

For instance, when I wrote about what I called the investor sentiment cycle back in 2010, I’d only seen a couple of sector-specific booms and busts – though I’d read about many more.

And it’s somewhat gratifying to extract the following snippet from that 2010 post today:

Dot come again

For a contrasting unloved sector, consider technology companies.

It’s hard to remember a time when half the office owned shares in nonsense companies like Baltimore, Webvan, and NTX.

Yet it was only a brief decade ago that the Dotcom stocks were doubling in a month on a good press release and a name change.

Today roughly nobody except institutional investors bothers with individual technology shares – yet the Nasdaq tech market in the US has been quietly beating the Dow and the S&P 500 for months.

Especially this bit further down:

Perhaps Facebook or Twitter will float for what will seem a crazy valuation, but will look positively modest a few years later.


Keen observers of the market may know that Facebook did float at $38 a share in 2012, and many pundits thought it was overpriced.

Indeed the shares plunged below $20 a few months later on fears that Facebook would not be able to capitalise on smartphone advertising.

That seems ridiculous now, particularly when you look at Facebook’s share price.

As I write its shares are up more than ten-fold from that low, at $211.

Tech tock goes the clock

Today’s investors (to some extent me included) can’t get enough of growth and tech names.

There are good theoretical reasons for this, in a low interest rate world. (See point #10 in my post on low interest rate investing issues).

But it’s surely also true that we’re happy to hold tech shares at high valuations because they’ve shot the lights out over the past ten years. Facebook is now a $600bn company, and four US tech companies in the US are valued at over a trillion dollars each!

Will this continue?

Yes –  until it doesn’t.

“Trees don’t grow to the sky”, as the old-timers used to say.

I’m not going to speculate here about when the very real potential of technological disruption is sufficiently priced-in, or whether the future will disappoint us.

But I will remind everyone again that these things move in long cycles.

Not for spooky reasons. Rather from a combination of economic reality and sentiment.

For example, emerging markets just hit a 16-year low relative to US stocks, as shown in this graphic from All Star Charts.

(Click to enlarge)

I would – and as an active investor probably should – bet that the slope won’t look that way in 2030.

For passive investors, it’s an umpteenth reminder to stay diversified across geographies, sectors (i.e. own the market) and not to get distracted by fads.

For naughty active investors, it’s a warning to stay aware. (And maybe to become a passive investor if your edge is simply that you own a lot of tech shares… 😉 )

Have a great weekend!

The title is a quote from Horace. But you knew that.

From Monevator

Why I’m not scared of my interest-only mortgage – Monevator

From the archive-ator: How gold is taxed – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

The Body Shop will start hiring the first person who applies for any retail job – Fast Company

Pound jumps after Sajid Javid storms out of No.11 and is replaced by Rishi Sunak – ThisIsMoney

House prices rise across UK for first time since July 2018 – Guardian

US investors’ move to indexing means the average dollar invested beats the average fund –  Morningstar

“She was beautiful, funny, and she scammed me…”BBC

Failing to protect nature could cost UK economy £16billion a year says World Wildlife Fund – ThisIsMoney

(Click to enlarge)

Ranked: The social mobility of 82 countries – The Visual Capitalist

Products and services

NatWest unveils a bumper £175 bank account switching offer – ThisIsMoney

An overview of country specific and regional investment trusts – IT Investor

German digital bank N26 pulls out of UK, blaming Brexit – Guardian

RateSetter will pay you £20 [and me a cash bonus] within 30 days of you putting in your first £10… – RateSetter

…while Zopa will pay you £50 if you invest £2,000 [and give me a cash tip, too]Zopa

City penthouses for sale [Gallery]Guardian

Comment and opinion

The Getting Rich Quadrant – Safal Niveshak

Nobody told me – Humble Dollar

The wealth gap: how changing fortunes tear close friends apart – Guardian

Some thoughts about young people getting into day-trading – A Wealth of Common Sense

Finance and Instagram: What’s not to like? [Search result]FT

What if my broker goes bust? – Finimus

Not-so-great expectations: The curse of high expected returns – Daniel Egan

Fighting complexity – FireVLondon

How will the novel coronavirus affect your portfolio? – Of Dollars and Data

Illusion of progress – Indeedably

The choice of success – The Simple Dollar

A (not so) brief history of the value factor – OSAM

Hedge funds floundering mini-special

Hedge funds have (almost) never delivered on their risk-mitigation promises – Institutional Investor

Still, five hedge fund heads made more than $1billion last year… – Yahoo Finance

…but hedge fund ‘Masters of Mayfair’ are no more, says Man chief [Search result]FT

Naughty corner: Active antics

The coming green bubble – The Macro Tourist

The secret of stock picking – The Irrelevant Investor

Why you should hunt around for boring investments – Collaborative Blog

Beyond Meat, post-barbarianism: Reasons to invest vegan – Bennallack

ICOs make IPOs look good – Klement on Investing

Valuing the UK market by CAPE ratio; the FTSE 100 and FTSE 250 – UK Value Investor

What would you put in a 100-year portfolio? – RCM Alternatives

The primacy effect on trading and investing decisions – Price Action Lab Blog

The Warner music IPO and the case for investment in music – The Lefsetz Letter

Politics and Brexit

Michael Gove confirms post-Brexit trade barriers will be imposed – Guardian

Home Office tells 101-year old man Italian applying to remain in UK that his parents must confirm his identity – MailOnline

Kindle book bargains

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption by Ben Mezrich – £0.99 on Kindle

Zero to One: Notes on Start Ups, or How to Build the Future by Peter Thiel & Blake Masters – £1.99 on Kindle

Hit Refresh: A Memoir by Microsoft’s CEO by Satya Nadella – £1.99 on Kindle

Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth by T. Harv Eker – £0.99 on Kindle

Off our beat

Kombucha slime is an edible solution to the world’s plastic problem – One Zero

All your favorite brands, from BSTOEM to ZGGCD – New York Times

Bats carry many viruses. So why don’t they get sick? – NPR

World population: 2020 overview – Yale University

You are not, and never will be, Anna from This LifeThe Guyliner

And finally…

“Ironically, a crash at the beginning of your investing life is a gift. In fact, any pullback in stock prices is a gift while you are in the process of accumulating your wealth.”
– JL Collins, The Simple Path to Wealth

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 50 comments… add one }
  • 1 MrOptimistic February 14, 2020, 3:38 pm

    What, Horace used American spelling! Is this Horace Simpson?

  • 2 The Investor February 14, 2020, 4:41 pm

    @MrOptimistic – Um, I hate to break it to you but I believe he wasn’t writing in English…

    Been a long while since anyone has complained about US spelling. Used to happen every week in the blog’s early days! I assumed the diehards had – um – died, or thrown in the towel.

    If it’s any consolation I still write the words in Queen’s your honour but if the spell checker changes and I don’t notice I leave it be…

    Perhaps I’ll change it just for you this time. It is Valentine’s Day after all.

  • 3 Tony February 14, 2020, 5:17 pm

    Be diversified geographically, and go passive I’ve firmly “bought” into (pun and no pun intended). Where I still remain ignorant/unconvinced (the latter may be due to the former) is the case for government bonds in diversification. I won’t buy into them, being so highly priced with low yield in recent years. And the usual case for them: prices have historically moved inversely to share prices, might not be the same in the future. There’s the interest rate issue too. I can nonetheless accept the historic answer of water in your whisky. But not convinced yet that holding deflating cash instead of bonds is not a reasonable risk diversification approach. Am very open to an explanation why my approach of cash instead of bonds as diversification is flawed.

  • 4 Berkshire Pat February 14, 2020, 6:03 pm

    @Tony. Likewise- although many investing gurus specify a percentage in government bonds I can’t bring myself to buy Gilts at the current valuations. My zero risk stuff is FSCS -protected savings accounts (NSANDI ISA/ Investec High 5) and I do have some (unprotected) P2P and a corporate bond fund (SLXX) up the riskier end
    Why buy Gilts with, say, five years to run when you can get better returns from a 5 year consumer ‘bond’? I guess liquidity is one aspect, but if you are 99% certain you will not need the cash until the end of the term…

  • 5 MrOptimistic February 14, 2020, 6:06 pm

    @TI. I knew he was Italian :). Just back off holiday so feeling chirpy. The FirevLondon link cheered me up. I though I over complicated things but he/ she sets a new standard.
    @Tony. Someone famous ( could even be Italian) said that you are not diversified unless you hold stuff you would rather not own. There are scenarios were bonds would gain relative to cash so you are effectively discounting those. Bond prices haven’t moved markedly downwards so others are buying. What do you know that those buyers don’t?
    Actually I have the same bias and am holding far too much cash but what is invested is 40% bonds and I’ll keep it that way if I invest more.

  • 6 Berkshire Pat February 14, 2020, 6:19 pm

    MrO: “There are scenarios where bonds would gain relative to cash ”
    In the simple case of a (say) 5 year Gilt I can’t see much upside. It all gets complicated with bond funds holding some very long bonds. I know there are ‘forced buyers ‘ of bonds also, which distorts the market

  • 7 SemiPassive February 14, 2020, 6:56 pm

    I like John Kingham’s FTSE100 and 250 valuations. I realise it is short-sighted to look at just dividends rather than total return, and in some periods the 250 kicks the 100 so badly in total return that the excess in dividend yield is a very poor compensation.
    But looking at the next 10 years its interesting that the 250 is only half a percent pa ahead on those projections. My natural yield portfolio would favour the FTSE100, indeed it already does, with most of the FTSE250 company exposure coming from IUKD at present.

    My target to load up on the FTSE250 (by buying VMID probably) is if the yield rises to 3.5%, which would point to valuations being low enough to cushion any downside. But this doesn’t seem to occur all that often. It would probably need a global bear market, Labour government, or catastrophic worst case Brexit scenario to occur.
    Fully aware that natural yield portfolio construction should not be driven purely by “yield greed”, the portfolio as a whole should have enough capital growth to keep up with inflation otherwise the overall income it gives will not keep up either. Which is why I do want to add some FTSE250 exposure when the price is next right and I’m not already up to my allocation limit on equities.

  • 8 BBlimp February 14, 2020, 9:08 pm

    ‘If you can be sure you won’t need the cash in five years’

    I think the holding of a diversified asset is so that you have something to ‘buy the dip’ with… so if stocks were to fall in value by 20pc you’d sell bonds to buy more to get back to your original allocations… if you think about it, this assists in ‘selling high/ buying low’ whilst remaining passive. The easiest way to do this would be to buy a multi asset fund and have a computer doing the buying and selling for you… If all your non share money is tied up you can’t buy the dips and might move away from your allocations…

  • 9 bigpat February 15, 2020, 12:14 am

    You read Guyliner Monevator? Are you a secret Guardian Blind dates fan?

  • 10 Mathmo February 15, 2020, 12:27 am

    Thanks for the links this week, TI (early – someone has Valentine’s plans!).

    This week I particularly enjoyed Humble Dollar’s things he wish he knew sooner. A lot of familiar ground there, but some nicely worded bits — “relax, things will works out”, together with “retirement [is so expensive it] is your top goal not buying a house”. Asked for financial advice from a young executive recently I considered describing index funds in a low-fee tax wrapper, and realised that staying healthy, staying married and being happy in his life were more important (life and) financial goals for him. It was a three drink discussion after that.

    I was fascinated to read of the slime-plastic. Ultimately an interesting idea that swims against installed technology. There is in fact a similar solution that’s a mere additive to existing plastic production — a group of enzymes so tunable that you can choose which month in the future your plastic degrades — not into microplastic – but in to nanoslime. So why isn’t this in general use? Why don’t they throw a handful of pellets into the mix when they are making your everyday packaging? It costs a bit of money and the buyers of plastic aren’t shouting loud enough because their consumers aren’t shouting loud enough. Frustrating.

    Indeedably always writes so clearly — oh the data! — and enjoyably and this week’s recycling of some familiar graph formats are very welcome. In particular the addressing of the inner saboteur in the comfort of having progressed well in life to a place of apparent stasis and perhaps even a hint of boredom with an amazing winter-working set-up. There’s some real wisdom here and humble self-knowledge (perhaps you get that with 8 months off — who knows?), although why not throw a bone to the saboteur and appease him rather than try to rise above our inner tormentors? Spending a little tax efficiency for a little satisfaction? That must be money well spent…

    Finally I liked FireVLondon’s revelation on the road to Shipley Tax Office that complexity was a real cost like fees and taxes. I myself just a few weeks ago pinged my tax return off with just 10 lines of information to my accountant so his inventory of tax filing effort was eye-opening. I’d suggest the solution didn’t go nearly far enough in the face of active naughtiness — if the cost of complexity were properly measured, the knife would have cut much deeper. TEA had written a few weeks ago on measuring expenditure, and the mind-bending effort of even his simple description made me realise why I find the idea of tracking in detail my complicated income and expenditure arrangements a task that is ripe for procrastination (I’ve got 22 years to catch-up on if I pick it up again). Odd that there isn’t better technology to help with this yet (and I suppose the moneydashboard types get enough of our private financial data to pseudo-anonymise and sell-on with a sub-standard product so why try harder?) When is that going to be the next privacy scandal, I wonder? It can’t be long. Anyway I’ll settle for quarterly balance sheets and if they move in the right direction for long enough perhaps one day I’ll too be joining indeedably on the beach.

  • 11 Vanguardfan February 15, 2020, 12:31 am

    I thought the headline was a reference to recent political events…

  • 12 Ecomiser February 15, 2020, 2:06 am

    @MrOptimistic – The Americans actually use Horace’s spelling, while we follow our former French overlords’ usage and add a redundant ‘u’.

  • 13 Simon T February 15, 2020, 9:27 am

    @mathmo – there is a sort of pseudo anonymisation of credit and money dashboard data. I (or the companies I work for) buy the income and debts against cookies which I can then combine with your personal data (matching cookies to email addresses you put in for surveys or newsletters or samples etc to come up with “tribes” which are then used to buy digital adverts

  • 14 xxd09 February 15, 2020, 10:08 am

    A saying of a John Bogle always made me think and eventually invest his way
    “Don’t look for the needle in the haystack-buy the haystack!”

  • 15 Mathmo February 15, 2020, 12:52 pm

    @Simon T — I’m guessing at some point the New York Times does a similar article to the recent one on pseudo-anonymised phone location data (where they found the home addresses of cell phones that frequently visited the White House — where they spent the night most often as well as places where they spent the night occasionally). I assume it’s reasonably trivial to cross-reference subscribers to Married High Court Judge Monthly with those who pay for Tinder Premium and go fishing. I don’t think it’s well understood how poorly this area of data is regulated either by law or by player ethics and there’s the inevitable expose in the post.

  • 16 Flashb. February 15, 2020, 1:54 pm

    I totally agree with The Macro Tourist article on the green bubble. The trend towards green investing/ESG funds is only beginning and as the climate emergency continues to take hold it will grow and grow in value.

    The article on social mobility was interesting although I can’t say there were many countries whose ranking surprised me!

    I am actually in the process of moving out of the UK to Dublin for a few years – a decision which will result in me paying MORE taxes, both on income and interest. Despite a pay-rise (to just above median weekly earnings for a full-time employee), I will have less disposable income each month after taxes and rent. While I say goodbye to low taxes, and goodbye to contributing to my SIPP and H2B/S&S ISAs, I say hello to a new adventure!

    A couple of years ago I was blindly pursuing a high savings rate/FI at the expense of all else and would likely have stayed in the UK. Now I am taking a 5-10% hit on my savings rate and going somewhere new.

  • 17 Adam February 16, 2020, 12:59 pm

    Great article, again. With US looking like it could be overvalued and emerging like could be undervalued, from that chart above. What would recommend as a low cost emerging market passive fund?

  • 18 Gizzard February 16, 2020, 8:41 pm

    I use VFEM (large cap) and IEMS (small cap/value).

  • 19 MrOptimistic February 16, 2020, 9:41 pm
  • 20 Mathmo February 16, 2020, 9:51 pm

    In the spirit of this place, isn’t VWRL a good way of investing in emerging markets? 😉

  • 21 MrOptimistic February 16, 2020, 10:05 pm

    Just been looking at EM trackers. They fall into two camps depending on whether the index includes South Korea or not. One variety has more than 30% in China. Given the coupling of the Chinese economy with the rest of the world it isn’t clear to me that this is buying much in the way of diversity, perhaps, by leveraging up on China, even the opposite. I suppose this may be a reason to look at EM smaller companies as posted by someone earlier.

  • 22 IanT February 17, 2020, 9:48 am

    The MSCI Emerging Markets index includes South Korea.

    The fund I use is the Fidelity Index Emerging Markets, with an OCF of just 0.2%, and it pretty much follows the same path as VFEM.

    Cheap as chips.

  • 23 Vanguardfan February 17, 2020, 9:52 am

    Remind me again why everyone’s suddenly so keen on overweighting EM?

  • 24 ZXSpectrum48k February 17, 2020, 10:53 am

    Em equities are getting some press because you’ve got relative valuations back at the lows of 2003 and also because of the COVID- 19 virus. In 2003, SARS was coincident with the base in EM equities. It then outperformed till 2007/08.

    The problem is that 2003 was a rather different time. In 2003, EM equities were very much out of fashion. The investment bank I worked at fired all it EM equity analysts in late 2002. By comparison, EM equities have been a recommended overweight by analysts for the last few years.

    More fundamentally, in 2003 EM equities had been beaten to a pulp by the Asian currency crisis in 1997, the Russia default in 1998 and the Dot com crash. China was starting its rise as the growth engine of the world. Moreover, trade globalisation was rising rapidly (relative EM/DM equity returns tend to be correlated with changes in trade globalisation).

    By comparison, China is now struggling to maintain the rapid rates of growth seen in the last two decade (you just can’t compound at 10% forever). The KOF de facto trade globalisation index has been falling since 2011/12 and show no signs of levelling off.

    I owned zero EM equities for seven years. I covered my underweight late last year. That’s already cost me. I’m not going overweight until EM equities show some sustained sign of outperformance. Too many years of giving presentations of “Em as an asset class” where the conclusion was always that bonds were a better passive allocation than equities. That the higher carry of Em equities didn’t compensate for the fx volatility.

  • 25 Amit February 17, 2020, 11:10 am

    The Simple Dollar post on choice of success is so well written, counters with full force the reasons why the choice of a more outwardly affluent lifestyle is so attractive, yet not aligned with what one may value. Probably the first weekend link I have re-read.

  • 26 ChrisF February 17, 2020, 11:38 am

    Love the idea of a 100-year portfolio (RCM link) but I cannot quite get what they mean by “Active Long Volatility”. Anyone here understand it, and can explain to layperson?

  • 27 Fremantle February 17, 2020, 11:59 am

    I dropped my EM small cap recently as it slipped below 4% of my portfolio’s risk adjusted target allocation, merging it into my EM large cap allocation, for which I use VFEM and Fidelity Index EM in different accounts.

    Ultimately, I’ll probably drop the Tim Hale over-weighting global philosophy and just go for a FTSE All World tracker and let someone else work out the cap-weighted allocations.

    As for bonds, liquidity is the key, but I guess it wouldn’t hurt to take some pain out by allocating some fixed income to fixed term retail bonds, although these tend to be lower interest rates within ISAs than without

  • 28 The Investor February 17, 2020, 12:54 pm

    Morning all! Cheers for the comments. Just briefly to reply to a few:

    @Tony @BerkshirePat — Pays your money, takes your choice. As a naughty active investor I am comfortable running a very low UK government bond allocation (though I do have a handful, as well as a bunch of other interesting fixed income / proxy investments). I would not feel the same if I was a passive investor. For instance I can and sometimes do dump 30%+ of my equity holdings in a period of days/weeks to move to cash, if I feel the need to be defensive. Will you, as a passive investor? You certainly shouldn’t. 😉 People have decried government bond prices for pretty much a decade now, and your comment could (and was) written in 2012. With all of that said I have no argument with private passive investors keeping a big chunk of what would have been a bond allocation in cash, provided it’s all part of a well-thought out strategy. AAA bonds and cash are not the same thing, but at these low rates they are more alike than ever.

    @SemiPassive — If you are over-weighting the FTSE 100 then you are taking an active view. Fair enough, but I think you then need to consider what the FTSE comprises. It’s dominated by big banks, energy firms, and pharma. Banks are struggling to earn a decent return 10 years after the crisis (though to be fair I think they are cheap on a long view), energy firms look structurally out of position, and pharma is charitably in transition. Not saying I wouldn’t invest, and I see the same thing as you. But if one is being active, be active I say, and look beyond just the top numbers. There’s no ‘rule’ that says the FTSE 100 / FTSE 350 has to mean revert etc. 🙂

    @bigpat — I do and I am. 🙂

    @mathmo — Perceptive! 😉 As for your three drink conversation, yes, we’ve managed to write (almost all) a 300+ page book on passive investing but a book on how to stay married and healthy and solvent and engaged could never be finished, and probably of only marginal use even if half read I suspect…

    @Vanguardfan — My graph in the article has crossed the active/passive streams. With that said it can be argued that EM is underweighted in global market cap trackers (relative to economic weight) for technical reasons, so perhaps adding additional weight isn’t the worst idea even for passive investors? 🙂

    @ZXSpectrum48K @others — As an active investor I am really on tenterhooks with this virus. Not sure we really appreciate how locked-down China is currently. I have friends who work with Chinese factories etc and all they’re doing is pinging WeChat messages back and forth to each other waiting for activity to resume. Some of this will be deferred consumption (presuming virus is wrapped up soon) but some lost output won’t come back. Normally I’m one for buying the fear, but I don’t see any fear in equities! Perhaps because of the stimulus promised by China, but how much can you stimulate a deflating balloon with new gas?

    @Amit — Agreed. Inspiring when a fellow old-time blogger manages to find a new way to say the same familiar things. Must try harder! 🙂

    @ChrisF — I haven’t the opportunity to refer back to the article write now but from memory they’re using it in a fancy way to say they own equities (or similar, e.g. VC or private equity); ‘long volatility’ is a way some financial types like to obfuscate.

    @Fremantle – I’ve dabbled in retail bonds but I don’t think passive investors should go near them, except with fun money. Individual issue risk is way too high for a (sensibly) edge-less passive strategy.

  • 29 ChrisF February 17, 2020, 3:35 pm

    Thanks, @TI – the clever persons at RCM refer to this Artemis fund that has about 25% each in “domestic equity” (presume USA) and “long volatility” . They then confuse me further with talk of “Discretionary Global Macro”.

    You are right: they must be paid extra to obfuscate.

    Does anyone know a website that translates this clever-person-speak into English?

  • 30 Berkshire Pat February 17, 2020, 4:23 pm

    “The Investor
    February 17, 2020, 12:54 pm
    @Tony @BerkshirePat — ….People have decried government bond prices for pretty much a decade now, and your comment could [have been](and was) written in 2012.”
    The ‘problem’ I have is most asset classes have an unlimited upside (within reason) – whereas as bonds have a ceiling (zero yield to maturity). I feel that following the ‘rule’ x% in Gilts as minimal risk asset means investing in something that is almost guaranteed to produce poor returns, and has a significant downside if rates go up and one is a forced seller

  • 31 Brod February 17, 2020, 5:25 pm

    @ChrisF – if you mean Discretionary Global Macro, I’ll try.

    Macro means they’re awfully clever at Excel.
    Global means just that, they pick nice sounding places they’d like to go on holibobs to and invest there. So the fund can pick up the tab. It’s research, see?
    Discretionary means that if they don’t like what their Excel spits out, they can change their minds. After a long lunch.

    I think that just about covers it.

  • 32 ChrisF February 17, 2020, 5:29 pm

    Thanks, Brod. I can compute that one, but “long volatility” could mean anything that lasts more than a week or two and jigs about a bit. On that, I remain uninformed.

  • 33 Brod February 17, 2020, 5:46 pm

    Ah! I think that’s to do with String Theory. As in how long is a piece of…

  • 34 Factor February 17, 2020, 7:08 pm

    @Brod #33

    Answer = Twice as long as a piece half the length 🙂

  • 35 ZXSpectrum48k February 17, 2020, 8:08 pm

    Long volatility is an investment strategy where, in simple terms, the fund buys option structures that give them a profile which is long gamma (the 2nd derivative of the option value with respect to the underlying asset price) and long vega (1st derivative of the option value with respect to the implied volatility of the asset price). Buying these options costs premium and as a result they are short theta (the 1st derivative of the option value to the passage of time) or time decay.

    In most asset classes, you earn yield/carry/income from the asset. Your vulnerability is that these assets rise slowly and fall rapidly; you are to some degree ‘short volatility’. Explicit short option volatility strategies (selling options) actually generate quite good Sharpe ratios as a passive approach, albeit the path dependence of your short positions leaves you very vulnerable to shocks. You have to be careful with leverage levels. Many who try it eventually blow themselves up.

    In contrast, the long volatility strategy can benefit from rapid moves in either direction. In the absensce of sufficiently sized moves in the asset prices, however, the options will decay in value. In that sense it is short yield/carry/income. The long volatility strategy will not ever blow up but could instead bleed to death.

    The reality is that the implied level of volatility (the level implied by the option price) is typically higher than the delivered/realized volatility in the market. Options mitigate risk and mitigating risk doesn’t come cheap. Moreover, high levels of volatility tend to manifest themselves more in bearish markets than bullish markets, which means that long volatility strategies tend to outperform when markets fall. As a result a pure long volatility strategy is often not really a good idea as a passive approach. It can only really work well as an active strategy as it requires skill (buying volatility when it is cheap) and good timing (to mitigate time decay).

    Long volatility strategies are gaining some prominence at this time because both implied and realized levels of volatility are at the same lows (or lower) than that observed in the run up to 2008. Some of this is caused by the same behaviour that caused 2008 with funds selling options and other forms of insurance to earn income (yield grab). Some of this is caused as a by product of changes in investment approach; ETF investing, for example, tends to reduce typical day-to-day volatility at the expense of creating “digital volatility” in liquidity air-pockets. Underlying everything, however, is financial represssion from central banks, who now act quickly to suppress market falls and thus volatility (the Fed put).

  • 36 ChrisF February 17, 2020, 8:50 pm

    Thank you ZX for taking the trouble to explain. I get a glimpse of what is going on and I find it fascinating.

  • 37 The Investor February 18, 2020, 9:36 am

    @ZXSpectrum48k @ChrisF — Awesome description by ZXSpectrum48k, thank you! My quick response was more along the lines of how most investors are exploiting the volatility ‘factor’ (e.g. see https://www.etf.com/sections/etf-strategist-corner/all-investors-are-long-volatility-theres-help), which indeed is not how they mean it here.

    I’ve now downloaded the original paper referenced, and it gives some description of this ‘long volatility’ strategy as described/modeled in its 100-year portfolios. The paper’s authors admit they’re not doing the finely-tuned strategy @ZX describes, though they concede the benefits. Unfortunately the paper is secured against copying and pasting and I don’t have time right now to type out by hand the relevant section here, but you’ll find it on page 14 of the doc.

    What they say they are doing in their portfolios is buying options as @ZX describes to get exposure to equity volatility “in the direction” of the market *after* sharp market moves in either direction, which is somewhat confusing to me, (a) as I’d have thought such options would be priced higher after sharp moves (b) it suggests they are taking a directional position (perhaps along the lines of my first description, but agnostic towards whether the market is rising or falling). Perhaps it indicates the market is trending and this is in part a momentum strategy or whatnot, and that is (in part) what they’re buying. But I’m well outside my wheelhouse here, so read @ZXSpectrum’s post twice instead! 😉

    Anyway not sure this all has much to offer private investors beyond it being thought-provoking. Even if in theory we could exploit the same strategy, in practice it would probably mean buying it via an expensive active fund, and I’d be willing to bet most such funds will disappoint because my observation is most such things disappoint! (For example, see ‘absolute return’ funds through the last crisis, that as a group overwhelmingly under-performed before, during, and after the crisis, partly due to fees and partly due to seemingly not being very effective.)

    That’s not to say individuals/certain hedge funds/whatnot don’t make good use of the strategy, of course. I’m sure they do. But for most of us it will likely be a distraction, even if/where retail tactics are available.

  • 38 MrOptimistic February 18, 2020, 12:34 pm

    Can someone explain what is meant by ‘ long’ and ‘ short’ exposure? My understanding was being long meant you gain if the asset goes up, lose if it falls. If I just hold long stuff, I am exposed to the volatility of the assets so am I not long volatility ( even if volatility tends to be asymmetric in the sense that it is more prone to spike for asset falls)?
    Interesting discussion above: my only observation being that derivatives, especially higher derivatives tend to amplify noise in a system, the opposite of smoothing/integration.

  • 39 syrio February 18, 2020, 1:15 pm

    I have no idea what ZX is talking about, but

    > My understanding was being long meant you gain if the asset goes up, lose if it falls.


    > If I just hold long stuff, I am exposed to the volatility of the assets so am I not long volatility

    No, you are long the asset price, but not long volatility. You won’t profit if it goes down, and you won’t lose money if it stays the same.

    For example you could be long volatility by buying an option to buy the asset at 10% above the current price and an option to sell the asset at 10% below the current price. If the asset price doesn’t go up or down 10% the option expires worthless. If the asset goes up or down more than 10% plus the cost of your options you start making money.

    If the market is volatile then options will be expensive, if it is stable then options will be cheaper. You want to buy options when they are cheap and then sell them when they are high.

  • 40 MrOptimistic February 18, 2020, 1:20 pm

    @Syrio. Ah, thanks.

  • 41 ChrisF February 18, 2020, 1:29 pm

    Thanks to all who have shared their knowledge on long volatility. Who knew it could be so complex…
    Can I return to the original link, and the idea of a 100-year portfolio? The original post, and the discussion here, has led us down a fascinating rabbit-hole (worm-hole?) but surely there is a useful discussion (perhaps a post, @TI?) to be had about really long-term investing, hopefully leaving aside the stuff you need two maths PhDs and a private bank to cope with.
    Charities, trusts, even some families all have horizons beyond the ‘invest while I work, spend when I retire, die broke’ timescale of the FIRE set.
    So, team, how does one devise an eternity portfolio? Or one for a century, if eternity is a bit much?

  • 42 Naeclue February 18, 2020, 1:54 pm

    Exchange traded options are a zero sum game (actually less than zero as brokers and the exchanges take a cut). For each option contract bought, one has to be sold (“written” in the jargon). Either the buyer or seller will turn out to be wrong, or both may be wrong after frictional costs.

    If you are buying a fund which dabbles in options, what confidence do you have that your dabbler is better than whoever is on the other side of his/her trades?

  • 43 Naeclue February 18, 2020, 2:18 pm

    @Chrisf, I just read the 100 year portfolio link and my answer has to be buy a world tracker fund, or funds if you want to mitigate some of the fund manager risk. Over 100 years the charges from the likes of Artemis will heavily eat into returns. Even if Artemis do outperform over some periods, the chances of them keeping up with the market over 100 years are miniscule.

  • 44 ZXSpectrum48k February 18, 2020, 4:24 pm

    @ChrisF. If you are thinking about a 100-year portfolio where you only care about the final value at the end of the horizon then the answer is a 100% equities portfolio. Endowments and trusts (charitable, university etc) don’t have that luxury. They usually have a mandate to maintain the purchasing power of the endowment in perpetuity but they also have a requirement to meet liabilities as they fall due. You don’t really want have to say to the Cancer Research project that you promised to fund for the next two decades, that we’re going to kill your funding mid project just because the SPX has had a bad run over the last few years.

    Those dual objectives aren’t easy to balance. Most of these endowments end up with absolute real return targets, typically say CPI+4%. CPI+1% maintains their purchasing power, while the extra 3% is what they distribute. A 100% equity portfolio won’t work since the drawdowns are too fierce. Conversely, you can’t hold enough cash or short-term bonds to outlast some bear markets without impairing returns in better years.

    Their answer is diversification, normally combined with an emphasis on protecting the downside. So you find that these endowments have larger positions in private equity, hedge funds and high quality residential property. The Wellcome Trust endowment is a good example. It’s the UK’s largest charitable endowment at £25bn. It has 50% public equities, 25% private equity, 10% hedge funds, 10% in property and 5% in cash. It has a great record of 14% returns since the mid 80s; it’s last down year was 2008. Nonetheless, in good years it does pay a price for protecting the downside. In 2019 it only returned 7% while VWRL returned 22%. Of course in 2018, Wellcome returned 13% while VWRL returned -5%. Wellcome prefer that smoother return profile.

    It’s very hard for the average retail investor to replicate a Wellcome or a Yale. They have enough scale to access the better private equity or hedge funds (but aren’t so big they have to buy all the dross). They can hold positions for the long term since they have no “end client” who asks to redeem; as a result they cut good fee deals in return for offering that “sticky money” (i.e. a multi-year lockups).

  • 45 Sparschwein February 19, 2020, 2:26 am

    Fascinating discussion here. The Artemis piece is well worth reading. The key problem is, how diversify from stocks when bonds have such a poor expected return, and correlations may flip. I got as far as TIPS, precious metals, and too much cash for lack of alternatives.

    I’d be interested how long volatility or commodity trend are accessible to non-professionals.

  • 46 William February 19, 2020, 10:44 pm

    As of 19 February 2020 the Vanguard SIPP/Pension account is available on the platform. One can set up a new account or existing customers can add the account and transfer in pensions.

  • 47 Naeclue February 19, 2020, 11:08 pm

    From its peek in 2012 the Artemis Vega fund has lost about 19% of its investors money. The ProShares VIX Short-Term Futures ETF (VIXY) has lost 97% of its value over the last 5 years.

    If you look at etfdb.com you will find that the only commodity ETFs to make any money over the last 5 years are those based on precious metals or inverse ETFs, which are based on the shorting of commodity futures.

    A difficulty with commodities is that storage costs are very expensive, although precious metals are not too bad. To avoid storage costs you have to use futures instead, but all commodity futures suffer from contango most of the time, so long term rolling over of futures contracts will drag returns compared with movements in the spot price (and that is before the trading costs). Pure volatility plays, such as with VIXY also rely on VIX futures, which again suffer from contango. Contango is the primary reason for the very poor performance of long VIX ETFs.

    In short, expected returns from long commodities and long volatility are negative. The only way to make money over the long term is to employ traders who are a lot smarter than the other traders. Good luck with that.

    A case may be made for investment in precious metals, as there is a long track record of demand, but precious metals are not really income producing assets, unlike bonds and shares, so future value depends solely on what someone is prepared to pay. A good option for UK private investors may be gold sovereigns and Britannias as these can be traded free of CGT and VAT.

    The other main income producing assets are land, property and infrastructure. To get exposure to these assets most private investors will need to invest in the shares of companies holding the assets, rather than directly in the assets themselves, except in the case of their own home, BTLs and perhaps solar panels. Investing in companies brings in management costs and risks (and usually leverage), but those risks can be mitigated through diversification. We have high exposure to UK property, so my only investment here is in a US REITs ETF.

    My preference is to hold income producing assets at low cost and with as little trading as possible. The less money handed to middlemen the better.

    If you don’t like the volatility of a portfolio of income producing assets (and possibly PMs), hold cash. Cash deposits have zero volatility and close to zero correlation with other asset classes. Cash may lose money in real terms, but nothing like as much as investing in commodities or long volatility is likely to.

  • 48 SemiPassive February 21, 2020, 7:08 pm

    In reply to Naeclue you could get an income play on commodities by buying something like BlackRock Energy And Resources Income Trust, currently yielding 6%.
    For gold held in ISA or SIPP wrappers it sounds like the new Royal Mint physical gold backed ETC will be a decent option with a TER of only 0.22%. Bars kept in a Royal Mint facility in Wales. Enough safety for the paper gold conspiracy theorists?
    I was going to say that will be the lowest TER of any gold ETF, but looks like iShares have now dropped their costs on SGLN, from 0.25% to 0.19%. Bars kept in a JP Morgan vault in London.

  • 49 BBlimp February 29, 2020, 9:14 pm

    Funny isn’t it, after almost four years of bleating about leaving the Eu, waiting for a ‘deep & immediate’ recession that never happened, and the markets have been hit by something no one saw coming.

    Still, gives you something real about rather than worrying about planes will still be able to fly after the transition period ends

  • 50 The Investor March 1, 2020, 10:15 am

    Still, gives you something real about rather than worrying about planes will still be able to fly after the transition period ends

    I’m not particularly worried about that sort of doomster-y thing, as I’ve written several dozen times.

    On the economic front I’m dismayed, for example, that the economy will grow 0.25% or so slower for at least several decades because of the abandonment of brilliant trade relations.

    But that’s for another day. We’ve both said our bit. Pandemic talk only today please.

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