What caught my eye this week.

Here we are at the end of 2020 2021 – sorry, pandemic brain – and the final Monevator missive of the year.

And what a ride it was!

Remember the meme stock madness? The SPAC boom? The crypto-mania and the pixel painting that sold for millions?

The restaurants reopening and seeing your first menu for six months?

Party-gate, and our GOAT Prime Minister – greatest that is if you’re under-three-years old or you grew up in a Banana Republic?

The past 12 months had the lot.

Luckily reader Tim P. has inspired me to dodge the bullet of pontificating too much about 2021, or getting predictions about 2022 wrong.

He requested last-minute investing book ideas for Christmas presents.

And who am I to forego the chance to embed some Amazon affiliate links?

Those 2,632-word articles on the minutia of withdrawal rates don’t write themselves, you know.

Last Christmas

We’ve just been through the weirdest string of short-terms strung together for 24 months that most of us can remember.

And for investors they proved again the value of taking a long-term view.

However you called the big picture, the markets demonstrated themselves to be short-term confounding machines. Again.

Maybe you thought we’d see an economic depression as a novel virus swept around the world?

Or did you foresee the house price boom that actually resulted?

Maybe you predicted an almighty rally in US stocks – even on top of the past ten years of gains and sky-high valuations?

Or did you suppose instead that an insurgency into the White House would rattle US investors?

Perhaps you predicted a fourth or fifth or sixth wave of the virus? Maybe you guessed the UK government would try to renege on its feeble Brexit deal before the ink was barely dry on it?

Maybe, but even the go-nowhere UK market still went up in 2021.

Freedom

Trying to turn these headlines into profits is a hobby for masochists.

Day-trading is a buzz but a soft drug habit would probably be healthier. Most who try fail to add value. They just make themselves poorer.

Active investors should raise their time horizon, and then double it again.

Passive investors, as ever, would do best to tune out the noise and run their portfolio on rails.

Trust me, in 2021 owning index funds beat betting on interest rate rises or the whims of Reddit board readers.

Have you seen the S&P 500?

Bad boys

All of which is to say (note the seamless transition) that we should be trading less and doing nothing with our portfolios more.

Here are a few investing books to save you – or a loved one – from getting RSI by smashing the refresh button on your share dealing app.

A good book for a totally new investor

Keep things simple by giving a copy of Ben Carlson and Robin Powell’s new book, Invest Your Way To Financial Freedom. Both me and my co-blogger did what they say on the tin in our different ways. It’s not easy, but it is simple.

Why it might have helped in 2021: A well-constructed global portfolio serenely glided higher through bond sell-off fears, market churn, and endless worries about over-valuation. A win.

A book for those who think they know better

I suspect Morgan Housel is our most featured writer in Weekend Reading and for good reason. The Psychology of Money distills a decade of his distilling down centuries of lessons about money into one easy read.

Why it helped: Big picture, everything was rosy in a well-diversified portfolio in 2021. Yet there were still countless ways to lose money. It’s all about behaviour, as Housel will explain.

Next steps for your meme stock trading niece or nephew

The Art of Execution remains my go-to gift for active investors. Plenty of investing books will (claim to) tell you how to find superior share ideas. This is about the only one that explores what to do with them.

Why it helped: By luck – or thanks to reading this book – I sold my accidentally-owned Gamestop shares at the top. Kerching!

Indexing stalwarts

For many years we’ve recommended either Lars Kroijer’s Investing Demystified or Tim Hale’s Smarter Investing as complete guides for would-be passive investors. Both books have their problems (I find the latter a slog, personally, though my co-blogger adores it) but for UK readers they’re still hard to beat. If you can put up with stuff about American taxes, you could try The Bogleheads Guide to Investing instead.

Why they helped in 2021: I had a stellar 2020 as an active investor but despite a lot of effort I’ve badly lagged my benchmarks this year. If you’re not doing this because you love it, pick up the market’s return in the time it takes to do a lateral flow test and then head out to do something else instead.

What book to get for The Accumulator

Easy, I bought him Robin Wrigglesworth’s new history of the index fund, Trillions, after he suggested he had better things to do than to read it. The freedom to chase cows wasn’t gifted to us without a fight, The Accumulator!

Why read it in 2021? Index funds continue to take a greater share of the world’s assets, thanks to their low cost and consistent results. Yet they generate few headlines, due to them being crushingly boring. This book helps a bit, by revealing the personalities behind the fund fact sheets.

What to give if you want to give like The Accumulator

Also easy, because The Accumulator kindly sent me two books by financial historian Adam Tooze – The Deluge and Crashed. They cover two economic maelstroms nearly 100 years apart. I haven’t read them yet, but Christmas gift etiquette demands I have to say they’re amazing anyway.

Why they helped in 2021: Those who fail to learn from history are doomed to repeat it, as George Santayana possibly said. Only now with emojis.

Books off our beat

A lovely thing that happened to me this year is I finally got back into reading for pleasure. Here are five of my recent random reads I’d recommend:

• Analogia – Pattern-matching earlier innovation to our doom from AI.

• Project Hail Mary – Feel-good sci-fi thriller from the The Martian man.

• Titan – Not a moon, but the life of John D. Rockefeller by Ron Chernow. Rockefeller makes today’s 0.0001%-ers look like strivers, but it turns out he was just as eccentric. Also I cracked up every time the narrator intoned about his ‘powerful side-whiskers’, like he’s describing an alpha hamster.

• The House of Morgan – Another by Chernow (it’s a phase) and at more than 34 hours on Audible a great value history of banking.

• Piranesi – Reading and writing can take you anywhere.

In praise of Audible

While we’re talking books, a quick plug for listening to them.

These days I’d be consuming books like a Neanderthal if I wasn’t able to ‘read’ half of them on the move via the Audible app.

We all know it’s hard to get through a book with our Internet-addled attention spans.

But personally I also find it ever-harder to sit around when I could be on my feet and doing something.

A sedentary life is a shorter, unhealthier one. Time is running out, and if I’m going to reduce my lifespan, I’d prefer it was by doing something racier or tastier than reading Tim Hale.

Happily, I’ve found Amazon’s Audible membership service an easy way to keep my book digestion regular.

I’m too stingy to forego the monthly credit that my membership buys – and I’m too tight not to get my money’s worth from anything I’ve bought.

Are you that kind of crazy? Try Audible with a free trial.

Freedom

Lastly on books, I might as well come clean and admit it now looks like the Monevator book may never see the light of day.

We’ve had it 95% written for a couple of years. But both The Accumulator and I have repeatedly failed to get it finished and out there. Self-publishing it properly involves an ordeal that Reset author David Sawyer has warned me could be a multi-month full-time job in itself.

We both fear such inordinate effort for an uncertain return. We’d truly love to ship 200 copies to our most faithful readers. But what if that was it?

Perhaps we’re being pessimistic – blame the short winter days.

More likely I’ve read too much about sunk cost fallacy to continue.

We’ll certainly publish the text someday, if only chopped up into articles, so do subscribe to our emails. We may turn some of it into PDF downloads, too.

Wake me up before you go-go

On that rather anti-climactic note I’ll slap on a smile and thank you for reading in 2021. We hope you stick around for 2022!

Despite the book debacle the experiments continue at Monevator Towers, so watch this space.

The crazy market isn’t going anywhere, after all.

Stay safe, have a great break, and enjoy the bumper link-fest below. See you in January!

[continue reading…]

Like most people, I can get behind the idea of being rich. Filthy rich. Ideally right now.

And if that’s due to a lucky YOLO bet on a stock going to the moon then so much the better.

The problem is I’d have to be very lucky. Because I don’t even make those bets.

No, I dutifully punch my ticket on the passive investing slow-train while everyone else – apparently – quaffs champagne on a first-class Hyperloop to Easy Street. 

It’s hard not to wonder where it all went wrong.

Every book I read is out the window. Forget diversification. Forget due diligence.

Just follow a two-step process:

1. Plonk your cash down on a meme stock, crypto-currency, or SPAC.
2. Drown in money. 

Simple!

Not exactly. Because being inherently more furrowed-brow than laser-eyed, I can’t quite shake a nagging question.

What happened next?

Having fun staying poor

The headlines typically only report rags-to-riches tales or train wrecks. 

But how are things going if you only jumped aboard some of 2021’s biggest investing thrill rides when they were hot?

And you forgot to get off?

Forget ‘follow the money’, let’s follow the emojis! 🚀🚀🚀

The tracks of my fears – The following collection of meme stonks, crypto-assets, and ETFs all triggered my hype alarm this year. Share price charts are from Yahoo Finance, denominated in US dollars. The Y-axis is log scaled, which is the right way to present prices but makes the peak-to-trough look less exciting than a linear scale. I’ve tracked the price level from a notional date of 31 December 2020 to show what could have happened if you bought in before Peak Froth.

GameStop

GameStop was the poster child for the WallStreetBets David vs Goliath story that blew everyone’s minds in January 2021.

A ragtag band of Redditors – armed only with rocket emojis and pump-action call options – supposedly had institutional short-sellers on the run. 

How did it work out?

If you’d dropped some coin on GameStop at the end of last year, your position had spiked more than 2,400% by 28 January. 

Behold that first jagged peak in the graph – soaring over blasted earth like the Dark Tower.

And, by some black magick, you were up more than 12,000% if you’d bought GME shares that were going nowhere way back in July 2020.

But as The Investor wrote at the height of GameStop mania:

GameStop isn’t worth $22.5bn. It just isn’t. The company should try to raise capital while it can at this price, because it won’t stay here.

It didn’t. Like gravity, the fundamentals eventually brought us back to Earth. If you bought in at the peak then you’ve lost 65% as I write this. 

You’re still up 768% on bets placed on 31 December, mind you.

How firm are your diamond hands now?

AMC

The world’s biggest cinema chain AMC was shuttered and mired in debt when meme-stonk status (and free popcorn) put a rocket up the shares. 

Turned out this trip to the moon involved a crash landing six months later. AMC is down 60% from its high. 

You’re 1,226% to the good if you’d bought on December 31 2020. Damn my low horizons.

Virgin Galactic

Is Virgin Galactic heading for Zero G, or zero gees? As you can see the stock is prone to cratering.

Excitement mounts whenever everyone’s favourite Earthling emigrant threatens to leave the planet. But since going parabolic in February, the shares have plummeted like the oxygen levels in a depressurised spacecraft. 

Virgin Galactic is down -75% from the peak and down -39% from our 31 December 2020 waypoint. Cue emergency klaxons!

Dogecoin

Is this a joke? Yes, and a crypto-currency.

Dogecoin began as a satire on Bitcoin. But rearrange the following into a beyond-parody late-capitalism spectacle and you’re up over 15,800% in four months:

• A Reddit fanbase
• Mischievous tweets from Elon Musk
• A doge meme logo

If you’d somehow foreseen that 2021 would be the year of the doge, then you’re up 3,748% since 31 December 2020. 

But if your strategy hinged on Elon’s latest Tweet, you’re down 75% since the top.

Theme ETF

A lifetime ago, a videogame called Theme Park taught Gen X how to exploit a captive audience. If you loaded your popcorn products with salt, then you’d sell bucket loads more sugary drink to thirsty punters as they tooled around your rollercoasters. 

Purchasers of salty thematic ETFs will also be familiar with rollercoaster rides. Sprinkled with the promise of ‘disruptive innovation’ to get your mouth watering, these ETFs were lapped up in 2021.

But did these exciting investments justify the hype?

ARK Innovation ETF

How can you go wrong investing in genomics, fintech, space exploration, AI and robotics? Well, for now, it seems the market thinks your growth stock holdings are massively overvalued…

(The Investor is an admirer of this ARK’s Noah – superstar stock-picker CEO Cathie Wood – and he wants me to show ARK’s full 2020 performance. Yeah this ETF gained 153% in 2020. But that was then, this is now. And that’s the point!)

Defiance Next Gen SPAC ETF

A Special Purpose Acquisition Company (SPAC) sounds like something that Sacha Baron Cohen would invent to entrap a Tory minister. 

Turns out it’s a shell corporation that lists on the stock exchange, and is otherwise known as a blank cheque company. 

SPACs are marketed to ordinary investors as a way of tapping into the riches of private equity.

Some SPACs are even celebrity-endorsed. The likes of Jay Z, Shaquille O’Neal, and Serena Williams have all gotten involved. 

Sounds like a winner, right?

The US Securities and Exchange Commission (SEC) felt moved to mention:

It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.

Rize Medical Cannabis And Life Sciences ETF

You can’t blame anyone for investing in a Cannabis ETF when 11 out 12 bathrooms on the parliamentary estate recently tested positive for drugs.

But cannabis profits have gone up in smoke since the high in February. 

That’s a shame because a joint select committee working to the sound of Big Ben’s bongs could really nurture grassroots support for this issue.

I’m sorry if I’ve made a hash of this analysis. [Sacked! – Ed]

Hubbly bubbly

The rolling wave of manias in 2021 doesn’t necessarily mean a huge market bubble is due to burst.

In fact, I’m relieved to see that subsequent losses in every one of these fad-stocks have released some pressure. 

The best explanation I’ve seen for 2021’s rampant speculation is that Covid created a reservoir of savings out of stuck-at-home citizens. In 2020 this birthed a new generation of bored share traders. Surplus cash flooded the markets and pumped up prices across asset classes of every description.

I guess we’ll all feel the pain when that liquidity drains away?

Best of luck to anyone who walked into the casino and came out smelling of roses and money. I hope you hang on to your windfall.

As for the rest of us not relying on blind luck, let’s keep the passive investing faith. 

The market mints winners and losers every day.

The tricky bit is that failure is silent, while success is noisy.

Take it steady,

The Accumulator

Few of the universals of personal finance and investing are – paradoxically – as individually experienced and feared as inflation.

That’s true both in terms of the headline inflation rates you happen to live through, and also your personal inflation rate that varies with what you choose to spend money on.

You may not even have thought much about inflation before 2021, depending on when you were born.

If you’re under 30, the most striking inflation you’ve seen is how many pints of milk it now costs to buy a Bitcoin, compared to a few years ago.

At its £48,000 high, the Bitcoin price was up about 70-fold since the start of 2017 – in pint of milk terms.

No wonder a generation of DIY-traders aim to get rich quick from Bitcoin.

Most of the YOLO crowd will never have thought much about the price of a pint of milk, though. Why would they? It’s been steady in the UK for ages.

But other people in history have seen the cost of food skyrocket in less time than it takes to recite Old MacDonald Had A Farm.

In Weimar Germany in the early 1920s:

Prices ran out of control. A loaf of bread, which cost 250 marks in January 1923, had risen to 200,000 million marks in November 1923.

The Weimar Republic 1918-1929, BBC

Such hyper-inflation is rare. But more routinely high inflation isn’t merely a ghost story from the economic textbooks.

Right now, annual inflation is running at 10% in Brazil, for example. It’s more than 20% in Turkey.

If you’re Turkish you’d be happier if some of your life savings had been in US Dollars. Let alone in Bitcoin.

How much was a Mars bar?

Closer to home, cautious 70-something fund managers have warned us about inflation ever since Central Banks began quantitative easing in 2008.

They’re still at it. Here’s 77-year-old hedge fund manager Paul Singer writing in the Financial Times in December 2021:

The global $30tn pile of stocks and bonds that have been purchased by central banks in order to drive up their prices has created a gigantic overhang.

With inflation rising, policymakers are reaching the limits of their ability to support asset prices in a future downturn without further exacerbating inflationary pressures.

– Financial Times, 6 December 2021

Younger investors too who’d read economic textbooks – for the little good it has done in the past decade – may have also have felt uneasy.

But the rest have happily bid up the multiples on equities, taken out huge mortgages, and saved into near-zero interest cash accounts in a low inflation world.

Today’s 20- to 30-somethings don’t know any different. At least not from lived experience.

In-between you have the likes of me – Generation X – who remembers inflation in my childhood and getting 7% on cash in my early working years, but who mostly invested this century. I’m caught somewhere in the middle.

Let’s recall how the generations are popularly sliced:

Source: Pew Research

Now consider a key measure of UK inflation since the late 1980s:

Source: ONS

Today’s Gen X senior banker, trader, or fund manager graduated in the late-1980s to mid-1990s with vague memories of crisps and sweets getting dearer as kids, but the cost of their lunch at work has changed little in 20 years.

It wasn’t a smooth ride. There were the Dotcom and banking crashes, the Eurozone crisis, a pandemic. Inflation fears have arisen now and then.

But as things turned out – and whether by luck or design – UK and US price rises have mostly been modest since the 1990s, when Central Banks began directly targeting a specific inflation rate.

As a result – and with hindsight – you could have done a lot worse than to buy long-term bonds in the early ’90s, and then gone to lunch for 30 years.

A truth universally acknowledged

Alas for bond managers (but fortunately for City tailors) the big win of buying a huge pile of bonds, reinvesting the coupons, and getting another hobby was only certain retrospectively.

Nobody could risk dismissing an inflation resurgence just because the Bank of England targeted a 2% rate forever. Inflation pops up all the time in the history books, so they kept an eye out for. Many suspected reports of inflation’s death might be exaggerated.

The oldest measure of inflation, RPI, (since superseded by CPI) was only introduced in 1947. However the Office of National Statistics has done some backward gazing to 1800:

Source: ONS

When I first saw this graph, I felt bad for Jane Austen’s rich men boasting about their fixed incomes.

Inflation often spiked towards 20% in the 1800s! Fixed income riches looks less attractive in this inflationary light than the Darcy-fanciers imagined.

However we can see that deflation was also incredibly common back then.1

Sure, Mr Darcy’s £10,000 income would have been inflated away for a while. But it would have surged again in real terms a few years later.

Economic life was just more volatile. As academics who’ve studied the backdrop to Austen’s novels note:

During Jane Austen’s own lifetime, the British economy experienced a series of economic crises. 

An oversized national debt, four waves of recession, two banking crises, the debasement of coins, a major economic crash, and a depression led, in combination, to a doubling of consumer prices, i.e., extreme inflation.

In 1795 […] the first financial crisis of Jane Austen’s lifetime occurred in the form of a massive crop failure brought on by a long drought and a harsh winter. 

The price of bread, meat, milk, and cheese doubled, leading to food riots across England.

The Economics of Jane Austen’s World, JASNA, Winter 2015

The 19th Century economy ran without Central Banks or government backstops as guardrails. This – along with war, disease, weather, and the industrial revolution – made for a cycle of feast or famine.

Twitter economists who rail against today’s crisis-dampening central bankers might want to ponder that graph above.

Down, down, deeper and down

A surprising number of people with arts degrees end up in money management. The English Literature graduates at least might have read plenty about financial instability.

But it was still more the 1970s than Jane Austen’s time that a Gen X bond manager would have had at the back of their head as inflation’s ‘great moderation’ got underway.

This chart shows how RPI surged in the 1970s:

Source: ONS

As you can see, a 21% inflation rate in the UK is very much within living memory.

Even more so when the benign conditions of the 1990s first took hold.

Memories of 1970s inflation was surely the main reason why UK yields took 25 years to fall to their nadir. Purchasers feared inflation’s bond-slaughtering recurrence. But as inflation didn’t surge back – and Central bankers further lowered rates – yields marched ever downwards:

Source: Independent

Near-zero interest rates are almost taken for granted today.

But for much of the past 100 years an economist would assume we were living in Bizarro world – or at least in a depression – if they saw this graph.

Even better than the real thing

Today few people who’ve worked through bouts of high inflation remain at the coal face of big financial institutions in London or New York.

They’d have to have been working in the 1970s, really. That would put them in their 60s or older.

A few (such as the aforementioned Singer) soldier on. But most by that age have headed upstairs and away from the trading terminals, or else out the door.

Which is interesting, given that in late 2021 inflation is on a tear:

Source: ONS

Some pundits argue the lack of hands-on investors with inflation experience is a blind spot. They say there are few people around who’ve seen inflation before who can spot the inflation that’s now (allegedly) taking hold, leaving us vulnerable.

But does their logic stand up?

Everyone and their FT-reading dog is worried about inflation, so it’s no secret. Along with speculation about rate rises, it’s 90% of what the financial media talks about.

Besides, perhaps someone who’d invested through an inflationary spiral could just as well spot a fake one? Maybe they’d tell us this recent uptick is a blip?

Where is the union bargaining power, they might ask? Why can’t firms continue to look overseas to cut prices in the long-term? Are the goods and services that make up the inflation basket inherently more expensive?

We may indeed be experiencing a small energy price shock. But did we also just come off the gold standard – that other hallmark of the 1970s episode?

Alternatively, is inflation just down to temporary SNAFUs at ports and factories, restarting commodity production, and perhaps even over-ordering by panicky companies trying to avoid problems in future?

A short-term supply/demand mismatch? (I suspect this, for what it’s worth.)

The reason the market wants answers to these questions isn’t just because higher inflation would probably require higher-than-expected interest rates eventually, and that could weigh on the bond market.

It’s also because our financial system has been broadly rewired for a low rate and low inflation reality.

For a very relatable example, look at how the price-to-earnings ratio for first-time buyers has soared to an all-time high as inflation has steadied and rates declined:

Source: ThisIsMoney

In 2000 a first-time buyer paid about three times their salary for the average starter home. Now they pay nearer six times.

That would not be possible without low interest rates keeping mortgages affordable.

The same relationship rolls out across the investment universe. For instance I’ve previously explained how low long-term yields and expectations for subdued inflation underwrite high multiples on equities that have boosted the indices for years.

Deflated expectations

Experienced antique dealers aren’t only good at spotting the real thing.

Much of their skill is avoiding old tat that looks like an antique, but isn’t.

We haven’t seen inflation shoot up like it has recently for a long time. No wonder it’s unnerving.

But maybe what we need is an old pro in a fedora to sniff the air, and then to turn up his nose at the scary headlines and walk on by, unruffled.

1. That’s assuming the ONS got its retrospective sums right. [↩]