What caught my eye this week.

I enjoyed a top floor view over the Thames this week at the book launch for the second edition of Lars Kroijer’s Investing Demystified. It was a pleasure too to meet his family including his young children, one of whom said she hadn’t read her father’s book because it was likely to be “gobbledygook”.

It’s commendable to be so skeptical at such a tender age about people who promise to share the secrets of making money. But Monevator readers who know Lars from his contributions to our website will surely beg to differ.

Indeed many of you have already read the first edition of Investing Demystified. Should you get the second? It’s substantially the same book, but Lars notes:

“Compared to the earlier edition I have downplayed the addition of non-essential elements to the book and moved to the Appendix a number of more tangential points, while keeping the core elements and focus on the rational portfolio unchanged.”

You probably don’t need both editions, then, unless you’re a Kroijer completist (in which case you ought to get his enjoyable hedge fund book, too).

If you’re new, starting with the new edition (which costs £16-ish from Amazon) is the way to go.

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A heatwave struck London the week I decided to revamp my home office. I usually enjoy assembling flat pack furniture. Less so in a DIY sweatshop.

Perhaps the resultant lethargy is one reason why I’ve been lingering over the paperwork the rearrangement brought to the surface.

Bundles of old bank statements. Letters confirming the opening of savings accounts that paid 7% interest. A document I’d kept confirming my entitlement to 228 HBOS shares when Halifax turned itself into a bank. A decade and a half of summaries of Legal and General tracker funds.

I’m going to shred and recycle most of this stuff. But I have mixed feelings about doing so.

Unreal returns

Investing can be such an ephemeral thing.

When you first put money into funds or shares and see it fluctuate like a statistic in a video game, the pounds and pennies you’re winning and losing seem entirely concrete.

But soon enough it’s not real money anymore. It’s ‘halfway to a house deposit’ or ‘not enough yet to compound to retirement’ or ‘thirty swanky holidays you could have had instead’ money. It’s ‘doing well’ or ‘must try harder’.

I’ll often smile as I pounce on a yellow sticker-ed bargain in Waitrose, delighted to save 50p on some fancy soup. But I no longer bat an eyelid when my portfolio fluctuates by thousands over lunchtime as I eat it.

Different rules apply to that money. For now it has become a score or a staging post towards a goal, or a marker against a market that as an active investor I’m always trying to beat.

Other people talk about paper profits, or losses not being losses until you sell. Such mental accounting may be a trick or a trap, depending, but in any event it can only happen once you can stop seeing your portfolio as entirely real money.

I believe most of us who are natural savers – grown-up children who could easily forgo eating a marshmallow – are good at abstracting money like this.

In contrast, people who can’t save even when on healthy incomes are probably bad at compartmentalizing. They only see real money they could be spending.

Similarly, people who struggle with risky assets are perhaps too prone to seeing their ‘pension pot cut in half’ and ‘tens of thousands wiped out’.

Such things rarely cut so deeply when your portfolio is – in some abstract sense – not real money. When, rather, it’s in this special universe of long time horizons, distant goals, and where volatility that would have you calling the police if it happened to your bank account or in your wallet is expected and welcomed for giving you the chance to buy more cheaply.

We evolved as hunter-gatherers. At most, our ancestors might have salted away a bit of woolly mammoth jerky for the hard times.

Those of us who happily tuck away multiples of our income for a future we may never see are probably the weird ones.

Paper assets

Maybe back in the days of beautiful share certificates people felt less disconnected from their investments?

You can read old stories of investors carefully inspecting their shareholdings before returning them to their bank’s safety deposit box. Once upon a time you had to physically carry your certificates into a broker’s office to complete a transaction.

It’s easy to see how things change in a world where you can sell a six-figure holding via your smartphone in a few seconds.

Which is probably why these old letters and statements have struck a nerve. As a (naughty) active investing junkie, I’m used to knowing my portfolio’s value up to the last second. So it’s a melancholy feeling to find an old note from a broker confirming I’ve opened an account that’s now as familiar to me as doing my teeth – but that was once a leap of faith for a 20-something version of me.

I’ve got more options now because of the decisions he made. In truth, I’m well ahead of most of the goals he set.

But equally a bit of me wants to go back in time, take £200 from the savings he invested, and instead send my young self out into the turn-of-the-century night to have fun when nothing hurt the next morning and most of my friends were single and fancy free.

Intangible assets

As I said, I’ll probably shred most of this stuff. I’m not even sure I like the feelings they’ve brought up. Besides, a few key documents should deliver a Proustian moment without taking up several feet of London living space.

Filing them has little practical justification, either. Most of my accounts are paperless now, so this random repository is not comprehensive. I know brokers urge you to print and store everything, but whenever I’ve had a query, I’ve solved it online. That’s how this forgotten and neglected stuff got forgotten and neglected.

Also I keep a (very irregular) investment log that reminds me of the arc of my story, if not every detail. So most of this ephemera is surplus to requirements.

Yet I have mixed feelings about destroying the paper trail. Maybe because even far from Wall Street, investing so easily feels like a fugazi…

Note: The title of this article refers of course to Alice Schroeder’s biography of Warren Buffett, The Snowball. It’s well worth a read.

What caught my eye this week.

Passive investors who dabble with the value factor and wannabe Warren Buffetts alike know that every few years, the ‘value is best’ mantra gets kicked into the long grass.

Value investing – basically buying cheap companies and ideally shorting expensive ones – has a great long-term record. However sometimes it performs like an elephant on LSD, crushing your returns.

Indeed, one theory for why value investing works is that these periods of under-performance are so miserable, few people can stick through them.

The years after the financial crisis were not kind to value investors. Slow growth and low inflation among other things made growth stocks the place to be.

But that changed in 2016, particularly in the US as this rather beautiful graph from a new GMO PDF demonstrates:

Value versus growth in US market in 2016. Divergence.

Source: GMO.

The market got giddy about Trump going on a spending spree, it looked like interest rates were headed higher and faster, and outside of Brexit-blighted Britain, growth accelerated.

However it wasn’t to last, as GMO demonstrates in the following graph:

Value versus growth: 2017 edition.

Source: GMO.

Value players might have expected a few years in the sun after their years in the – um – desert, but the market has turned around and undone the progress they made in 2016.

But the authors’ urge value disciples to hang tight:

It’s an interesting paper if you’re an active investor like me.

If you’re a passive investor who includes value funds in your portfolio, though, then arguably you shouldn’t be reading stuff like this.

You’ll probably do better to keep plugging money into your lagging value funds year in and year out, and trust in the long-term charts that led you to tilt to value in the first place.

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