Good reads from around the Web.

I know someone looking to buy a flat in London who was astonished last week to find his low-ball opening gambit treated with some reverence.

Earlier this year our mild-mannered friends had recounted harrowing tales of being transformed into bare-toothed gazumpers by those insidious ‘open house’ days, which were blatantly designed to game frightened buyers into bidding well above the asking price (after they’d trapped the opposition couple in the box bedroom with a strategically placed Eames chair wedged under the doorknob.)

But now? Fewer viewings, no offers, and “yes, that does sound like a reasonable position to take in today’s market”.

ThisIsMoney sees a chill is coming, and it blames democracy:

It may still be six-and-a-half months before the General Election, but the market is already preparing for its traditional slowdown leading up to polling day.

Sellers know if they do not complete by Christmas, they may be stuck with their homes until well after the election, which we know will be held on May 7.

As a result, between a quarter and a third of homes on the market today have had their prices cut, with more to come.

If you prefer to hear from the frontline rather than hacks hunting for a story, then consider this week’s update from Foxtons, one of London’s swankier agents:

Although the longer term outlook for London property markets remains positive, the market is expected to continue to be constrained for some time due to political and economic uncertainty within the UK and Europe, tighter mortgage lending markets and mismatches between the price expectations of buyers and sellers.

These external headwinds have exacerbated the rate of slowdown in sales transactions we noted at the time of our H1 results.

Market volumes in Q3 have been more in line with the first half of 2013 and we now believe that market volumes in H2 2014 overall will be significantly below levels during the same period last year.

That was enough to knock roughly 20% off Foxtons’ share price, and it had already been sliding for months beforehand.

General uncertainty

I’ve heard some hedge fund managers predicting very dire things for next Spring in the UK, and while I’m not one to spread doom they might have a point when it comes to the frothy property market down south.

Their concern is that no political party is likely to win the General Election, and that all subsequent tie-ups come with uncertainties.

In particular the Conservatives seem to be talking themselves into a position where mooting a UK withdrawal from Europe is not a bogeyman to frighten the moderates but an implied plank of their manifesto. Amongst much else, it’s hard to see London continuing to suck in capital and talent in a world where we are leaving Europe. The potential alone could put off buyers, especially foreign money.

Meanwhile Labour and the Lib Dems are promising mansion taxes, which are hardly bullish for London house prices.

Add the prospect of higher interest rates and ever-tightening banking regulations and one does wonder if the trigger is here to finally pop one of the last great pre-2008 asset booms.

Merryn Somerset-Webb thinks so. In the FT this weekend in her article “The deficit will kill the property bubble” [search result] she writes:

Sooner or later, and regardless of who wins the next election, wealth taxes in the form of property taxes are going up. […]

You might not be ready to accept this yet – but the buyers of London property clearly have.

On the other hand I’ve been short one London house for far too long, and I may be clutching at straws.

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Investing should be all about the long-term. Yet almost everyone who grabs our attention when it comes to investing – media pundits, asset managers, brokers – have an incentive to keep us guessing about the state of the market, and the performance of individual shares and funds.

• Magazines and websites want us to tune in and ideally pay up to hear the latest news and views.

• Fund managers want us to recognise their apparent skill and then switch to their funds.

• Brokers want us to trade our holdings. And then to trade them again.

• Even non-financial companies may benefit from a febrile atmosphere if they need to tap the markets through rights issues, IPOs, or spin-offs.

Heck, even the tax man would probably prefer we churn our portfolios. In the UK most share purchases are liable for stamp duty tax, and most investments sold for a gain outside of ISA or pension face capital gains tax, too.

Whatever you do, don’t do it

There are big problems with being too concerned about the meanderings of the stock market when you’re a private investor.

Active investors who are overly obsessed with day-to-day market noise and commentary are more likely to feel the need to do something – which usually means trading shares or swapping funds their around.

Too much of trading increases expenses and will likely reduce your returns. And most of the time, when people swap funds they are chasing performance, which can have a damaging impact over the long-term, as they repeatedly sell low and buy high.

Yet even passive investors can suffer if they’re partial to weather reports and horoscopes stock market updates and analysts’ commentary.

A well-balanced asset allocation can be derailed if you react to some super-smooth pundit opining about asset classes, touting that “only a fool would own government bonds right now” or claiming that “This is surely a once in a lifetime chance to invest in the Democratic Republic of Congo!”

Then there’s the worst fate of all – being scared out of your positions at the bottom of a bear market, and missing out on the rebound.

Stick to the plan, Stan

Sticking to your long-term plan is vital for success, as this video from Sensible Investing TV explains:

As Vanguard founder Jack Bogle says:

“Why in the name of peace do we pay any attention to the stock market? The stock market is a derivative.

The stock market is a derivative of what? It’s a derivative of the earning power and dividend yields on, in the case of this nation, US corporations.

The dividend yield, plus the earnings growth that follows, is what creates the fundamental return on stocks.

The speculative return on stocks, compared to that investment return, is how much people are willing to pay for a dollar of earnings.

That carries the market up and down, and in the long run, in the last 100 years, the contribution of speculative return to total market return is zero.

The contribution of investment return, if you happen to have 4.5% dividend yield and 4.5% earnings growth, that’s the 9% you read about in the past for the US market.

Bogle’s conclusion? The stock market is a giant distraction to the business of investing.

Most people are best off ignoring it like you’d ignore the tantrums of a greedy and tired child, and letting long-term compound interest work its magic.

Check out the rest of the videos in this series.

The low volatility phenomenon is described as an anomaly; like ball lightning or a dog that says “sausages” or sexy popes, it shouldn’t work but it seemingly does.

The promise of low volatility equities is three-fold:

• Returns that match or exceed the market over time…

• …while inflicting around 20% less price fluctuation pain upon investors, and…

• …during a bear market nightmare, total losses that are less severe than the market as a whole.

It sounds too good to be true. The same or better returns for less risk? Yes please, I’ll have some of that.

Most investors will be aware that financial theory warns that you don’t get something for nothing. There’s no reward without risk they say, and so more volatile investments should offer greater expected returns than safer options. Except they don’t.

Low volatility equities have been shown to outperform their high vol peers, offering superior risk-adjusted returns over the course of the last 40 years.

And that’s as weird as a catfish playing with yarn. What are we doing stocking our portfolios full of shares that are about as stable as dynamite when we could get the same results for much less trouble?

The low down

Low volatility is another of the return premiums that concentrate on certain company traits to produce something like a genetically modified super-crop of equities – with the potential to increase the return of your portfolio.

In this case, the low volatility bracket is filled with companies that are relatively less affected by the movements of the broader stock market.

These are known as low beta companies. When the stock market takes a tumble, their prices won’t necessarily fall so far in tandem.

An example of a low beta equity is a power company. Customers still need to keep the lights on even during a recession, so the firm and its share price may be less badly hit than say a car manufacturer when the wider economy heads south.

Equally, if there’s a raging bull market, the utility firm will benefit from the general upswing in demand. But it’s unlikely to get as big a bounce as the car company with its new line of robot-chauffeured roadsters.

The upshot is that low volatility strategies tend to underperform during the good times and outperform during the bad.

Humans don’t learn

None of this explains why sluggish shares should out-perform high beta (that is, high volatility) shares that experience more ups and downs than an elevator operator.

For that it seems we must once again turn to our dumb human brains.

There are a number of theories from behavioural finance that might explain why we accept higher prices and lower returns when buying high volatility equities:

• We love a lottery. We’d sooner gamble on an overpriced tech company that’s never made a bean in the hope that it might become the next Google than we would invest in some boring dog food cannery that will keep making profits as long as people don’t want to starve their dogs.

• Overconfidence means we’re convinced we can pick the next Google out of the crowd, even though we know most investors don’t have this skill and most ‘next Googles’ turn into the last GeoCities.

• Optimistic analyst forecasts for fast-growing equities serve to push up prices and consequently lower future returns.

• Active fund managers dare not tilt towards low volatility equities for fear that they’ll get fired when they deviate from their benchmark for a prolonged period.

• We’re not all Sages of Omaha. One way to exploit the low volatility anomaly is to load up on less risky equities and then pump your returns with leverage. ++ Alert ++ Alert ++ Compulsory Warren Buffet reference: Warren Buffet apparently does this with his insurance company float. ++ End Alert ++ But many investors are prone to leverage aversion. They’re either not allowed (pension funds) or too afraid (me!) to take on the risks, costs, and hassle of borrowing to invest. So instead they lean on high beta assets for extra snap, crackle, and pop but that dependency raises prices and reduces future returns.

A low ebb

Human behaviour being what it is (i.e. mentally frozen in the Paleolithic), there’s good reason to believe that low volatility may survive the ravages of arbitrage as has momentum.

For instance despite the anomaly’s discovery in 1972, low volatility beat the US market by 2% per year between 1963 and 2009, while exhibiting 15% less risk.

However, like all the return premiums, low volatility is not an escalator to dreamland. There’s no guarantee it will outperform in the future and there’s a near certainty that it will underperform for years at some point – testing your will and sanity when it does so.

Indeed, the irony of low volatility’s recent popularity (and the proliferation of supporting tracker products) is that low vol equities may have become significantly overvalued.

As always, when an investing strategy becomes a fad, then there’s a heightened danger that it’s due a strong dose of underperformance. That plus a few other controversies surrounding low volatility are worthy of further consideration.

Take it steady,

The Accumulator