Plus some good reads from around the web.

Given the competing attractions of street parties in the rain and watching News 24 to spot Prince Philip putting his foot in it, I doubt many will see this edition of Weekend Reading.

Although you are here. Thank you! I won’t overstay my welcome.

Here’s my bit for the Jubilee – a bunch of statistics about investing over the Queen’s 60-year reign, followed by the usual roundup of links.

The UK stock market’s glorious 60-year run

• £1,000 put into the UK stock market six decades ago would now be worth in excess of £1 million, assuming all dividends were reinvested.

• That’s equivalent to a compound return of 12% a year.

• £1,000 of gold bought in 1952 would now be worth £81,360.

• Shares were cheap in 1952. Glaxo Laboratories (the forerunner to GlaxoSmithKline) was on a P/E of 2! Low valuations do wonders for future returns.

• British Motor Corporation, formed in 1952 by the merger of Austin and Morris, controlled 50% of the UK car market, and was valued at £35 million.

Source: Telegraph and The Motley Fool (see links below).

Savers victorious

• Savings now stand at an average of over £150,000 per household, including pensions, investments and deposit savings, compared with just below £50,000 in 1951 (at today’s prices).

• Wealth in the UK wasn’t evenly spread then or now. In 2011, almost one in three UK households had no savings, while a further fifth had less than £1,500.

• Household savings recorded their biggest rise in value in the 1980s, with a real increase of 115%.

• Savings fell 12% in the 1970s in real terms due to ruinously high inflation.

• Deposit savings’ share of total savings has fallen from 42% to 29% since 1951. Pensions and life insurance’s share has more than doubled from 24% to 53%.

• The gross interest rate offered on no notice accounts has averaged 6.01% over the past 60 years. But in real terms, savings rates averaged 0.29%.

• 1950s ‘Savers’ clubs’ were popular ways to save for Christmas and holidays, even though they paid no interest!

House prices since 1951: We are not amused

• House prices across the UK have nearly trebled over the past 60 years, up by an average of 186% in real terms.

• Prices have risen at an average annual real rate of 1.8%, slightly faster than the 1.6% per annum average rise in real earnings.

• In nominal terms the average UK house price has increased 7,278%, from £2,200 in 1951 to £162,338 in 2011.

• London has seen a real rise of 189% in just the past 40 years.

• House prices recorded their biggest increase in the 1980s, with a real rise of 42% between 1981 and 1991. That’s greater than the increase of 30% during the last ten years.

• The worst performing decade was the 1950s. House prices declined by 7% in real terms.

• House prices have been the highest in relation to people’s earnings over the last ten years. Prices averaged 4.8 as a multiple of gross annual average earnings between 2001 and 2011, peaking at the highest level in the past 60 years at 5.8 in 2007.

• This compares with the average ratio of 3.9 since 1951.

• Property values were lowest in relation to earnings in the 1990s, when the average house price to earnings ratio was 3.4.

• The number of houses built each year has fallen by one-third since 1951.

• In 1947, more than four in ten households lacked a fixed bath or shower. By 1991, this proportion had fallen to just three in a thousand.

• Nearly two in three households (64%) were without a basic hot water supply in 1947. By 1991, this proportion had fallen to one in a hundred.

• Home ownership has more than doubled over the past 60 years, from 32% of all households in England in 1953 to 66% in 2010-11.

Source: Halifax / Lloyds TSB press release.

[continue reading…]

Poor Warren Buffett. The company he runs, Berkshire Hathaway, has over $37 billion sitting around in cash. But with a near-$200 billion market capitalisation, Buffett has to buy on a monumental scale to move the dial.

If Buffett could chuck me a billion or two, I think I could make him some money. That’s because various shares listed on the UK stock market are currently trading at a big discount to net asset value (NAV).

They might boast £100 million of assets after debt, for example, yet only be trading on a valuation of £70 million.

On the face of it, you’re being offered the chance to buy £1 coins for 70p. With a Buffett-sized warchest you could buy these companies outright, wind them up, and pocket the difference!

Well, it’s a nice theory. In reality there are costs involved with realising assets – perhaps as much as 5% of the NAV – and it can take a while, too. And when investing, time means money.

Also, if anyone got wind of Buffett or another deep-pocketed investor buying up such shares in a big way, the price would shoot up. Shareholdings above a certain size have to be declared, so there’s a limit to how sneaky you can be.

Finally, there are the takeover rules. Buy too many shares and you’re going to have to make a formal bid for the company. Again, that’s going to drive the price higher – perhaps too high to make your wind-up plan worth the bother.

You win if you’re right – but when?

So much for why Mr. Buffett isn’t shopping in London for bargains. You and I have different problems. We can put a few thousands pounds into an investment trust trading at a discount without so much as rippling the price.

Rather, that’s where our problems begin.

You might decide an investment trust or company deserves to trade closer to the underlying NAV of its holdings, but who’s listening? If Buffett bought in it would make headline news. When you buy in, nobody cares except your broker who enjoys the dealing fees, the taxman who gets his 0.5% stamp duty, and your partner who wonders where that £5,000 they’d earmarked for a new car went.

As a small investor buying into an ‘asset play’ like this, all you can do is plan for one of three outcomes:

• You win – You correctly identify an investment trust or similar company trading at an unwarranted discount to its NAV. Perhaps better results attract more attention, or perhaps an activist fund takes a stake and starts demanding the board make changes or even liquidates all its holdings and returns the cash to shareholders. Either way, the NAV stays firm or even increases while the discount gets smaller as the share price rises. On paper, you’re in profit.

• You lose – Perhaps the discount was warranted, after all. The market was right to be skeptical of the value of the property or investments or other assets that comprised the company’s NAV. Rather than the share price rising, the discount is closed as the NAV is written down. The share price likely falls, too,1 and you potentially make a loss.

• You wait – Often nothing happens. You keep holding the shares, maybe collecting a dividend for your troubles, while watching events unfold. You take a holiday. One of your children starts school. Sooner or later one of the above two scenarios happens, but you could be waiting years.

There is no easy money on offer in the stock market, and buying assets at a discount is no exception.

Asset plays aren’t easy money

If you pay 70p for assets worth £1 then something good is likely to happen, but there are no guarantees.

That said, I would wager that the ordinary person is likely to fair better with asset plays than, say, trying to outthink the analysts when it comes to the share price of Rolls Royce or Vodafone.

That’s because investment trusts clearly move in and out of favour, and fear and greed is easier to spot in the discount to NAV compared to a potential boost to Vodafone’s earnings that went unnoticed by dozens of professional analysts covering the stock, for example.

On the other hand, it’s mentally difficult buying into something other investors are clearly avoiding. For good reason, us human beings have evolved to do what other people do. Those who charged on regardless tended to run off cliffs, got eaten by lions, or poisoned themselves by feasting on rotting food.

Is the opportunity you’ve spotted a gold mine or a mineshaft? Only you can make that decision if you go down this road, and you must live with the consequences.

Such is the lot of an active investor.

1. Note that the share price might not fall. For example, a new CEO could come in and order a revaluation of assets that restores confidence in the NAV, but at a lower level than before. It might still be higher than the price you paid for the shares, however. [↩]

The financial crisis has hit us with big numbers as remorselessly as Professor Brian Cox enumerating the scale of space, time, and his pay packet (as well as how many hours he’s on TV, which researchers now estimate is “all of them”).

When failed bank Northern Rock was nationalised back in 2008, £25 billion still sounded like a lot of money.

But as we’ve come to hear about the hundreds of billions required to underwrite the UK banking system, or the trillion Euro ‘big bazooka’ said to be required to see off Europe’s demons, a billion now seems a mere bagatelle. (My first reaction on hearing that JP Morgan was down $2 billion on one trade was to shrug).

There is however one class of ginormous economic number that can still send shivers down our spines, and that’s anything concerning debt.

Few people seemed to care less about either consumer or sovereign debt a few years ago.

Now you can’t get through an edition of Question Time without rival politicians trying to bludgeon each others’ arguments through sheer weight of zeroes.

Balancing the books

It’s hard not to quake when you hear that UK citizens owe so many billions on their credit cards, so many hundreds of billions on their mortgages, and so many unfunded trillions to the pensioners of 2030.

I’d be the first person to agree that at the national level we’ve over-borrowed and over-spent, as well as encouraged the plastic-wielding proletariat to do the same.

However we rarely hear about the other side of the balance sheet – the assets that we’ve also accumulated during our orgy of spending and borrowing.

Yet those assets make a big difference.

• If you were on a blind date and your opposite number admitted to being £500,000 in debt, you’d be legging it of the restaurant faster than you can say, “Let’s pay with cash”.

• If your date clarified that their £500,000 debt was a mortgage on a £1 million country home, the footwork might be more of the under-the-table variety.

Same thing with the balance sheet of UK households.

Yes we’ve increased mortgage debt, but house prices have risen far faster, which means total housing wealth has raced ahead, as have our savings and other financial assets.

Wealth in the UK

So how much wealth have UK citizens managed to accumulate, despite two bear markets in a decade and a banking meltdown?

A hell of a lot, according to research by Lloyds TSB Private Banking – by well over £6 trillion, in fact.

Using data from government bodies1 and its own estimates, the bank’s number crunchers calculate that net household wealth in the UK rose from £4.3 trillion in 2001 to £6.6 trillion in 2011.

That’s a 55% rise in the past decade, handily beating inflation over that period (the retail price index rose by 38%) and also faster than the growth in gross household disposable income (see below).

The bad news however for anyone who believes house prices went a bit silly in the noughties (*whistles*) is that the house price rises did much of the heavy lifting.

Housing wealth in the UK now accounts for 40% of total household wealth, up from 36% in 2001. Housing wealth rose by 73% over the past ten years, compared to a rise of 45% for financial assets.

Growth in UK household wealth: 2001 to 2011

Here’s a table that shows snapshots of the balance statement of loadsamoney Britain at various points from 2001 to 2011:

All figures in £ billions

	2001	2007	2010	2011
Value of Residential Properties	2,116	4,077	4,037	3,891
Less Mortgage Loans	591	1,187	1,240	1,246
Net Housing Equity	1,525	2,890	2,797	2,644
———
Total Household Financial Assets	2,880	3,953	4,205	4,177
Less Consumer Credit Loans Outstanding	150	222	213	207
Net Financial Wealth	2,730	3,731	3,992	3,971
———
Net Household Wealth	4,255	6,621	6,789	6,615

Source: Office for National Statistics, CLG and Lloyds TSB estimates

Over a trillion in mortgages is certainly a scary-sounding number – enough to make anyone splutter on their cornflakes.

But net those off from total housing wealth of £3.89 trillion, and Englishmen (and women, and Scots, and the Welsh) are still £2.6 trillion in the black when it comes to their castles.

As well as house price inflation, the £1.8 trillion increase in housing wealth is due to there being a greater number of privately owned homes now than in 2001.

According to Lloyds, the total private housing stock rose from 20.1 million in 2001 to 22.4 million in 2011.

Adding 2.3 million extra houses in a decade seems a far faster clip than the statistics I’ve seen for the annual output of housebuilders, which peaked at around 210,000 homes a year in 2008 and plummeted to 150,000 by 2010.

I’m guessing that the difference is made up by the transfer of social housing to the private sector through the Right to Buy scheme, which you could argue is a bit of an accounting trick that mildly juices up this aspect of the wealth growth.

A nation of savers

Turning to wealth held in financial assets, here things look more robust than you might expect, too.

UK households had very nearly £4 trillion in savings accounts, investments, pensions, life assurance schemes and National Savings and the like by 2011 – nicely up from less than £3 trillion in 2001 and higher than the pre-crisis peak, though down a little on 2010.

The biggest driver according to Lloyds TSB was the £718 billion rise in the value of equity held by households in life assurance and pension fund reserves, though cash deposits also doubled to £549 billion.

Imagine how we’d do with proper interest rates and a happier stock market.

It’s worth taking note of the relatively small amount of total consumer loans outstanding. Much of the big non-mortgage debt figures you’ll see bandied about refer to credit card balances that actually get paid off every month; the amount being hit for extortionate interest is far smaller.

Believe it or not, in aggregate UK households are loaded.

Zero tolerance

I stress again I haven’t been bunged £100 and a dodgy dossier by the government to claim all is rosy. I got religion about debt when most of today’s chattering classes were still figuring out ways to get self-cert mortgages on their second homes.

As a nation we’re too indebted, in my view, and we need to work it off. UK households will need as much strength as they can muster as we strive to bring the deficit under control in the face of stagnant wages, higher prices, state pension commitments that are yet to be curbed, and more.

And even on the household level, things aren’t all rosy.

For example, the total value of British households’ housing assets has risen with the greater value of the mortgages secured against them, but we’re still more indebted overall.

I calculate the loan-to-value to have risen from 28% in 2001 to 32% in 2011.

And house prices can go down, too, just as surely as share prices, albeit it much more slowly. You can see it in the £186 billion decline in the value of residential property since 2007, with almost 4% getting knocked off in the last full year alone. A few more years of that and the figures wouldn’t look so good.

In contrast, financial wealth fell by just 1% in 2011 – a decline that the bank says was mainly driven by a £65 billion fall in the value of shares and other equity assets held by households. Chalk up another notch for diversification.

Finally, all the talk about income stagnation had me worried that disposable income would be the Achilles Heel in these figures.

However gross household disposable incomes have held up pretty well, rising 43% over the decade:

In £ billions

	2001	2007	2010	2011
Gross Household Disposable Income	700	882	979	1,006

Source: Office for National Statistics, CLG and Lloyds TSB estimates

The bank didn’t give any more detail on what comprises ‘gross household disposable income’, so I went to the ONS website directly to find out what had driven this growth.

Perusing the various surveys reveals strong growth in wages until 2007, then lower taxes and other benefits as well as lower mortgage rates helping to keep household income growth positive in the years that followed – although barely positive in real terms over the last couple of years.

Who wants to be a trillionaire?

Asset values will always fluctuate. The bigger limitation of these sorts of snapshots is that they don’t tell you anything about who has the assets, and who has the debts.

I think it’s pretty safe to assume that 99% of the population is paying off more mortgages than the infamous 1%. The latter has a disproportionate share of the cash, shares, and mortgage-free country houses. Meanwhile, millions of households have no savings to speak of at all.

What you feel about that isn’t just a matter of politics or even morals. It means that the system as a whole is less stable than this overview suggests, as the indebted households are more vulnerable to economic shocks.

That said, the positive takeaway is that whenever you hear a big doomsday number being expressed, it’s important to think about what’s sitting on the other side of the balance sheet before you run to the hills with your gold, baked beans, and a shotgun.

There is much more wealth in the UK than the gloomier headlines would have it.

1. Data comes from the Communities and Local Government (CLG) department for UK house prices, private dwelling completions and stock of private properties. The data for financial assets and consumer credit is from the Office for National Statistics (ONS). [↩]