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 bodies ¹ 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).[↩]

Some good reads from around the web.

I am sure there are some ordinary Greeks who are being taken to the brink by the crisis, but you wouldn’t know it from most of the news reports.

Invariably the street scenes in Athens look as prosperous as you can imagine, all BMWs and gushing fountains – more Rodeo Drive than road to hell. Interview after interview is conducted in a shiny cafe stuffed with prosperous clientele.

I saw one on CNBC yesterday held on the sunny apartment balcony with a chap who’d lost his job, who lamented that they were struggling to get by on his wife’s 35,000 euros a year (plus whatever benefits he was receiving, which were not cited by the program).

“Sometimes we run out of money,” he said. Maybe when he had to buy new filters for the chrome coffee machine or the other consumer treasure we saw dotted about his home.

Pay day looms

These people undoubtedly feel miserable, relative to where they were. But where they were was in the economic fun house – the equivalent of a kept mistress in pied-à-terre on borrowed time.

As one Greek businessman writes on Bloomberg:

For 30 years, these two [main Greek] parties competed in an orgy of jobs and entitlements for votes. In the span of a generation, the composition and ethos of Greek society were transformed.

Where there had been a mostly self-reliant and hard-working body of citizens, we got an army of state-supported employees with guaranteed job security and early pensions.

As the UK state’s own largesse is gradually withdrawn (despite all the debate about cuts, public spending is still at record levels) we will surely face more trouble here, especially as the deleveraged animal spirits of the private sector seem about as likely to pick up the slack as my mate Graham to pick up a bar tab.

And that’s bad news, because it’s a breeding ground for crackpot extremists, as we’re seeing in Greece:

The troika insists on structural reforms, such as less job protection, limiting trade union privileges, and opening monopolies and closed professions in the service sector.

In short, Greece’s creditors are asking the country to dismantle what was built during the last few decades and led Greece to bankruptcy.

The intent is to make the economy competitive, but those affected don’t see it that way, and they are many.

Close to one in four of the working population depends on the state for his or her salary. Add to them the unemployed at 23 percent, double among the young, plus all those whose salaries and pensions were reduced by the troika’s austerity measures, and you get a large pool of very unhappy and insecure people.

The interview with the jobless chap ended with him saying he might have to rent out his property and take his family back to live with his parents for a while, which he found intolerable at 40-years old.

I agree it sounds miserable (not least on the parents!)

And I’ve heard personal stories from people close to Greece that paint a much darker picture than those the TV news reporters are able to unearth within 20-feet of the lobby of the Athens Hilton.

Yet I’ve heard no reports of Greeks calling for measures like the six-point plan of privatisations and restructuring that Germany is apparently working on to try to save Greece.

Instead, I see people marching for free money to pay for unsustainable pensions, benefits, and tax perks – all to be paid for by foreigners.

Even the IMF’s Christine Lagarde this week called for Greeks to pay their taxes:

“I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time.

Because I think they need even more help than the people in Athens.”

While anyone with a heart would feel sorry for Greek children and others who can’t be blamed for the country’s predicament, I’m with Lagarde in tiring of the sob stories from Greece, and also here at home.

I have never been in debt. I didn’t lie to buy a property early on in the housing boom. I refused to pay 10-times average earnings by the time I didn’t need to. I didn’t shop til I dropped and make millionaire footballers or Sex in the City‘s heroines my financial role models. I’ve saved and reinvested a big chunk of my disposable income like most people pay their taxes. I’ve bought some nice things along the way, but I never thought I was entitled to everything.

I’m nearly 40, too, like the unhappy Greek on CNBC. And I rent my home.

So no, we weren’t “all at it” as the journalists keep saying, no doubt because they were all at it themselves.

Some of us avoided getting into debt, worked, saved, and invested. And being held ransom by the millions who didn’t in Greece and here at home (whether as a nation or as individuals) is starting to grate.

There was always another way. Most people ignored it.

Cradle to grave in debt

So as we go into yet another weekend wondering whether European leaders will surprise us on Sunday night with a radical plan D, I am wondering again how this will play out in the UK, too.

Previously I’ve been relatively optimistic. But faced with the political delusion apparent on the continent, I wonder if I’ve been too focused on the narrow economics?

We’re not in the same precarious financial position as Greece – we can print our money, intervene to bolster our banks, devalue our currency, and do a few things the world wants to pay us for – but the ludicrously carefree attitude most people had until recently towards debt, from the former Prime Minister to the average Brit in the high street – is not so far removed.

Few people seem to want to face up to the bill for the party, anymore than they do in Greece.

Shove it to the next generation is the order of the day, whether the choices be spending cuts for the undeserving, tax rises on the wealthier, or pensions curbed for everyone.

Years more of this (if we’re lucky)

For an investing perspective on the unfolding drama, you could do worse than read this interview with hedge fund manager Ray Dalio in Barron’s:

Deleveragings go on for about 15 years. The process of raising debt relative to incomes goes on for 30 or 40 years, typically. There’s a last big surge, which we had in the two years from 2005 to 2007 and from 1927 to 1929, and in Japan from 1988 to 1990, when the pace becomes manic. That’s the classic bubble.

And then it takes about 15 years to adjust.

Unlike the Athens we see on TV, there are many places in the UK where life is tough, shops are boarded up, and people have very low expectations – and that’s after over a decade of easy money from the State and banks alike. I dread to think how bad things could get if it continued for a decade.

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