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Weekend reading: Are you ready to start fearing the good times?

Weekend reading: Are you ready to start fearing the good times? post image

Good reads from around the Web.

The Americans are going nuts about a stock market bubble.

I know – it’s hard to keep up!

Only 18 months ago you couldn’t say something nice about US equities on TV without getting laughed back to the cab rank. But now everyone is bullish – and simultaneously nervous.

It’s not like that in Blighty. The FTSE 100 is ‘only’ up 11% or so in 2013, not counting dividends1. Whereas say house prices are rising and most people know it, I don’t get the sense the wider public is thinking about the stock market yet.

In contrast, the S&P 500 is nearly 28% ahead for the year. American investors, like most, have massive home bias, so they’ve seen their portfolios surge. In that sense, they are right to be wary.

There’s pretty much no correlation between one year’s returns and the next. However when prices rise, value goes down. It can’t be any other way. In that sense, I agree the US stock market is becoming less attractive – without having to consult my crystal ball.

Can you spot a stock market bubble in advance?

It’s been a good few years since people had to worry about a bubble in the overall stock market, so it might be worth brushing up on the basics.

This video interview by the every reliable Morgan Housel gives a nice bit of background:

I find this sort of thing endlessly fascinating, because I am an investing nerd.

But at the risk of sending regular readers to sleep, I also think that rather than playing poker, most people are best passively investing via a diversified portfolio, rebalancing annually, and getting on with their life.

True, that approach will guarantee you’ll never match the best performing asset in any given year. Sometimes you’ll trail quite considerably – like our model portfolio was versus UK equities as of our last update – but that’s the price of a very likely good result in the end.

The other reminder is to take short-term predictions of doom with a bag of salt – and those of rosy times forever, too, when such predictions finally do arrive.

As I wrote in November 2012 after the UK financial regulator predicted lower returns for as far as the eye can see:

Here we have the regulator rolling up to the scene of the crime not long after the worst decade for equities relative to bonds (the worst two decades, even) to warn us – wait for it – to temper our expectations.

As far as useful advice goes, this is a bit like Eva Braun showing up in London in the middle of the Blitz to warn Churchill that her boyfriend seems a bit obsessed with guns.

What was the regulator doing in 1999, when the UK stock market peaked at nearly 7,000 and shares traded on a P/E of around 30?


In my view equity returns will likely be at least average, if not higher, from here.

Depending which index you track, the US stock market has more than doubled since its 2009 lows. (And yes, one could see it might be good value back then).

Missing out on doubling your money because you listened to doomsters who said the world was ending or deflationists who said that the new normal was returns of 2% forever cost you dear. It will take many decades for cash savings to make up for those missed returns.

Get fearful as others get greedy

But all that was then, and this is now.

I’m obviously – doubled-underlined – not predicting an imminent crash. I don’t think anyone can do that, even if I thought it was wise to try – or likely.

However I think it’s safe to say the time for heroic over-allocations to US – and to a lesser extent other developed world equities – is over. Looking dumb now could plant the seeds for strong returns later.

Be diversified or be contrarian, but don’t be a clueless latecomer.

Merry Christmas!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Still to buy your turkey? ThisIsMoney has surveyed the field for the best value birds, from cheap and cheerless to quality free-range fair.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.2

Passive investing

Active investing

  • Shareholder perks and how to claim them – ThisIsMoney
  • You win by thinking everyone else is wrong – Motley Fool
  • The right way to invest in emerging markets – WSJ
  • Boca Biff: An American speculator – The Street
  • Turning $1,500 to $1m in 3 years [First signs of bull mania?]CNN
  • The most important charts for 2014 [Graphics]Business Insider

Other stuff worth reading

  • The 1% secret to getting richer – WSJ [featuring Mike]
  • Solution or symptom? Pocket’s 400-square foot flats – Guardian
  • Christmas sales: Where to bag a bargain – Telegraph
  • Did the big bank currency traders do anything wrong? – Bloomberg
  • The best investments in 2013 [Careful! Think contrarian!]Guardian
  • Fool’s Gold: End of an era – Index Universe

Book of the week: Fancy a new investing book? I did a quick review of the best of 2013, so go check it out! Or read what Bill Gates is reading.

Like these links? Subscribe to get them every week!

  1. Though small to mid-cap UK shares have done a lot better. []
  2. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []
{ 7 comments… add one }
  • 1 neverland December 21, 2013, 2:02 pm

    Interesting statistic from the Baronsmead VCT annual results last month:

    Unquoted portfolio – up 5%, driven only by earnings growth

    Quoted Aim portfolio – up 47%, driven mostly by valuation multiple increases presumably

    These are the same sorts of companies that Baronsmead is investing in, quoted or unquoted

    I haven’t seen it anywhere but I would be very interested to see how much of the respective growth in the FTSE and S&P 500 this year has been driven by earnings growth and how much has been driven by simple valuation multiple increases

    While I agree with the general positive sentiment about emerging market and I overinvest there myself, you might well face some gut-wrenching churns there is the next few years, based on my past experience

  • 2 The Investor December 21, 2013, 2:30 pm

    @Neverland — Yep, in the US at least this year it’s been pretty much all multiple expansion. I think AIM stocks in the UK have also been bolstered by the ability to put them in an ISA — especially the sort of stocks Baronsmead owns. (i.e. Not wing-and-prayer oil and gas explorers etc).

    I’ve been very circumspect about emerging markets for the past few years. I only had a small allocation in EMs for the big post-2009 bounce back, unfortunately, and after that I was wary of the growing hype about emerging markets — as debated in the comments on this site and alluded to in this article on a (then) new mainstream EM tracker in late 2010.

    However since then, as you note, they’ve come down a fair way — especially in relative terms — and now look at worst fairly valued. Most people just tolerate an allocation currently, and money has flowed out of the class overall.

    I fully agree they could be choppy with all the currency flows around tapering and so on, but I think it’s a much better time to increase the allocation now. I’ve gone from 2-3% weighting to about 8% in the past six months.

    Too soon so far and in the red! 🙂 But I’ll keep slowly adding for some time to come if they keep falling / my other equities keep rising. 🙂

  • 3 Paul S December 22, 2013, 10:23 am

    The S&P500 is still, in real terms, 5% below its all time high 13 years ago. The FTSE100 is still 30% below its real all time high in 1999 and is still 18% below the intermediate high it made in 2007. Doesn’t seem too bad at the moment.

  • 4 BeatTheSeasons December 22, 2013, 3:07 pm

    Did you see this Telegraph article on Friday claiming that passive investing in tracker funds has done worse than active investing this year, mainly due to increased volatility?


  • 5 The Accumulator December 24, 2013, 3:35 pm

    Questions you need to ask yourself: which active funds did better this year and which did worse? Could you have predicted the ones that did better in advance? Are the ones that did better this year the same ones that will do better next year, and in 5 years time, and in 10?

    There’s a wealth of evidence that answers the yes/no questions above decisively with the answer ‘no’.

    Also, volatility is not unusual; the big sell of active management is that they can outperform regardless of market conditions, but most of them don’t over any worthwhile timeframe.

    Finally does the comparison adjust for the risk taken to achieve the results given and does it include the results of every fund that was closed over the course of the year? If not then it’s apples and oranges time.

  • 6 Snowman December 24, 2013, 4:12 pm

    Just want to wish everyone at monevator a Merry Christmas and happy New Year.

    Thanks for all the great posts during the year

  • 7 The Investor December 24, 2013, 5:35 pm

    Thank you! Thanks for your excellent input over the year, too, Snowman.

    Merry Christmas to all readers and anyone who stumbled here by accident!

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