Good reads from around the Web.
I really enjoyed today’s spirited column by Ken Fisher in the FT [Search result] on the doomster-ism implied by the negative bond yields we’re seeing across Europe.
Monevator started life a year before the financial crisis, and its early articles were often trying to help people understand that the case for buying shares hadn’t changed just because they’d crashed – quite the opposite – and that the elevation of gold and the likes of Zero Hedge to cult status were typical over-reactions to a severe market dislocation.
A couple of years later, and the fight had turned to making the case for developed market shares – US and European companies.
Many out there, including some readers and Monevator commentators, were convinced that everyone should sell out of supposedly sclerotic mature markets in the West because the emerging markets were going to overrun us.
(A few of these Monevator commentators seem to have forgone their previous certainty, as we may well see again in comments on this post… 🙂 )
Of course, emerging markets have underperformed since then and the US has shot the lights out.
I didn’t know that was going to happen, but I was pretty convinced the doom-and-gloom theory was bogus.
A decade ago I was having arguments with people who thought peak oil was about to cripple us (never even slightly likely in our lifetimes, even back at higher prices) and a couple of years ago The Accumulator was arguing that most investors should still have money in bonds.
He was called irresponsible and reckless or worse; bonds went on to deliver excellent returns (which was unexpected and wasn’t his point, but it goes to show…)
You usually sound like a happy-clappy idiot if you take the opposite side in these arguments.
The bear case always sounds smarter.
A balanced mind and a balanced portfolio
None of this is about being particularly clever, or being seen to be clever.
It’s just a reminder that betting on extremely bad and unusual outcomes is very rarely a winning strategy.
The flipside is true, too.
For instance, those believing dotcom valuations in 2000 were justifiable because the world had changed forever were making a similar mistake.
But to stick with the doomsters, Fisher writes:
If it’s Armageddon or total societal collapse you fear, you don’t want any securities. Not stocks. Not bonds. They’ll just be worthless paper, no use for anything except lighting fires. Gold? You can’t eat gold bars.
If you really fear the total collapse of western civilization, then invest in canned food, bottled water, armour, guns, bullets, bows, arrows, knives and a bunker. Do you need a cave? Can I sell you a rock to crawl under? A shovel to dig your moat?
Does that all sound crazy? If so, go back to question one: why buy a negative-yielding long-term bond
If you do, you’re betting on a scenario you don’t remotely believe in.
Markets move on probabilities, not possibilities. If you don’t think economic doom has a snowball’s chance, don’t invest like it is inevitable.
Put your money on what’s likeliest — the world keeps turning, advancing and growing.
The unpalatable fact for the perma-bearish is that it pays to be optimistic as an investor.
Also, the most sensible hedge to that optimism being misplaced is a diversified portfolio – not a theory that everything is rigged / about to crash / unsustainable / different this time.
Have a good weekend!
From the blogs
Making good use of the things that we find…
- People still believe in active management? – White Coat Investor
- Mike points out a move to give John Bogle a Presidential Medal of Freedom – [You can sign the petition here]
- Love and stock picking – The Value Perspective
- One way to beat the market – A Wealth of Common Sense
- Beddard: How UK small cap Tristel saved itself – iii blog
- Beware the very cheapest price-to-book stocks – Millenial Invest
- The case for selling ICAP – UK Value Investor
- The calamity that is Petrobras – Musings on Markets
- Why is good news still bad news? – Investing Caffeine
- An interesting talk from economist Daniel Kahneman – ThinkAdvisor
- Real-life portfolios are more complicated – RIT
- Tracking expenses with MoneyDashboard – theFIREstarter
Product of the week: Chelsea Building Society has launched a 2.19% five-year fixed rate mortgage, which makes it a Best Buy says ThisIsMoney. You’ll need a 35% deposit, and do consider the high fees.
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.1
- Is diversification worthwhile? – Asset Builder
- Mike Piper expects passive portfolio management to become free – WSJ
- Spin-ready Yahoo looks cheap – Dealbook
- The gloomy outlooks for US equity returns – Morningstar
- Assets at hedge funds still growing, despite lousy performance – Bloomberg
Other stuff worth reading
- Which life insurers are offering true pension freedom? [Table] – Telegraph
- Pensions minister proposes £1 extra for every £2 saved – Telegraph
- Who could afford to live in Albert Square? – Guardian
- 40-something would-be pensioners: Case studies – Guardian
- How a janitor amassed $8 million [Living to 92 helps!] – CNBC
- Meet a professional dumpster diver – Wired
- The nascent field of financial therapy – NY Times
- Hustle for higher pay while you’re still young – Bloomberg
Book of the week: This year marks the 50th anniversary of famed investor Warren Buffett assuming control of his vehicle, Berkshire Hathaway. If you’re relatively new to this game and you haven’t yet learned much about this singular individual, then The Snowball is a comprehensive place to start.
Like these links? Subscribe to get them every week!
- Note some 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”. [↩]
Something I enjoyed recently:
Tim Harford at the LSE talking about Irving Fisher and John Maynard Keynes investing in the boom and bust of the 1920s and 1930s; the futility of professional forecasters; and how (potentially) we can come up with meaningful forecasts.
The talk is based on an article of his from late last year: http://timharford.com/2014/09/how-to-see-into-the-future/
Another nice thing about the talk is that, at the end, Tim is asked by an audience member how he invests his money and he emphatically puts his lot in with low-cost index trackers (quelle surprise…)
Tim’s talk also fits in nicely with Ben Carlson’s (AWOCS) recent pieces on Keynes’ investment performance (above) and http://awealthofcommonsense.com/keynes-fired-money-manager-today/
> Monevator commentators seem to have forgone their previous certainty
Ah, what the heck. EMs served me well when I used a 50:50 global:FTSE100 index starting buying at the time of your fortuitiously timed ‘who isn’t buying’ article. Hat tip for stiffening the spine and tempting the bet on red.
Most of the win there was shifting my money out of the atrociously dropping pound for a while.
BTW, one of the symptoms of peak oil even in conventional analysis is severe oscillations in the oil price. We have a classic feedback mechanism with a delay element in it. You can’t just start up and shut down exploration – it seems to be have about a five year lag to market signals. Even Mark Carney says enjoy it while it lasts 😉
I’m not saying the bearish argument is smarter – a la Harford article from @L I’ve gotten less certain and perhaps better off as a result of knowing I don’t know. But I will go as far as to say that it’s early days yet to dance in celebrating the final solution of the energy problem for industrial consumerism.
@Ermine — Hah! You’re not actually who I’m thinking of when it comes to saying we should go all-in on EMs etc. From memory, you thought the Western World stunk but bought it anyway as a hedge. 🙂
Agreed. But to be clear my position has very little indeed to do with the current low oil price, except in that it points to the desperation of certain incumbents to try to flog the stuff before the world moves on to something else. 🙂
Liked the absence of a direct link to ZH! Tasteful.
Slightly off topic but can someone help me understand this.
Some bonds are paying a negative yield. The purchaser is guaranteed to get back less than they invest ( – inflation – dealing charges ).
In that case leaving the money under the mattress is going to beat bonds by “only” losing on inflation. 100% guaranteed.
So why on Earth would any financial organisation buy such a bond? It makes no sense to me.
And more to the point if any funds owned by retail investors bought such bonds ( for example German Government ) then they are committing their customers to losses that could be avoided. So are surely opening themselves up to be sued?
I cannot think of a rational at all for buying a product with a -ve yield. Someone help me!
@TomTomAgain — Three quick points.
Firstly some players must hold bonds for regulatory reasons or certain business reasons (e.g. Collaterol on ultra short term loans).
Secondly, very large institutions are driven by different rules to us; they can’t invest cash in best buy current accounts etc, in tbe extreme! 🙂 One reason I think some underate cash as an asset class for PIs btw. In some countries they already face a negative interest rate on cash deposits.
Thirdly, bonds are great in times of deflation. You are assuming positive inflation but if deflation occurs paper assets become more valuable. True that looks in the price at negative yields, but it is a factor.
I agree with the first two points. Number one is insane. Nobody ( not even a bank ) should be forced to buy something at a guaranteed loss.
Second point I understand. But they in that case they simply should not invest it at all. How about the radical notion of not-deliberately-losing-your-clients-money?
Third point I disagree. In deflationary environment cash becomes worth-more. ( Opposite to worth-less in inflationary times ).
So if I keep £100 pounds under my matress in a deflationary
environment then in a few years it will I will have £100 and be able to buy some goods. If I buy a bond that will cost me to hold it then I will still have less £100. Regardless of the inflationary/deflationary outcomes.
The only “advantage” I could see to a bond that has a -ve yield is this:
If I think that the EURO will break up and I buy German Gov. bonds in EURO’s. When the currency collapses the bonds would be revalued in the “New German Currency”. Which should rapidly appreciate.
Though even that is still not any better than having Euro’s in a German current account.
PS Lurve your blog. Keep up the good work guys.
I read Fisher’s article in the FT with a shake of my head.
It’s a classic example of wrong-headed thinking about returns without considering risks. The goal of our balanced portfolios is not to maximise return — it is to minimise risk (volatility) for a given target return.
“Seek higher yields”, he seems to be saying. “Stocks will outperform bonds”. Broadly true in the long run.
So if that’s our guiding light, why aren’t all 60:40 portfolio holders ridiculed for having laggard bonds in their holdings instead of being 100% equity holders? (and let’s ignore here the facts of the bond market performance over the past few years).
The fact is, that it’s sensible to hold some low yielding or negative yielding bonds, as well as some no yielding storage-costing precious metals because they exhibit non-correlated asset price variations compared with the main equity yield engine. Put simply it’s a place to put wealth while you’re waiting for the stock price to come down and allow the volatility to work in your favour.
So Mr Fisher, chase higher yields, by all means, but you better have a long time horizon, excess wealth over FI or a strong stomach. I will blindly allocate my assets according to the plan, regardless of the doom-mongers or the optimists.
@TomTomAgain — As you wish, but what I’ve written is correct. 🙂
Let’s say a one-year bond has a negative yield to maturity of 0.25%, and deflation is running at 0.75%. When the bond matures in a year’s time, the real return will have been + 0.5%.
Points (1) and (2) interact with point (3) of course. You might feel it’s a safe bet to keep £100 under your mattress. A pension fund with several billion under management may not realistically have that option.
And as I say, some of these countries have negative deposit rates currently. (Switzerland’s National Bank, for example). I haven’t done the maths, but I suspect the negative yield bonds offer a higher return (ignoring risk).
Glad you’re enjoying the blog! 🙂
@Mathmo — All fair comment. As I know from experience (because I write them, and don’t have gazillions of readers reading them) articles going into the caveats and ifs and buts and wotnot do not make for strident copy. I really enjoyed Fisher’s big picture view here, and the way he delivered it. But I agree the average investor is likely to be better served by not abandoning fixed income / cash altogether just because the world seems to have gone a bit terrified.
Indeed, most will be better off sticking to their plans derived in the cold light of day, through thick and thin, and not trying to second guess at all. (To your point about the great returns recently from bonds, and wrt to TomTom’s above, who knows, perhaps we will see deflation, equities will plummet, and bonds will have another few good years. Nothing is impossible. Ruling out certain outcomes because of known risks introduces new ones. We all must make those decisions for ourselves. 🙂 )
Another point to make on the negative bond yield question is that if you are an uninsured depositor at banks a small negative yield from owning high quality government bonds might be a small price to pay for the greater certainty that it will be repaid.
The utterly relentless negative focus of the media in general is becoming beyond a joke. It’s not only on financial matters. The other week the headline on Radio Five morning news was about an Australian mother who’d drowned three of her kids. That was the most important thing going on in the world that they could find to tell us. There’s nothing wrong with a bit of negativity, I’d be the first to say that, but these days it is so out of balance I’m really beginning to wonder what the agenda is?
Absolutely agree about the gloomsters. The Perma-Bears (Montier, Edwards etc) can be entertaining and educational, but if they didn’t scoop stuff up in 08/09 it suggests they’re not as smart as they think they are. True Diversification seems the only sensible solution.
I’m not sure where this idea that emerging markets have done badly is coming from
Over the last 15 years they have returned 11% annually according to LBS yearbook compared to 5-8% for developed markets (probably the 8 is the us and the 5 is europe)
That’s kinda what you would expect
You would also expect scandals, crises and wars in emerging markets which is exactly what you are seeing
I’m pretty happy having a big chunk in emerging markets and adding to it
To my mind the risks of investing in developed and emerging markets are getting more similar
Greece might not be the last “developed” market to get demoted
@Neverland — Ah, there you are. 🙂 Sure, but the arguments being had that I referenced were in 2011, when EMs were all I heard about.
Now, barely a peep.
Today is a different matter, of course. 🙂 Good time to be overweighting emerging markets, I’d wager/agree, if you’re of the nefarious active investing mindset like ourselves.
I try to be a very passive investor and track world economic activity
Increasingly world economic activity is happening outside of the US and Europe
@Neverland — I know, I recall our previous discussion of this in 2012 when I tried to warn you there’s a weak correlation (or even a negative correlation) between GDP growth and and stock market returns:
Since that discussion:
the S&P 500 is up 62%
the FTSE 100 all share is up 35%
the DAX is up 74%.
In contrast emerging markets are up just 10%.
And they were flat as recently as the end of 2014.
As I tried to explain in our 2012 discussion, among other issues a big problem with chasing GDP — which of course is what everyone was seeing and highlighting in the EM mania of 2011 — is valuations get pushed up, and that alone is enough to weaken future returns.
I believe an unwinding of that is what has played out in the various indices since then.
To be clear, that was then, this is now. As a nefarious active investor I’d much rather be overweighting EMs now versus say the US market then back in 2011/2012. 🙂
I appreciate yours is a sort-of passive stance and even if you still won’t take on-board these points about weak correlation with GDP, I have some respect for somebody who takes an active position by reason of their own logic and sticks to it.
(And an active bet is what a big overweight in EMs versus say the weighting in the FTSE All-World represents. You’re betting you know better than global capital where the superior returns will come from, at least ignoring risk).
I doubt either of us have the appetite to ding-dong through the GDP debate again (certainly I don’t! 🙂 ) but interested readers can follow the link above to hear both points of view.
Do reckon this has something to do with it?
2003-2010 EM returns were good (except of course, you know, the 50% drop in 2008).
But 2011-2014 they haven’t been so good… And we all know that the most talked about assets are the ones performing the best until, well, they aren’t performing best. I’m sure in the next 5/10 years there will be reversion to the mean and EM will start being trumpeted again, until of course, it isn’t.
One neat thing from the link above is that it shows over a reasonably long period (15 years and two big recessions) that if you had stayed the course you would have got good returns out of almost all asset classes. Another feather in the cap for the passive buy-and-hold crowd.
Another neat thing is that it starts to show some of the well documented return premiums: small-cap, emerging markets etc. For example, you would have done well in EM over the past 15 years (c.7.8% return pa) but you would have to have stomached some big losses (50%, 30%, 20%) and still been in the game to experience the big gains (80%, 55%, 50%, 35%).
@L — Sure. That’s another way of saying/seeing that the EM trade got crowded and valuations were pushed up accordingly. 🙂
The nice thing of EMs is they move to the beat of their own drum
The only way that EMs can provide diversification is to behave differently to the US stock market (which London and arguably the rest of Europe just basically follows)
Therefore, if they are to offer diversification, they have to do poorly when the US does well
This last bout of turbulence is pretty mild, I remember some of my emerging market investment trust losing two thirds of their value in the space of a year back in the 1990s
This is the sort of gut wrenching volatility you need to get used to if you want to get double digit returns
@Neverland — Indeed. 🙂 You’re talking to a man who has been buying Russia (very modestly!)
I will be probably be shovelling the ISA allowances into emerging markets this year but I’m under no illusions that emerging markets (collectively) couldn’t halve in a year
If I had my money in plain vanilla global stocks index (mainly 50% or more in US stocks) I would be nervous nowadays. http://www.cnbc.com/id/102424071
I prefer value indexes.