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Weekend reading: Egging on another stock market wobble

Weekend reading

Good reads from around the Web.

I liked Mr Money Mustache’s take this week on the right way to think about falling share prices:

Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business.

You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month.

Enough to live off for life and retire.

You buy your first 100 hens, and they get right to work.

You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store.

Suddenly your phone rings and it’s Farmer Joe down the road.

“The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!”

Is this a sensible way to think about it?

No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster.

Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks.

Read the rest of the article for his typically no-nonsense take on passive investing.

Sadly, the markets seem to have stopped falling and some have risen rather notably. The FTSE 100 is all but back to where it began the year.

Let’s hope someone comes up with a few new scare stories for the economy!

Gotta keep buying those egg-layers…

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Tesco Bank has extended the interest-free period on its balance transfer credit card to a table-topping 40 months and cut its transfer fee to 2.69%, reports ThisIsMoney.

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

Passive investing

  • Make a plan on how to handle risk, then stick to it – New York Times
  • Vanguard has four new fixed income ETFs for UK investors… – ETF Strategy
  • …and Lyxor is cutting fees on a number of bond ETFs – ETF Strategy

Active investing

  • Tickets for the Master Investor show on 23/4 in London are free – Website
  • Doomsday for UK dividends – Telegraph
  • Buffett’s Berkshire Hathaway looks good value – MarketWatch
  • Smart Beta could kill off active managers – ThisIsMoney
  • The lone analyst who had a Sell rating on Valeant – Bloomberg
  • Lord Lee: Share triumphs and disappointments [Search result]FT

A word from a broker

Other stuff worth reading

  • The most important number in Buffett’s letter – MarketWatch
  • Swedroe: It’s time to buy the emerging markets – ETF.com
  • RIP: The plain old cash ISA – ThisIsMoney
  • Has Osborne ruled out big changes to pension tax relief? – Guardian & BBC
  • How to increase the chances that your pension will outlive you – Telegraph
  • Younger investors: Read this and thank your lucky stars – ThisIsMoney
  • Don’t raise lots of money for your start-up – Fast Company
  • The downside of “assortative mating” – New York Times
  • Leap year mathematics – Slate

Book of the week: The UK Value Investor blog is a frequent denizen of the Weekend Reading roundups, so I was interested to see that the brains behind that site, John Kingham, has a new book coming out. I wish John the best of luck with The Defensive Value Investor. (And I wish The Accumulator would hurry up and finish our book!2)

Like these links? Subscribe to get them every week!

  1. Note some 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”. []
  2. Note: The Accumulator is doing his weekday job this weekend, poor dab. I’m only teasing, The Accumulator. []

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{ 21 comments… add one }
  • 1 Neverland March 5, 2016, 12:37 pm

    I am really crying that I didn’t buy more when the market wobbled last month

    Still the US earnings season just finishing was terrible so there is some hope for some falls

    Need a rate rise or Trump to win republican nomination really

  • 2 Anony March 5, 2016, 1:05 pm

    I prefer Buffett’s hamburger analogy

    http://www.berkshirehathaway.com/letters/1997.html

  • 3 The Investor March 5, 2016, 1:24 pm

    @Anony — Far be it to impugn one of my investing heroes, but I’ve never been entirely comfortable with the hamburger analogy because (a) you consume hamburgers and (b) having too many of them is bad for you.

    In contrast (a) you hold stock market investments and reinvest the income and (b) the more you have the merrier! (Leaving aside camels and needles and Picketty and so forth…)

  • 4 Paul Claireaux March 5, 2016, 3:28 pm

    The story works perfectly for accumulators where pound / dollar cost averaging is also your friend.
    For the de-cumulator the story is the opposite and the call from the farmer is a nightmare.
    The investor’s proximity to retirement matters

  • 5 MyRichFuture March 5, 2016, 3:53 pm

    I’m glad to see that pension changes in the UK have been scrapped. It just felt like they were rushing into a tax/incentive problem.

  • 6 SemiPassive March 5, 2016, 3:58 pm

    The big news last night/today is Osborne finally backing down after months of speculation and conflicting leaks and stories about either flat rate pension relief or Pensions ISA being introduced to screw any “toffs” (c) Guardian commenter) greedy enough to earn in excess of 43,000 pounds pa after April.

    I actually buckled to the propaganda and made an extra contribution last week, not that I regret it but its excellent news we should still get a few more years of 40% tax relief.
    Make the most of it while you still can, especially if aged 44 or older, fingers crossed we could be safe now until after the 2020 election. And barring a disaster will be able to access the money at 55 for anyone who hits that age by 2027.

  • 7 Planting Acorns March 5, 2016, 4:21 pm

    @Semi Passive…indeed. Those of us in 30’s might be considered naive if we thought tax treatment will remain constant between now and retirement. Hardly encourages one to save.

  • 8 magneto March 5, 2016, 4:35 pm

    “The story works perfectly for accumulators where pound / dollar cost averaging is also your friend.
    For the de-cumulator the story is the opposite and the call from the farmer is a nightmare.
    The investor’s proximity to retirement matters” Paul Claireaux

    Hi Paul,
    We have been in retirement since 1992, and have been cheerfully hoovering up the chickens since Aug 2015. More chickens as pointed out, more eggs. Long may stock weakness dominate!
    But then we use valuation driven Variable Ratio Asset Allocation rather than the more widespread/traditional Constant Ratio Asset Allocation Formula Plan. VRAA is not for everyone as it adds a further layer of complication onto the AA decision process.

    One of the best suggestions for retirees who cannot or will not use valuations direcctly when setting AA , think was from Frank Armstrong in ‘The Informed Investor’ is for the retiree to keep 5 to 7 years income needs in short bonds and/or cash, rest in stocks; then sell stocks only when stocks fully valued. Thus avoiding the horror, to which you allude, of selling stocks at ever more distressed prices. Someone recently described that horror as ‘pound cost ravaging!.

    All Best

  • 9 Neverland March 5, 2016, 4:46 pm

    @myrichdfuture, semi

    The lack of changes to pension tax relief is a zero sum game. There will be tax rises and relief cuts elsewhere to balance them

    My guesses on where the axe will now fall

    – self employed
    – contractors using limited companies
    – final salary pensions
    – salary sacrifice arrangements
    – buy to let
    – duties on fuel, cigarettes and alcohol
    – another on businesses like the “apprenticeship levy”

  • 10 SemiPassive March 5, 2016, 5:27 pm

    It may be a zero sum game across the board, but not necessarily on a personal level (sorry if that sounds a bit I’m Alright Jack, but “fairness” is in the eye of the beholder).

    I think he will come for contractors with ltd companies, the dividend tax change will already be a big hit from April and I wonder why they seem to be bothering with stricter IR35 tests when the gap in tax differences is narrowing anyway.

    Can’t see them doing away with salary sacrifice just yet as that is more meddling which impacts employers and contrary to what has just been leaked.

    If I was Osborne the simplest thing to do with pensions to reduce the tax relief cost would be cap the annual contribution limit at 30k or lower instead of 40k. Way, way simpler to implement. At least for defined contribution pensions, and only likely to impact the top 5% or so of earners.

  • 11 Survivor March 5, 2016, 5:39 pm

    Yup,

    Basically the axe will fall on those who don’t vote, but even more importantly can’t fight back – the weakest in society, like the mentally ill, poor of any description, particularly the youngest, single women are historically always a good political football [immorality see?] & of course the dog-whistle to the closet xenophobes anything ”other”.

    A pattern is clear to anyone who wants to see, before the budget, the front is softened up by a constant bombardment of scare stories in the tame media owned by their billionaire/oligarch cronies. ”Help, they’ll take away nice middle-class people’s pensions !!!” Then they don’t actually do it & the panic subsides, so everyone thinks they have a victory & scared them off from doing something nasty ….. but then what they really planned to do all along slips quietly under the radar, past all the patsies.

    Meanwhile, if something appears to be real, just look out for the loophole – they still have to stiff the majority to get the freebies, keep the gravy train going – so you just have to put in the effort finding out where they hid it – the financial equivalent of an easter egg hunt. For example – want to keep ducking your taxes perfectly legally using that bribe to the middle-classes? – call any new umpteenth investment property a ‘holiday let’ instead or buy a ‘starter home’ http://www.independent.co.uk/news/uk/politics/loophole-means-buy-to-let-landlords-could-exploit-government-starter-homes-a6899056.html

    The party never ends

  • 12 John from UK Value Investor March 5, 2016, 5:48 pm

    Just spotted your mention of the book. Thanks, and of course I look forward to the Monevator book when it appears.

    To be honest I didn’t know TA was writing a book, but I did have my suspicions given his low blog output of late.

    Good luck to him, where ever he is.

  • 13 The Investor March 5, 2016, 7:11 pm

    @all — I appreciate there is a political dimension to all this, perhaps especially in this instance, but can we try not to get overly diverted into political speculation on the average Monevator article. Everyone will have their views, few will change their minds, and it rarely makes for pleasant reading.

    Or where you do feel it’s the most relevant avenue then can we try to keep the language temperate and on-topic.

    (I appreciate I don’t always do this myself in certain rant-y posts, which is why I let comments run a bit freer on those! 🙂 I’ll try to do another one soon so we can all have a good vent in that ‘safe space’. Maybe Brexit.)

    This is an avoiding a ‘tragedy of the commons’ type call; I’m not singling out any particular view here, and indeed I have some sympathy with what’s been written.

    Cheers!

  • 14 Planting Acorns March 5, 2016, 8:45 pm

    The simplest way to cut the cost of pension tax relief would be to raise the higher rate tax limit to 70k ;0)

  • 15 dearieme March 5, 2016, 11:04 pm

    The simplest way to cut the cost of pension tax relief would be to reduce the annual allowance. By floating more ambitious schemes, and then funking it, he may have closed that door for the time being.

  • 16 Planting Acorns March 5, 2016, 11:45 pm

    @dearieme … I don’t think you’ve caught my drift at all … If the starting point for the higher rate of tax was 70k then the relief pensions attract would of-course be a lot less …

    As would the tax take but I was going with simplicity and what I’d like to see not cost neutrality ;0)

  • 17 Paul Claireaux March 6, 2016, 12:46 pm

    Hey Magneto
    Can you remind us – are you picking stocks or operating at Geographic index level – and what are your preferred metrics ? CAPE?

  • 18 dearieme March 6, 2016, 3:16 pm

    “If the starting point for the higher rate of tax was 70k”: it will be someday, perhaps. After the Great Inflation of ’25.

  • 19 Planting Acorns March 6, 2016, 9:49 pm

    @dearime … No chance. It’s lower now than it was in 2012… Everyone will pay tax at the higher rate by the time I draw my pension…which begs the question…are pensions worth it if you’re going to pay tax at a higher marginal rate in future than present ??

  • 20 Yabusame March 6, 2016, 11:53 pm

    I’m just hoping that the markets tank in April when its time for me to throw a bunch of money in my ISA and buy up the index trackers (Vanguard LS100 Acc) once more 😉

  • 21 ChickenFarmer March 14, 2016, 10:25 am

    The egg analogy is not right. With an egg, you know that you’re going to get a chicken, but there’s no such equivalent for stocks.

    Look at the following two assumptions:

    1. The market grows at X% a year in the long term.
    2. We don’t know the true value of a stock, so the market price is our best estimate of it.

    I think that #1 is essentially the basis of this whole website and long-term investment in general, so doesn’t need explanation.
    For #2, the idea is that if globally people thought a stock was worth more, its price would rise. The price it reaches is thus the sort of average of opinions on the current value. I have no skill in determining whether its true value is above or below the current price.

    With these assumptions, lets look at an example.
    Let’s say that on day 1 I have 1 stock, worth £100. I think that in 5 years time, its value will have risen 60% to £160.
    My plan is to buy another 10 stocks tomorrow, so overall my expectation is that in 5 years time I will have 11 stocks worth £160 each, or £1760.

    A day passes, and the stock price drops to £50. What happens to my predictions now?
    Based on the two assumptions above, my estimate for the price in 5 years is £50 * 160%, or £80.
    The £1000 I planned to spend on 10 stocks, I can now use to buy 20 stocks (more eggs!). So at the end of day two, I have 21 stocks worth £50 each.
    My estimate is that in 5 years these 21 stocks will be worth £80 each, totalling £1680.

    What you’ll notice is that a price drop did not affect my profits from unpurchased stocks at all. All it did was tell me that the stocks I already own are worth less than I thought.

    The fallacy of the egg argument is assuming that my day 1 prediction of the stocks reaching £160 in 5 years is the right one, and the day 2 price is just an artefact.

    That’s why I’m sad when the market is red and happy when it’s green.

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