Weekend reading: Investing misery

Some good weekend reads from around the web.

There are many reasons to be a passive investor rather than trying to pick stocks or funds to beat the market: It’s cheaper, you’ll probably do better anyway, and it takes a lot less time than reading company reports or hunting for the next Warren Buffett.

A less frequently touted advantage is that passive investing saves you from having to make uncomfortable choices.

Regular readers will know that I actively manage a portion of my net worth, for my sins, despite suggesting most readers should follow the passive approach. And this past week brought out the best and the worst emotions in active investing.

The main reason I choose to actively invest some of my money is the most honest, but also the least edifying – it’s fun.

For example, for 12 months or so now I’ve been selling down shares a bit when the market has got ahead of itself, and loading up on companies I like when it dips. Unfortunately I only got my portfolio back up to about 10% cash and fixed interest (and only bank preference shares at that) before the recent wobble, which has limited my warchest for hunting bargains in a market I still judge decent value.

I only have a vague idea of how far my meddling has put me ahead of simply sitting in the market – and I have absolutely no idea if the outperformance is down to dumb luck. Ask me again in 30 years!

But I do know for sure that it is generally enjoyable.

That kind of attitude quite rightly enrages my co-blogger The Accumulator, but at least I’m honest about it. (It’s one reason why I first asked him to blog here).

Difficult choices

Taking advantage of the fear and greed of the public schoolboy traders in Canary Wharf is one thing, however. But looking at the market in the wake of a natural disaster, potential nuclear contamination, and heartbreaking loss of human life isn’t my idea of a rollicking good time.

Having previously read in some detail about the horrible human sacrifice at Chernobyl, my heart aches to think of the core 50 workers at Japan’s stricken Fukushima nuclear plant. They are likely committing themselves to a horrible lingering death in their efforts to get the situation under control. And while they are doing it for their country, it’s their bosses and shareholders in TEPCO who are most geared to their success, as well as investors and management in nuclear facilities across the globe.

As one who fears environmental meltdown on a global scale, nuclear power is an extremely difficult issue for me to make my mind up about. But I don’t need to think hard to feel awful for those workers – nor to wonder exactly what would happen if there was a similar nuclear accident in the UK or the US, rather than in a country with a strong tradition of personal self-sacrifice like Japan, or a long tradition of using troops as cannon fodder like Russia.

And what about as an investor? Here we get to the awkward moral issues.

If you’re a passive investor, you can sit through all this and look disdainfully at those who’d “try to make a buck” out of human misery. But if you’re an active investor, you can’t afford to leave crisis investing out of your strategy grab bag.

In both cases money will remain in the markets – and indeed in both cases returns will follow the decisions of active investors – but the active investor is the one who will be staring into the mirror in the morning, or washing her hands over and over in the bathroom after clicking ‘buy’.

Intellectually, I don’t believe economies benefit from the breakdown in orderly markets. Quite the opposite in fact. Japan would be in a stronger position if its market hadn’t tanked nearly 20% in a week in the wake of the magnitude 9.0 earthquake and its repercussions. In that sense, anyone buying into their cheap-looking market is doing them a favor.

Equally, I can see why that sounds like self-justification from someone who knows, for example, that an investor who bought into war-ravaged Germany in 1948 saw a 4,000% return over the following decade, whereas an investor who bought the UK’s FTSE 100 at the end of the happy-clappy 1990s is still looking at an index that’s lower 11 years on.

The case for investing in nuclear-related plays – some uranium miners have dived 30% or more – is even more fraught, with enough moral murkiness to propel along a Michael Frayn play.

I can’t tell you what to do. I can’t tell you how to sleep at night.

But I can tell you that you need to override your primal emotions one way or another, whatever path you take to building long-term wealth.

From the money blogs

• Black swans, 100 year floods – The Big Picture
• Will Bill Miller’s stock picks make you rich? – Swedroe
• A tale of foreclosure and financial ruin – Five Cent Nickel
• Beating the market is a new idea – Canadian Couch Potato
• Behavioural anti-trust: Microsoft to Apple – The Psi-Fi blog
• Moonlighting your way to success – Green Panda Treehouse
• Diploma makes its own case [Beware: Stock picking!] – iii blog
• Why Stieg Larsson should have written a will – The Digerati Life
• Early retirement: Easy maths, hard to do – The Financial mentor
• Past returns can overstate investors’ bad timing – The Finance Buff
• Frugality: Akin to a celibate monk living in a brothel – Simple in Suffolk
• Principal protection [i.e. GEBs in the UK ] likely not worth the cost – Swedroe

Mainstream money and investing sites

• Some case studies of the impact of 2011 tax changes – KPMG
• What it takes a millionaire to feel wealthy – Wall Street Journal
• Disaster in Japan could change history – The Economist
• Financial crises and property go together – The Economist
• Now the Wall Street Journal builds a paywall – The Economist
• Jobs for the boys – and the over-65s – Flanders/BBC
• The easy way to equity income: revisited – Motley Fool
• Tax-free cash ISA rates surge to two-year highs – FT
• Why I’m sticking with Japanese stocks – FT
• I’d love to start a bank that didn’t lend your money – The Independent
• UK housing market remains stuck in a rut – The Telegraph
• Government to slash subsidies for solar power – The Telegraph
• Why Warren Buffett can’t make money anymore – The Telegraph
• Super-rich fast-track to settle in Britain – The Guardian

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