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Weekend reading: Investing when you don’t know how the story ends

Weekend reading

Good reads from around the Web.

I met my friend The Bear last week for one of our occassional wanders through London.

The Bear is not his real name – he is not a character from a Disney movie, or even a gangster from a Guy Ritchie one.

He is however invariably pessimistic about something – hence a bear in investing terms – and I do enjoy his entertaining rants.

Not just doom and gloom

I have other reasons to meet up with The Bear, besides getting myself a healthy dose of anti-euphoria.

For one thing he kindly hands over past issues of the cult US investing newsletter Grant’s Interest Rate Observer – delivering a big batch that I carry about in a Tesco bag during our wanderings, before starting to work my way through them on the Tube before I’m even home.

More on that later.

The other reason I value talking to The Bear about investing is that while he can seem dogmatic in his views, he is not dogmatic in how he should respond to them.

For example he is apoplectic about what he sees as the rigged and ruinous nature of the UK property market (he swears a lot about everything) but that hasn’t stopped him owning shares in UK housebuilders, which he plans to dump before his predictions of a downturn come true.

And like his hero James Grant of the Interest Rate Observer fame, he is scornful about the utility of extended low interest rates and QE.

Yet The Bear has profited from owning shares in certain UK banks in the past few years, which he bought when they were cheap enough to withstand even his gloomy outlook.

I also like how he’ll make a dozen small bets, knowing he might lose all his money on half of them but with the chance of 2-5-10-fold returns on those that do prevail. (Bankruptcies, deeply discounted rights issues and the like).

That’s what the maths says makes sense, but very few stockpickers have the fortitude to carry it out.

Are we there yet?

I should say that I don’t actually know if The Bear has beaten the market, for all this sparky thinking and stock picking effort.

I discuss investing with him for intellectual stimulation and to challenge my own views, not for actionable advice.

(Indeed if I do ever achieve my aim of persuading him to write occasionally for Monevator, this will be the motivation.)

One thing that makes it difficult to judge any investor’s world view, let alone their performance, is timing and timescales.

For instance, I put it to The Bear that perhaps Grant’s subscriber list had shrunk, given that the publication has been warning of the dangers of a reckless Federal Reserve and the folly of selling your gold for several years now in which the US economy and market has actually recovered and gold has tumbled down the toilet.

A subscription to the fortnightly Grant’s Interest Rate Observer costs $1,175 a year. Small change for a hedge fund perhaps, but not so trivial that you wouldn’t want to think the authors were occasionally getting something right?

My friend responded with the classic defense of the unrequited pessimist…

…namely: “It’s still too soon to tell. Wait until it’s over.”

Waiting for the Fat Lady

This sentiment is the ready retort of anyone whose downside bet has gone against them.

It was long my rallying cry against soaring London house prices, until I decided it’d be better to shut up than cry wolf for another decade. (Many others have since taken up the call).

It’s also what optimists think when they buy in the midst of bear markets, even if they quote Warren Buffett rather than reach for the mantras of more pessimistic folk.

“Wait until it’s over” is a strong defense, because you can’t argue with the logic – because you can rarely be sure it’s over.

It’s true that Grant’s and others who’ve warned of all kinds of toxic fallout from QE have – as my friend suggested – become almost laughing stocks when they appear on CNBC and the like nowadays.

My friend (and no doubt Grant too, for he is a formidable student of the markets) sees this as a sign that the last days of the current bull run may be upon us.

Equally, it’s easy to forget how terrified everyone was of QE when it began, even though investors and pundits today tend to cheer it whenever they see it and now fear tighter money instead.

I admit I expected inflationary consequences, like most other onlookers.

But today? Inflation? On the contrary, we only recently saw some deflation.

The Bear would say you need to look at elevated asset prices and depressed yields to see where QE-stoked inflation has had an impact.

I’d retort that I don’t remember many of the doomsters saying “buy bonds and equities because of QE”.

In fact, quite the opposite.

“Buy gold because the dollar will soon be worthless” was more their sentiment at the time.

You told them ‘not to fight the Fed’ all you liked (and I did). This time was apparently different.


In truth all of us take what we can and justify it as we go along to some degree, however much we try to stay alert to these sorts of behavioural flaws.

Long-term buy and believe

Now, most of you are passive investors, to whom this post has been at best a semi-interesting diversion that’s probably outstaying its welcome.

However don’t think you’re not betting on the same sort of reversions that my friend is looking for.

Passive investors in equities and are other assets are not neutral on the direction of those prices in the long-term.

On the contrary, their implicit position – which of course I think is eminently sensible – is that while ups and downs are apparent on a graph of stock market returns, over the long-term, for most markets, the trend is definitively higher.

What would you tell a cynical family member who said you were wasting your money, given that shares were down but you were still pumping your hard-earned cash regularly into your index funds?

“It’s too soon to say that,” would be your reply. “Let’s wait and see over the long-term.”

You don’t know Jack

The truth is whether we’re passive investors, permabulls, or inveterate doomsters betting on a crash, we only have so many decades, which means we can only afford to take so many steps back from those graphs.

Eventually our time horizon shrinks to such an extent that the zags down on the graph look more like ravines, and the zags up more like distant summits that always seem to be just another valley out of reach.

That’s why we’re told to reduce our exposure to riskier assets as we age.

It’s also why we diversify – in case we’re climbing the wrong mountain.

How things turn out are only ever obvious in hindsight. I’m always reading Grant’s 12-18 months after it publishes its (always extremely readable) thoughts, which could make me feel like a genius if I’m not careful.

I know better than they do! True, I haven’t seen the ending but I have seen the spoilers.

But real life is not like reading old publications, obviously. However we invest, and wherever we think things are going, we’ve walking along with our hands outstretched, feeling our way through the fog.

One reason passive investing works so well is because it acknowledges and even exploits such uncertainty with a humble and automatic strategy that can cope with almost anything that looms out of the gloom.

Us more egotistical active investors have to work hard to remember we know nothing, and to challenge our preconceptions all the time.

Reading yesterday’s thoughts from the super-smart writers at Grant’s – and debating The Bear’s gruesome stories in the moment – are some of the ways I try to do that myself.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Feeling heady about the future of English cricket following the Ashes triumph? Surrey county cricket club surely suspects as much – which might be why it’s just launched its 5.5% paying five-year mini-bond (as reported in The Guardian) to fund a new stand at the Oval. Remember that mini-bonds have particular risks, and are not protected by the FSCS.

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

  • A financial plan on an index card – USA Today

Active investing

  • Ken Fisher: Grow your own dividends [Search result]FT
  • Which asset classes are out of favour? – Interactive Investor
  • Is Google’s Alphabet a tech Berkshire Hathaway? [vid]Motley Fool
  • Discounts widen on UK-listed China funds [Search result]FT

Other stuff worth reading

  • Lessons from the long US bull market – Morningstar
  • Time is an investing ally, not an enemy – Bloomberg
  • Right-to-buy has been a definitive disaster – Guardian
  • £1,083 a month, for what’s seemingly a shed in Hackney – Guardian
  • £96,000 extension added £600,000 to house price [vid]Telegraph
  • Beware of recycled bank accounts – Telegraph

Book of the week: Disney shares dropped recently when it said an ongoing decline in cable subscribers could hit revenues at ESPN, its lucrative US TV brand. I think we underestimate this trend in the UK, what with the dominance of the BBC, Sky, and to a lesser extent ITV, but you can’t fight technology. With Amazon selling its powerful Fire TV Stick streaming device for just £35, change is coming here, too.

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”. []
{ 11 comments… add one }
  • 1 Minikins August 15, 2015, 7:15 pm

    Always good to read articles with a healthy dose of humility and investing agnosticism.
    More people are cutting the umbilical cable with the rise of frugality and Disney may well experience loss of customers. Despite having done this my children still love the Disney channel but they get it on NowTV instead and they can watch it any where on any device as long as there is internet. The irony is they were introduced to Disney channel in Spain where it is free (and where we are at the moment). I suspect Sky will move with the tech and become more mobile (it owns NowTV) and it is certainly seen as the coolest option by kids. How much that will influence things will have to be seen but no strings telly (and just about everything else) does seem to be on the rise.

  • 2 Malcolm Beaton August 16, 2015, 8:49 am

    You don’t know Jack-presumably means Jack Bogle of Vanguard.
    Buy broadly dviersified Index Funds and hold them forever!

  • 3 magneto August 17, 2015, 12:00 pm

    “The truth is whether we’re passive investors, permabulls, or inveterate doomsters betting on a crash, we only have so many decades, which means we can only afford to take so many steps back from those graphs.”


    An investor who invested solely in the FTSE100 in December 1999 and spent the dividends (but we would do neither would we!!!), would still apart from a brief blip be below water today in nominal terms.
    In inflation adjusted terms when last time checked that would mean a real spending capital loss of about 42% (E&OE).
    So much for the steady long term progress of stocks.

  • 4 gunnar August 17, 2015, 2:49 pm

    Buffett says that he would much rather work with someone who has a 130 IQ, but think its 125 instead of someone who has a 160 IQ but think its 170. Grant strikes me as being closer to the latter. The guy can really write, and is an original thinker. The words read great, and as you say, you feel smarter having read them. Then there are results.

    Grant’s main case for gold is that he hates the Fed. Even if his analysis on the Fed is right it does not mean that gold is a good idea. Rational analysis, taken to extremes, can drive you to irrational actions. Witness his big pick from a few years back – buy Russian banks and oil companies. How did that one work out? They’ve been cut in half.

    Looks to me that Grant’s single minded hatred of institutions like the Fed led him into not seeing the deep risks of recommending to buy stocks in an essentially lawless places.

    I about fell over on his glowing, wildly bullish review of Russia’s Sberbank he actually said (about negative 50-70% ago) if Sberbank operated in another country it would be valued way higher. Gee, you think? That is the whole point. Grant would be well served if before he serves his next heaping bowl of scorn on the Fed to spend a minute reflecting on Chesterton’s fence:

    “In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it”

  • 5 Mathmo August 17, 2015, 4:09 pm

    Good links, thanks, TI.

    Thin pickings as the August holiday continues apace but one that I thought was worth picking up on is diy-investor’s struggle with decumulation in bear markets.

    I think bear markets are particularly tricky — the temptation to “hold on a few weeks” and see if things get better is a very strong one — and they clearly test discipline more than bull markets where every decision seems to make you look like a trading genius (missed opportunities are easier to discount in your mind than lost cash). I know that I have personally failed to take a few small losses recently when I know I should have, and managed to turn them in larger losses. With the smell of bear in the air, it may well be time to recheck that we are indeed wearing our swimming costumes.

    diyi has identified that he needs ready cash as part of his portfolio to give him confidence that he need not be selling off equities in a down market. He’s also figured out that he like a balanced portfolio with some bonds and equities. He hasn’t equated these two things, however, deciding that the cash pool sits outside his investments and is to be topped up when things are going well. (Definition of going well is unclear, but approximately “when things are up from last year”).

    I happen to think this is half right. I love the idea of having a year’s expenditure in cash in decumulation phase. It’s the kind of thing that gives you confidence that the world is going to be alright, and the feeling of wellbeing is real benefit over and above the spending power. In addition as an individual, there are quite a few places where you can hold that much cash without giving up all that much yield, and a fairly favourable tax environment. However, I think this should be viewed as part of the portfolio counterweight: it’s an extension of the bonds section (short-term, government backed), and should be rebalanced as part of it, in strict terms as the rest of the portfolio is. So if equities fall, then still some are sold but not as much value comes from them as from the equities.

    This removes the uncertainty of the rule and keeps things in line with the

    I’d suggest that if you’d like to take an active view when equities fall, then firstly go and have a cup of tea and don’t (apparently Tetris works to stop you fidgeting with your portfolio) — and then if the feeling won’t go away, set a limit order for the last 180 days of the year to make the annual equity sale. This usually gives enough volatility for a few % to be made.

  • 6 JohnG August 18, 2015, 2:06 pm

    @magneto But that’s effectively a mythical scenario, breaking just about every rule in the book:
    > Investing all at once rather than staggered
    > In just one index of 100 companies in a single country
    > Throwing away the power of compounding by ignoring the considerable dividend
    > Selling all the stocks in one go instead of gradually winding down.

    I think the FTSE over the last 15 years is a very helpful counter-example to people who are too positive about stock performance, but its a bit hyperbolic to try and make it out it’s been a massive money loser.

  • 7 magneto August 18, 2015, 5:18 pm


    All good points but would add at the very top of the list :-
    > Not taking any note of asset valuations

    and remember in relation to :-
    “> Throwing away the power of compounding by ignoring the considerable dividend”

    Haven’t run the calcs but suspect it would be a close shave as to whether the dividends compensate for inflation over the period in question.

    Not all here can accumulate the dividends. Some are in retirement drawing on the natural yield of our investments, while still aiming to grow capital in real terms for the benefit of both ourselves and our heirs

    The Investor’s point “we can only afford to take so many steps back from those graphs” is a memorable one.

  • 8 The Investor August 19, 2015, 12:25 am

    Whilst I am very glad you liked the image/quote @magneto, I said most will be best off pursuing a passive strategy in the article and so of course I think @JohnG’s interpretation makes some very good points, as you say. 🙂

    I am pretty sure most people will do a lot worse trying to think about valuations, versus diversifying ‘dumbly’ between different regional indices and holding their nose.

    It’s possible that 1999 was so extreme that it’s the exception that proves the rule, but not sure that’s not simply hindsight talking. 🙂

    Many people have failed to fully participate in the US rally over the past 5 years due to valuation concerns, for example. The US is 92% over the past five years before dividends!

    As for the FTSE 100, pretty certain it’ll be ahead of inflation over the past 15 years with dividends reinvested, but perhaps not ahead of an optimal cash strategy. It’s a while since I’ve seen the numbers run. 🙂

  • 9 Mathmo August 19, 2015, 9:38 am

    You’d have been spectacularly lucky to buy at the Mar 2000 peak. It’s a very odd reference point to pick. Miss it by just 3 months and the results are very different.

  • 10 david August 19, 2015, 7:38 pm

    @mathmo – “You’d have been spectacularly lucky [sic] to buy at the Mar 2000 peak.”

    This accidentally sounds like the old guy in Catch-22: “now that we are losing again, everything has taken a turn for the better, and we will certainly come out on top again if we succeed in being defeated”.

  • 11 Mathmo August 19, 2015, 11:24 pm

    Luck comes in lots of flavours. But I don’t think we’d be too easily accused of forcing our own worldview if we were to term this as “bad luck”.

    To quantify how sensitive this is, within 10 weeks either side of the 2000 local peak, the FTSE100 traded below 90% of peak. Same is true for a 12 week period around the 2007 local peak.

    Bullseyeing a stock purchase within 10 weeks on a 15 year time horizon is a very lucky shot indeed. I suspect that FTSE100 total returns beat cash(but not bonds, yet) on that horizon if you add in a 10% on the purchase price.

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