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Weekend reading: Stock market crash or Chinese takeaway?

Weekend reading

Good reads from around the Web.

I loved this warning from Ben Carlson at A Wealth of Common Sense this week:

Everyone invested in stocks loses money in a correction. For some, it’s temporary. For others, it’s permanent.

Stock market corrections are where successful investors make money and unsuccessful investors make mistakes.

Brilliant! Maybe it’s a well-worn quip that’s escaped my obsessional reading, but in any event Ben gets the credit from me.

Another way this is sometimes put is that bear markets are when you make your profits – you just don’t know it at the time.

It’s true in my experience, whether you’re a stock picker or a passive investor.

Ploughing money into a market that’s fallen 30-40% is like the supermarket sweep of capitalism. Chuck it all in your trolley!

Provided the revolution doesn’t come, things should bounce back sooner rather than later and your beaten up shares rebound.

They almost always do, though one notable exception was with the Communist revolution in 1949 in China…

Correcting a correction

Of course, judging when it’s time to stride boldly into the market like JP Morgan in the old days and buying everything you can… that’s the tricky bit.

Remember: A stock that’s fallen 90% is one that fell 80% – and then halved.

It’s something China’s latest generation of speculators have grappled with this week, as their market has had more swoons and recoveries than your local amateur dramatics’ performance of Hamlet.

Chinese investors have other problems, too, such as a Government that encourages them to buy shares on margin and then commands that prices stop falling, by halting trading and banning sales.

It’s enough to make our own Central Banks look positively lackadaisical! But I don’t expect it to work, long-term.

It’s one thing to have a command economy with a bit of capitalism on the side.

It’s quite another to try to control a free market when such a market consists only of prices and confidence.

Indeed, all those worrywarts who act like our stock market is rigged have two choices.

They can read Monevator and other such resources and learn why it isn’t…

Or they can invest in China where it is.

As Barry Ritholtz put it for Bloomberg View:

Why would anyone want to invest in a market where you might not ever be able to sell?

Happy Wimbledon watching!

Budget mini-special

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Not content with Black Friday and the Boxing Day Sales, Internet juggernaut Amazon has now created its own mega-sales event exclusively for Amazon Prime members. Dubbed Prime Day, it’s a blatant attempt to force a mid-year sales bump out of the summer doldrums. Prime members like me who love a bargain will surely check it out regardless.

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

  • Are people really ‘front running’ index trackers? – Bloomberg One & Two
  • Rob Arnott: The true elements of Smart Beta – ETF.com
  • Beware the ETF with a 60% (!) bid-offer spread – ETF.com

Active investing

  • Overseas investors selling unbuilt luxury flats [Search result]FT
  • Fundamentally analyzing ETF’s portfolios – Morningstar
  • Permabear James Montier will be right. One day. – Bloomberg

Other stuff worth reading

  • The moral choices around inheritance and opportunity [Podcast]BBC
  • Morgan Housel: The hierarchy of investor needs – Motley Fool
  • Generation X earns more but has less to show for it – Bloomberg
  • Michael Kitces’ financial freedom quest – Bloomberg
  • All about sleep [Podcast]Freakonomics and New Yorker
  • The office loo: Another reason to quit the rat race – Bloomberg

Book of the week: This week’s roundup – like most weeks – features Ben Carlson and his blog, which he’s now literally written the book on. A Wealth of Common Sense mines that clever name to attract more mainstream readers to Ben’s simple yet powerful insights on investing strategy.

Like these links? Subscribe to get them every week!

  1. 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”. []

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{ 22 comments… add one }
  • 1 Gregory July 11, 2015, 12:19 pm
  • 2 Hamzah July 11, 2015, 12:35 pm

    I am a bit perplexed at the doom and gloom about the changes to BTL interest tax relief. No change before April 2017 and then a four year taper to basic-rate relief seems to me hardly a cliff-edge requiring panic measures. I’m probably more concerned about the interest rate environment over such a time period pushing up mortgage costs.

    Many pensioners end up basic-rate taxpayers, so really just how much of an impact will this actually have on someone with a small portfolio of properties? I presume it is a balance between rental income, property maintenance costs, LTV and interest rates that sets the initial parameters for modelling any changes. I just don’t follow the examples given in the media as I don’t know what assumptions are being used to generate the scary reductions.

  • 3 Hamzah July 11, 2015, 2:31 pm

    I looked again at the table in the first Guardian link (and note the possible typo in the lower part of the example) and see how the calculation was derived. I guess the question still remains about the proportion of BTL landlords who are higher-rate tax payers and face an eventual differential rate?

  • 4 Hamzah July 11, 2015, 2:43 pm

    Sorry, I am talking to myself! I found a reported estimate by HMRC that 20% of landlords will be affected by this change.


  • 5 Underscored July 11, 2015, 2:59 pm


    No it is nuclear armageddon for BTL 🙂 Previously only the net rental income post deduction of interest charges was counted towards your income and taxed.

    Now gross rental income before any (reduced) reliefs are counted towards your income, ergo if you earn 30k, and have 2x BTL for which the tenants pay you a total of £16k, voila you are now a newly minted member of the higher rate tax payer class!

    Seems the Tories are worried about renters voting Labour.

  • 6 MyRichFuture July 11, 2015, 4:07 pm

    I recently wrote an article on my hatred of BTL. This latest tax change is just another reason to avoid being a landlord.

  • 7 Topman July 11, 2015, 4:11 pm


    I particularly like this quote in Ben Carlson’s book:-

    “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little”.

  • 8 Mathmo July 11, 2015, 5:10 pm

    Good selection this week TI (and how could you choose in a week when everything seemed to happen to everyone everywhere – china! greece! budget! sport!).

    I don’t see BTL as evil or pushing up house prices — nor is it an unfair advantage over residential owners: they don’t pay tax on the rent they pay themselves. Perhaps they should (this is one way to chase people out of over-housing themselves).

    I don’t think this is particularly terrible — it remains an epic way to leverage your portfolio and I’m guessing that the mortgage rate margin over residential will narrow: previously it has exactly absorbed the tax shield at 40% — I think it will narrow to the tax shield at 20%. This is a tax on mortgage lenders, not a tax on landlords. At worst it’s a tax on renters. What else are they going to do: they can’t buy so it’s a signal to everyone to put their prices up. Woohoo. Finally a bit of yield on top of the CG bet.

    Otherwise quite a tax raid in the budget: IHT weirdly restricted to a single asset class (why push housing?) — Dividend raid is a disgraceful attack on small business owners — and the 50% increase in base wages is brilliant news: I’m going to be delighted that my everyone I work with will be 50% more productive by 2020. Super trick.

  • 9 Hamzah July 11, 2015, 5:32 pm

    @ Underscored

    “Now gross rental income before any (reduced) reliefs are counted towards your income, ergo if you earn 30k, and have 2x BTL for which the tenants pay you a total of £16k, voila you are now a newly minted member of the higher rate tax payer class!”

    Where do you get that understanding from? I have seen no report of a change from net income to gross income with respect to BTL for tax calculation; only the reduction of the relief allowable on two components of running costs, mortgage interest and the blanket 10% wear and tear allowance.

  • 10 Harold the Herald July 11, 2015, 5:36 pm

    Are there any good articles out there in front running FTSE100 changes?

  • 11 Underscored July 11, 2015, 6:13 pm
  • 12 Hamzah July 11, 2015, 6:47 pm

    @ Underscored

    I still remain to be convinced that the paper you link to supports the notion of “nuclear armageddon for BTL” by completly changing the taxation of BTL previously based on net profit. I am clearly missing something that you seem to think is a significant change that would push many BTL landlords into a higher-rate tax bracket. Somehow I would have thought the media would have picked up on that specific point if it was coming.

    Anyway, I will leave it there as there are other aspects of this week’s reading that are worth comment.

  • 13 Naeclue July 11, 2015, 11:56 pm

    I agree with underscored’s interpretation. Effectively gross income will be added to other income and an income tax liability determined. Landlords will then get a rebate of up to 20% of the mortgage interest and fees. This is similar to the way VCT rebates work – tax is calculated and then a rebate is given for 30% of the amount of investment, or less if there is insufficient income tax liability.

    Probably not nuclear armageddon for BTL, but those doing this might find incorporation a preferable route. Form a ltd co and pass your BTL property into it. 100% of finance costs will then be deductible from rent and profit will be taxed as corporation tax (dropping to 18%). To get money out of the company, you can draw as salary, which will be subject to income tax, employee+employer NIC, all of which will be deductible from CT. Alternatively a dividend can be drawn, subject to new dividend rules or payments into a pension, which again will be CT deductible. One other advantage is that gains on disposable of property will be subject to indexation relief and taxed at the 18% CT rate instead of personal CGT.

    If I did BTL, not that I have any intention to, I would seriously consider running it through a ltd company.

  • 14 Naeclue July 12, 2015, 12:03 am

    Regarding my comment on BTL, it looks as though actual wear and tear allowances can be deducted from gross rent, but not mortgage interest. I would assume letting agents fees were also deductible.

  • 15 Underscored July 12, 2015, 8:21 am

    Hi Naeclue, I am not sure it is possible to get a BTL mortgage as a LTD company, I would certainly expect a higher rate akin to a business loan for such a product. If that is not the case now, it will be by the end of 2017 http://www.bis.org/bcbs/publ/d307.htm.

    Then you have all the additional problems of stamp duty and CGT to transfer an existing portfolio into a LTD company.

    Another aspect to consider is that I would expect a bunch of these people to be receiving some sort of government welfare based on their current 20p tax status, that will take a hit also.

    I also wonder whether lenders will want to re-assess their 125% rental cover?

  • 16 Mathmo July 12, 2015, 10:20 am

    Away from BTL — I found the retirementresearcher’s articles on CAPE interesting. By the end of the second one, he appears to be a strong cheerleader for asset allocation tweaked by CAPE (in a steppy-fashion). I couldn’t get the academic paper to download as it seemed blocked.

    The point makes intuitive sense, and indeed if you push it all the way down to the individual equity, isn’t this just what we mean by value stocks and the value premium?

    And then I thought to myself: haven’t we decided elsewhere that it exists, but it’s awfully hard to grasp?

    * * *

    Also: A 60% spread on an ETF? Thanks – TI – I’m feeling much better about my ERNS 5% debacle already.

  • 17 Naeclue July 12, 2015, 11:52 am

    You are right Underscored. It could prove uneconomic for anyone who has built a large capital gain on property to incorporate, assuming they have to pay CGT. It is also unlikely that anything like the same level of gearing would be available to limited companies as current BTL landlords can achieve. Having looked at the currently available tax relief, I can understand why BTL has proved immensely popular.

    The latest housing market tinkering reminds me of Lawson’s budget in 1988. Home owners used to receive tax relief on the first £30,000 of their mortgage (MIRAS) and if there were multiple owners of a property, with multiple mortgages, they each received up to £30,000 relief. The relief was valuable as mortgage rates were double digit at the time. Lawson restricted the relief to £30,000 per property. He foolishly gave something like 6 months grace period though so that people purchasing before a certain future date would still be able to get the multiple relief. It is not difficult to guess what happened next. An already overheated property market went through the roof, with people, mostly 20 something first time buyers, buying ANY property so as to not miss out on the boom and tax relief. “Buy now or you will never be able to get on the housing ladder” was the belief (prices were rising at 40-50% per annum in SW London). This came to a crashing halt around the time that the restriction of relief came about, prices plummeted and took several years to reach the 1988 peak again.

    I remember many friends and colleagues getting sucked in to the boom and it causing a lot of personal problems. People falling out with their co-owners, relationships breaking up, but they were unable to sell due to negative equity, etc.

    I wonder whether Osborne’s budget will usher in another slump? It is incredible how quickly sentiment can change from “Have to buy now otherwise I never will be able to”, to “No point buying now as I will be able to buy for less next year”.

    The article about Nine Elms was interesting as well. That is not far from me and the prices that the flats were being offered for made no sense to many local residents at all, even by the current very high prices of other property in SW11 and surrounding areas. It would not surprise me to see many of those who chose to speculate on these flats wanting out asap – much like the margined up Chinese stock market speculators. This could add to any slump triggered by the BTL changes.

    p.s. the 60% spread on an ETF is wrong – not an ETF!

  • 18 Underscored July 12, 2015, 3:51 pm

    @TI, I hope you don’t mind these long posts about BTL, please tell me to stop if it is offensive.

    @Naeclue. Ha! I used to live next to Bob on Battersea Park and have been keeping an eye on the area since I left. Watching the cranes there made me think of Richard Duncan’s statement about how the Asian currency crisis was preceded by peak crane.

    As regards MIRAS, Osborne is a student of Lawson and with HTB (nice little boom), seems to show an understanding of how to play the game for electoral benefit. I have no doubt that this is entirely deliberate, the BoE are also going to be cracking down this year on financial products for the sector.

    As for motives I guess they could be plentiful, but I guess getting it down at the beginning of the electoral cycle is important for them.

    1. Maybe they are genuine about transforming the economy from a brick based debt based Ponzi scheme
    2. Maybe they are clearing out retail investors to make way for build to rent L&G are apparently interested https://www.gov.uk/government/collections/build-to-rent-guidance-and-allocations
    3. Renters vote for Labour (maybe why Brown championed BTL?), OO vote Tory, May 2020 is but 5 years away

  • 19 magneto July 12, 2015, 8:31 pm

    @ Gregory

    “on CAPE: http://www.advisorperspectives.com/newsletters15/25-are-grantham-and-hussman-correct-about-valuations.php

    Wade Pfau Part 2 needs to be read and re-read very carefully.
    Larry S has stated on other occasions that ‘valuations matter’. The question remains what does the poor investor do about it?

    Interesting that link has been posted under ‘Passive Investing’ as such thoughts are usually sceamed out at by passive investors as ‘market timing’ (aka ‘Tactical Asset Allocation’); although the correct term for such methods as put forward by Wade are ‘Dynamic Asset Allocation’ (i.e. adjusting allocations in response to valuations).

    Wade has drawn attention in other articles to the ‘sequence of return risk’ faced by retirees, when examining this issue from a primarily defensive perspective.
    For us here in the UK a worst case might be someone who retired in Dec 1999, investing solely in the FTSE100. Such a retired investor is still today a little underwater if the dividends were spent. A more dynamic approach might have doubled possibly tripled his funds, while still drawing income.

    The Chinese investors might have avoided the worst of their current distress by paying more attention to valuations; rather than simply climbing aboard an apparently continually climbing market, hoping for the momentum to continue indefinitely.

  • 20 The Investor July 12, 2015, 9:26 pm

    @Magento — Yes, the Wade linked moved between “Passive”, “Active”, and “Other” several times over the construction of the links. In the end Wade was presenting it to passive investors, and it had attracted some comment in the usual passive circles, so I went with that.

    @All — Sorry for the lack of replies from me this weekend. Super busy couple of weeks on! 🙂

  • 21 Rob July 13, 2015, 1:54 pm

    Harold the Herald,

    You can see which stocks are on the the LSE reserve list from this s/s on its website.

    Them look at the market movements since the last rebalancing to form a view of which stocks are likely leave or join.
    Basically, it is a measure of popularity and little to do with financials.

  • 22 Chris July 13, 2015, 4:48 pm

    Barry Ritholtz’s view is somewhat my view. Sifting through the endless articles on Chinese stocks, found out that it is only a bubble, a bubble which is bursting, and Clem Chambers of ADVFN believes that another 25% fall might be on the cards for Chinese equities.
    While markets try to guess what the move of Chinese authorities would be next, and analysts try to do the guess work; the major concern remains on the growth story and the contagion if any (China’s imports and its impact on commodities).

    Bubble or not, any further dive will only fuel further selloff!

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