The Full English Accompaniment – Not all advice is good advice

What’s piqued my interest this week?

Unpicking this is a good exercise in publication analysis. A team from the Institute of Nuclear Physics of the Polish Academy of Sciences, Krakow, are the ones making the forecast. Clear valid prior experience. They predict a massive worldwide financial meltdown “such as never before” in the mid-2020s. Helpful. They performed a “multi-fractal” analysis of financial markets, published in the journal Complexity. To be clear, I looked up the journal Complexity (2). Studies are appropriately archived, but the journals impact factor is a measly 1.829, and it’s a pay-to-publish open access format. This publishing model is not well-regarded, but increasingly common and predatory. The author, Prof Stanislaw Drozdz, at least has previous for a number of interesting fractal theory publications. This paper was published in September and can be read here (3).

To summarise very briefly, the team used an analysis to look for multi-fractal formulae across the S&P 500 and NASDAQ stock market indices. Their hypothesis was to prove that investor nervousness, measured by proxy through market volatility, followed fractal patterns. They looked at the Hurst exponent, which has assumed values from 0 to 1 reflecting the degree of susceptibility of a system to a change in trend. The Hurst exponent has continually stabilised after dropping during repeated ‘stock market crashes’ over the past 30 years, each time stabilising at a lower level. The time intervals decreases between falls, and never reaches it’s previous level. The eventual tipping point is somewhere in the mid 2020s (4).

So a functionally derived measure of an assumed value measure predicts terror at an vague point in the future. Interesting reading, but is it going to change my plans? Probably not. But it does prompt the thought experiment (Hi Savings Ninja) ‘what if we had another Great Depression’?

This would harpoon the latest MMM blogpost. In it MMM has many sweeping statements, including:

“If you start with $1.2 million chunk (a 3% withdrawal rate), it is overwhelmingly certain that you’ll have a growing surplus for life.”

“A fixed chunk of money is about as safe a retirement strategy as you’ll ever find.”

“Stock market crashes are never permanent. In the long run, the market always goes up. So all that happens during a crash is that those few shares that you do sell during those brief times when the market is down, will hurt your account balance just a bit more. Within a year or two, the market is back up and your remaining stocks are more valuable than ever. If you want even further reassurance, you could just choose to spend a bit less money during this time.”

Eggs and baskets spring to mind. MMM advocates holding your money in a Vanguard ETF, tax-sheltered via your chosen domiciles methodology. You’re diversified across markets. MMM does qualify his claims:

“Now, these statements do all depend on the continued existence of a productive human race which continues to innovate and trade and not destroy its own productive capacity.”

Which is fair enough, but I seriously disagree with his suggestion to go wholly equities. Diversification out of the market and into other avenues is far safer. MMM goes on to say:

“Heck, even if you are stuck with a $1 million house occupying a huge part of your net worth, you can convert that into livable money: sell the house, put the cash into index funds, and use the resulting cash stream to rent a spiffy but reasonably priced house or apartment in the lovely walkable area of your choice.”

Which to me is nuts. Worst case unimaginable scenario the stock market falls through the floor/ a global hacker collective wipes debt and investment records/ Brexit causes the collapse of British industry and ‘the city’ etc, what happens to you? It’s all gone. We mourned this week the passing of Harry Leslie Smith, one of the last vocal writers who lived through such a time, the Great Depression (6). I recommend reading his experiences. His eldest sister died of Tuberculosis in a workhouse when he was 3 because his family couldn’t afford a doctor. She was buried in an unmarked paupers’ grave because they couldn’t afford a funeral. He worked as a barrowboy from age 7, then delivered coal aged 10 to support his family. He lived in and remembered a world few of us can now imagine experiencing. Here’s his memory of the Christmas of 1930, during the Great Depression (7).

MMM is a fantastic advocate for financial independence, but putting all your financial eggs in one basket is a risk. We can calculate that risk is vanishingly small, but we can’t predict the future. Is Prof Drozdz’s prediction came true, how would you fare?Diversification reduces risk, at the cost of potential returns. Maybe this is a risk you’re willing to take?

Have a great weekend,

The Shrink

Side Orders

Other News

Brexit twists the blade on UK GDP. Helpfully my beautiful part of the UK is least affected (8)
And some ‘experts’ worry a no-deal Brexit will prompt an interest rate rise and housing market crash (9) N.B. I try to read widely for my news, generally the Guardian counterbalanced by the Telegraph with the FT thrown in. I’ve recently gone back to browsing the i and the Independent, but I’m still not entirely convinced of a) editorial quality and b) editorial independence.
However the housing market saw a slight rise in prices (0.3%) last month. Crack out the Moet! (10)
But it doesn’t matter anyway as based upon the Met Office’s latest predictions low lying areas (most cities) will be flooded anyway (11)
So the rest of the UK should follow Scotlands lead on de-carbonisation (12)
And most homeowners want solar panels (13)
Which will be helped by a deal between Tesco and VW to provide free electric charging points (14)
Just a shame that Network Rail continues to fail, and our aging trainstock are falling apart (15)
As ticket prices rise by 3.1% (16)
And in a study not really picked up by UK news outlets, Brexit is pushing more businesses to automate (17)

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell

Religio Medici and Urne-Buriall by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor.

Enchiridion by Epictetus – Bedside reading for a bad day

References:

3 thoughts on “The Full English Accompaniment – Not all advice is good advice”

weenie says:

Nov 30, 2018 at 7:41 pm

Thanks for another bunch of great links.

Ref MMM, I guess he’d be ok with this strategy if things went belly up, since he’s been banking his $400k a year from his website and likely to continue to do so.

His many followers may not fare so well (particularly if struck with sequence of returns risks) so I hope they all do their own research.

LikeLiked by 1 person

thefirestartercouk says:

Dec 5, 2018 at 5:56 pm

That first bit blew my mind somewhat. Fractals?! Huh?! 🙂

MMM post was a bit slap dash wasn’t it. It is hard/impossible to get all of the nuances across in just one article but that doesn’t mean you should just tout a one size fits all attitude like he tends to do…

Thanks for the link!

The FU post was from their son not daughter by the way! 🙂

LikeLiked by 1 person

1. TheFIREShrink says:
  
  Dec 5, 2018 at 6:46 pm
  
  Moral of the story I think is that you can manipulate maths to tell any story you want, and use enough big words to sell it.
  FU post updated, my bad!
  
  LikeLike

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