The Full English Accompaniment – Pensions problems show societal flaws

I’ve whinged about the NHS Pension situation before, so this week I’ve been following Dr Kate Lovett’s threads on Twitter with interest. The Dean of the Royal College of Psychiatrists, this year she was the recipient of an incremental increase in salary due to experience and an excellence in practice award. This has resulted in a tax bill 120% of her annual salary. How?

Because if your hypothetical pension hypothetically grows the rules are that you pay tax on the hypothetical growth mostly at 45%

— Dr Kate Lovett (@DrKateLovett) October 23, 2019

As an unfunded DC scheme that has been raided multiple times by the Government, the whole situation is ludicrously punitive. There is no pot of cash which grows, it is all dependent on the pension scheme remaining the same by the time you retire, plus the calculations for tax being correct (1). If you’ve ever dealt with public sector HR you’ll have your own thoughts about this. The taper cap doesn’t work when applied to DC schemes, and in the medical profession it’s demoralising. There’s a whiff that the intention was to drive people out of the NHS scheme and into SIPPs or similar. A drive for a smaller government.

These pushes towards self-invested pensions are important for the self-employed. Despite continuous suggestions and prompting, most self-employed people are not paying into a pension (2). In previous times, a decent state pension could cover you, however our state pension has fallen to one of the lowest in Europe, again evidence of a smaller government dogma. Couple this with the expectation from some parties that the state pension/ national insurance should operate like a DC pension, not an insurance policy, and we see how people have become more ‘me first’ (3). I can understand the drive for a small government, but there will always be some who slip through the cracks or don’t understand. Encouraging everyone just to think about themselves risks leaving those individuals behind. How long can the state pension last in the face of dogma?

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References:

The Full English Accompaniment – Cognitive biases in crowdfunding

Continuing my current theme looking at crowdfunding, and in advance of some behavioural finance pieces I’m putting together, this week I’m pointing out some of the ways crowdfunding websites use cognitive biases to convince you to invest. For examples, I’ve pulled two pitches from Seedrs and CrowdCube which were at the top of their lists (1, 2).

Seedrs

Crowdcube

Crowdcube rewards

In my opinion, some of the main cognitive methods that these sites use are:

Bandwagon effect/ Confirmation bias
Overconfidence effect
Illusion of scarcity
Denomination/ reciprocity effects/ present bias

Bandwagon effect/ Confirmation bias

Confirmation bias is the internal yes-man, that disregards data that contradicts your opinion and suggests that ambiguous information supports your opinion (3). Your search for, remember and interpret information subconsciously to prove you are right. The bandwagon effect refers to the tendency of people to follow others, regardless of whether it’s a good idea (4, 5). It stretches into and is allied with groupthink and herd behaviour. It’s common in politics and consumer economics, and was also seen in the Dotcom bubble. Here confirmation bias and the bandwagon effect work in tandem, people will invest along with others thinking that it is evidence that they are making the right choice.

Crowdcube Bandwagon

Seedrs Confirmation

In the two examples chosen, you can see (circled in orange) that the number of investors and their commitment to a theoretical goal valuation are given pride of place in the ‘pitch’. Both websites aim to convince you that it’s a good idea, as many others are doing the same. Others must have done the research (social loafing), and they’ve committed (sunk cost fallacy), so you should too.

Overconfidence effect

Tied into confirmation bias, the overconfidence effect is the subjective belief that a persons ability is greater than the objective results would suggest (6). This should be well known to anyone who has read Smarter Investing etc, and is the basis of the active investment mindset. It’s also the whole basis of the Crowdfunding system, offering a variety of ‘pitches’ which you then evaluate, thinking ‘I have the edge others do not’. It’s worth noting in this that. Adding to this, optimism bias makes you think you are less likely to have a negative outcome (like a company failing) than others.

To help you on your way in your overconfident selection, the websites use the framing effect (7). Information is presented in a positive manner. These are, after all, advertising pitches. Every page will play-up it’s ongoing good points. Causes of concern are never mentioned (except perhaps in the discussion section). To look at the company financials often requires an investment or access request, inhibiting due diligence.

Illusion of scarcity

Scarcity, in human psychology, boils down to the fact that we as humans place greater value on things which are rare than those which are common (8). The scarcity heuristic is the mental shortcut we do when we say, ‘this thing is rarely available, therefore it must be worth more’. Salespeople employ this to great effect as the basis for mark-down discounts, Black Friday, and the perpetual DFS sale. Scarcity can come from quantity, rarity or time. For quantity, our innate reaction to finding out there is a limited quantity of something is to believe our choice to have that something is threatened, and therefore we want it more. For rarity, we place value on items we perceive to be unique. In companies this is often played on with pro-innovation bias, where we will favour innovation over the status quo and ignore flaws in the innovation (9). Such a pitch could be ‘look at our innovative unique idea, set to change the world’. For time, the scarcity heuristic is simple; time is running out, you don’t have time to do the complex thinking, the short cut answer is to buy, buy, buy.

Crowdcube Scarcity

Seedrs Scarcity

Once again these methods are front and centre of our two chosen pitches. You have limited time left to choose (time scarcity). There’s a limited quantity of available investment (quantity scarcity), at odds with the over-funding concept. Ask yourself why the data is being presented in this way?

Denomination/ reciprocity effects/ present bias

Denomination effect is a cognitive bias in currency where people are more likely to spend an equivalent value in small denominations than in large denominations (10). I see this alot, as MrsShrink will actively avoid spending big sums, but £<10 in Tesco on tat twice a week is not an issue. You are more likely to buy multiple small crowdfunding investments than one large investment, which also fits with diversification bias, the tendency to opt for a selection which gives you options or variety in the future (11).

Crowdcube rewards

Crowdfunding sites pitch your investments in small amounts. They also offer rewards, which works on reciprocity effects and present bias. Reciprocity is responding to a positive action with a positive action, leading to positive regard from both sides (12). If the company rewards you for an investment, you are more likely to see it in a good light. You are also more likely to pick a company which rewards you for an investment due to present bias (13). This incorporates hyperbolic discounting, but essentially can be said that if we are offered £100 tomorrow or £100 in a month, we’re more likely to choose tomorrow. If we’re offered £100 tomorrow or £110 in a month, the choice will depend on the person and how much they discount the worth through time delay. As all crowdfunding investments are essential gambles set for an uncertain future, a present day reward sways our choices.

TL:DR

These are just a few of the methods that crowdfunding websites use to part us from our hard-earned. There are many, many more, and I encourage everyone to read up on behavioural finance and understand when cognitive biases may be at play. The post may come off as harsh, so know that I invested in the last month on one of these crowdfunding platforms. It’s all about doing your homework and looking beyond the sales pitch. If you can be bothered.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

Not strictly the kitchen garden, but veg boxes offer the chance to try new variety (47)

What I’m reading (affiliate links):

References:

The Half English

Unfortunately I’m away/ busy this weekend, so it’s the abridged links only.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

References:

The Full English – The Crowdfunded Bubble

Calling economic bubbles is a no-lose situation for a blogger. If you’re correct, whoop-de-do, celebrate your foresight. If you’re wrong, you’re a grumpy pessimist but no worse off. With that caveat readers may recall a couple of weeks ago, in the last Full English, I mentioned that Curve had completed crowdfunding with a pre-money valuation of £201,000,000 (1). Yes, that is the correct number of decimal spaces. It left me asking, how the hell are people valuing these companies?

Turns out I’m not alone in wondering that (2). The hard data suggests that the price paid for a percentage of the company by the crowd is far higher than private equity pays (3). For your more expensive price you get B class shares and rarely see information about the valuation in the prospectus. How did we reach this point?

In a world of low interest rates investors are looking for returns. We’ve all read Smarter Investing, we know we should be avoiding active funds that would typically partake of Venture Capital. We exist in an economic climate that favours growth over value strategies. We see success stories like Facebook, Instagram, Monzo, Brewdog, Uber. We want a slice of that growth, and there are new and exciting ways to access it (4). So we apply some cognitive biases; illusion of control and confirmation bias. We can surely pick the winners.

We look to platforms like CrowdCube, Seedrs, etc to find a way in at the ground floor of the next unicorn. Because our purchase is fuelled by optimism (and a whole lot of sales psychology), we’re willing to pay over the odds for the ground floor. This drives competition for shares and increases the valuation of the company. Basic economics. When the company lists on the stock market you get off at the penthouse suite, suddenly a millionaire. The tech IPO procession continues (5).

But that competition for a slice of the pie ignores the companies bottom line. Crowdfunding platforms are slick presentations to consumers, not like the due diligence of a traditional capital firm. The position of power is with the listing company, not the lender. This again drives up the valuation of the market.

The companies, overvalued with optimism, get valued by the market fairly and fall from their listing price. The tech companies that have gone through the IPO process are losing money (6). And people are taking notice. IPOs are being shelved, most notably the recent WeWork delay (7, 8). Traditional institutions do not want an overvalued investment, because in the long run they won’t get a return. They don’t want to see their shares costing billions of dollars through the efficient market (9). While the stock is unlisted the return and gain/loss is not realised.

This isn’t stopping profitable and strong companies going public. AirBnB continues to voice that it will soon, now setting a timeline for next year (10). However as Crowdfunding grows it will continue to offer a window into murky investments, promising a lot but with little to report. It will continue to inflate prices with optimistic opinions of growth. At some point all the optimism becomes a little too sweet, and it’ll be interesting to see if we end up in a crowdfunded private-company rerun of the dot-com crash.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

References:

The Financial Dashboard – August 2019

The goals for August were:

Plan healthy weekly dinners
Exercise at least 3x a week
Get two more blogposts out
Recheck my budgets as I change jobs and drop my income by 1/4 (gotta love the NHS)

Checking the assets and liabilities:

Assets August Liabilities August

These are taken, as always, from my Beast Budget spreadsheet. This month my net worth grew by 5.47%, the second best this year. My savings rate, not including mortgage repayment, was 34.66%, pushing my average up to 18.69%.

Goals:

Goal failed: Plan healthy weekly dinners

Getting better at this, but continuing to be away a lot has meant that having the time and space to plan out food for the week has been tricky. I had begun to rely on frozen food, so we’ve gone back to fresh, and I’ve been making big batches using the glut of veg from the garden. We continue to just about manage a split of three meat, one fish, three veggie, but lunches are often whatever I can snatch. With a job change I need to get better at organising and preparing in advance.

Goal failed: Exercise at least 3x a week

Sort of fail. I averaged exercise 3x a week, but had a week where I only managed to go twice. Keeping this on to pressurise myself into making it a strict 3x in a week.

Goal failed: Get two more blogposts out

Miserable. Even worse than July. I’m just not at home or in front of a desk with free time enough to write at the moment. The pressure will remain on.

Goal achieved: Recheck my budgets as I change jobs and drop my income by 1/4

A necessity, as I change my job in the annual Black Wednesday shuffle, when all hospitals are suddenly staffed by junior doctors asking; “What do I do?”, “Where do I go?”, and “Who am I?”. My new jobs incurs a pay cut of 1/4, as I’m working fewer unsociable hours. Looking at my budgets:

Budgets

Groceries – Budget £200, spent £299.90, last month £254.

This probably isn’t an accurate representation, as our finances are now settled enough that all food bills go through out joint account, while this was set up when we were doing food individually. Somehow I seem to have spent £135 of my own money and £250 from the joint this month, and an eye-watering £490 from the joint last month. A few £50 shops, with lots of £10-20 top ups has really bitten a chunk out of our monthly earnings. I’m going to bring the budget down from £300 to £200, notionally as £150 for the joint (£300/2) and £50 from my own. I used to survive on £20/week, so there’s plenty of fat to trim.

Entertainment – Budget £100, spent £81, last month £186.

This suffers the same problem as the groceries section, in that the budget was set pre-usage of our main joint account. This mainly goes on eating out at restaurants or activities with friends. We could do better at getting out into the countryside for free again, and we should only really eat out once a month. Going to trim this down from £150 to £100 and see how we get on.

Transport – Budget £460, spent £241.97, last month £618.29.

Looked at this relatively recently, so it’s going to remain unchanged. Will hopefully be driving less in the new job, so can save some petrol money. Really need to get back on the bike too.

Holiday – £150, spent £0, last month £103.50.

Planning something for later in the year, and putting the budget towards that in a Starling pot.

Personal – £100/ £62.99/ £30.76.

This is clothes, gifts, books, games, DVDs, trips to the barber etc. I always feel like it should be more, but I suspect a lot of stuff ends up under Misc or Groceries (supermarket clothing etc). I’m going to keep this the same.

Loans/ Credit – £0/ £152.25/ £493.30

Big changes here, as now my credit card debt is cleared I want to make it an exception if I have to use and pay off any credit card. Dropping the budget to £0, as this is what I should be aiming to be paying.

Misc – £50/ £30/ £119.35

This is my catch all for unexpected or difficult to classify things. I have empty fields in my spreadsheet capture the data. No change to this, as you always need a float

Fees – £70 /£209.75/ £-

New data. This is all my monthly fees for services; mobile phone, internet, bank account fees, life insurance, plus professional subscriptions. It’s a pretty jagged graph, as many of my professional costs fall yearly as a big sum which I’m now averaging across months as savings in another Starling pot. Nominally I’ll set a budget which incorporates all my routine monthly direct debits without the lumpy stuff. Off the back of this I went and spoke to my mobile phone provider, renegotiating my contract and reducing the monthly figure by half.

In the garden:

Full glut mode activated. Chutneys everywhere. Excess beans, melons and tomatoes. Potatoes finally harvested, sadly a bit grub-munched. Sunflowers drying for their seeds. Cucamelons tiny bursts of joy. Purple carrots adding colour to salads. Just in time for that first chill wind.

Goals for next month:

Plan healthy weekly dinners
Exercise at least 3x a week
Get two more blogposts out
Look for a skip bike to use for short local journeys
De-clutter spare room for charity shop

What’s in the pipeline: (Life continues to get in the way of blogging)

Stoicism and the finance world
Should I buy an electric car?
Q2 2019 – Green Credentials
Property Renovation Lessons Part III
Plus the usual Full English Accompaniments and other drivel…

Happy September everyone,

The Shrink

The Full English Accompaniment – Three basic money skills

What’s piqued my interest this week?

In the last Full English I wrote about P2P and included Kiva, the P2P lending platform that offers loans to those in third-world countries that need an opportunity. This prompted a comment from Weenie about my opinion on charity crowdfunding. Dave Ramsey, that financial cross between Jeremy Kyle and Frasier, talks about 3 basic money skills; spending responsibly, saving and giving (1).

Spending responsibly I’m getting a grip on. I’m wired as a spender. I can be thrifty – I don’t instinctively like to flash cash and I have a tendency to do jobs myself rather than get people in, but I like things. Tools, art, books, cars. I get satisfaction from having the right thing for the right moment. Not very minimalist, frugal or FIRE is it?

Number two, saving, I’m also getting a grip on. I now have an emergency fund and I’m paying myself first every month. I was terrible and this is an upwards slope.

Number three, giving, I’m rubbish at.

I don’t mind giving time, effort or my skills. In my head, I make this trade off for my work. I could earn a lot more abroad, in the private sector, or even in another line of work. I don’t, because I like my job and I like to help people.

I don’t like giving things. I’m shit at gifts (Mrs Shrink fully embraces this role). I don’t mind lending stuff out, but I get very grumpy if I don’t get it back promptly. I collect things, that often have sentimental value, and I struggle to extricate the emotion from the object. I am getting better at de-cluttering, giving lots of stuff to charity if I can no longer see a utility.

I’m even worse at money. This is for three main reasons:

Most of the companies which come round asking for your money as a charity are not interested in the giving either. They are businesses, and by giving you are supporting their business model. Only a fraction of what you give goes to the needy cause.
In many cases, the charity model causes more harm than good. Foreign aid to places like Africa usually comes with caveats. The expectations on behalf of the giver deprive the recipient of truly deciding the direction of need. It continues a historic power imbalance. By maintaining dependence it prevent true progress (2, 3). This dependency and strings attached approach is also present in domestic charities. Gifts to the homeless are often tied to religions. Medical research charities have a point to push and a public to please. If I’m giving my hard earned, I don’t want it attached to someone else’s agenda.
A lot of charity work does not address the underlying issues. I spend a lot of time working with people from downtrodden and despairing walks of life. I work with the homeless, addicts, abused and dying. Giving £5 in the street to a homeless person does nothing to lift them out of their situation, it just assuages your own guilt. The charities offer sticking plasters for wider problems, hiding them from society so that we don’t recognise them. Societies problems become the charities problem.

I find myself wondering if these are all ways I deflect and manage my own guilt. I am buying from and giving more to local independent charity shops recently. Peer to peer charities would seem to offer a good route through problem two and three (although problem one remains). They help communities find their own directions to overcome problems. Wikipedia’s P2P charity page suggests there are 14 operating, although only Kiva and Global Giving I’ve heard of (4). I’ve also been looking at Credit Unions, following the logical track that they, like P2P charities, encourage responsible financial decisions and support independent choice. Credit Unions are also local, and by ‘saving’ with them, you’re offering your pool of cash as a resource to those locally who need it (5). Given most banks are currently offering crap interest rates anyway, what’s to lose?

I’m not sure I’ll ever be as good as MrsShrink, who supports about five different charities each month and always buys a Big Issue if she sees a seller. Kiva and my local Credit Union perhaps offer a route for me to get better. A new personal target for the next year.

Have a great week,

The Shrink

P.S. Since setting up an email link I’ve started to receive offers of guest posts. I’m flattered, but sadly can’t accept. This blog is a window into my own internal mono/dialogue, nothing more.

Other News

Nationwide is cutting the interest rate on it’s market leading Flexplus account (6)
Which may be a sign of a wider drop in interest rates to come (7)
Especially since some easy-access accounts offer better rates than fixed term savings (8) – A real life indication of the inversion of the bond yield curve?
Just as we get a wave of panic articles about Corbyn, Brexit etc (9)
Lots in the press this week about no deal Brexit hitting house prices (10)
And the resultant negative equity (11)
More high street brands like Topshop are on life support (12)
As we head toward (are already in) a recession (13)
But that hasn’t stopped the P2P fintech bubble, as Curve reaches a crowdfunded valuation of £200,000,000 (14) – More on this next week
Nor has it stopped the PPI claims bods, who are now looking for fresh meat (15)
Meanwhile, Labour is touting an interesting right to buy scheme aimed at tenants of BTL landlords (16) – I can hear the outrage from the Daily Mail already

And finally, on Brexit, here’s a great summary of Why (17).

Opinion/ blogs:

The FT has this to say about FIRE (18) – What did you really expect?
The Atlantic has the clickbaity titled – The Next Recession Will Destroy Millenials (19)
Monevator has a guest post from Mark Meldon about consolidating pension plans (20)
And TA has updated the best buy broker table (21)
John, the UK Value Investor, has created a value investing checklist (22)
And explains why he’s selling SSE (23)
TEA has a post about minimalism (24)
ERN continues the SWR series (25)
Cashflow Cop on the grit required to FIRE (26)
The DIY Investor UK continues his ethical portfolio shift, selling Vanguard due to it’s protection of big oil from accountability (27) – Something I wasn’t aware of and food for thought
Adding ITM Power (28)
And has a mid-year review of Mid-Wynd (29)
Firevlondon shares the tools he uses to manage his money (30)
Weenie has her August report (31)
As does Dr Fire (32)
Along with Part 2 of the piece on whether a PhD is compatible with financial independence (33)
The Caveman, on living and dying (34)
The Saving Ninja has been busy living, getting married and going on honeymoon (35)
A Way to Less has their August report (36)
The Frugal Cottage has their August dividend income (37)
GFF has his August financial summary (38) – Along with a whole heap of short posts which I won’t link
The Eagle compares SIPP portfolios with his wife (39)
Sam is trying to stretch her food budget (40)
The FI Foxes ask ‘how warm should you keep your home?’ (41)
And relate how they got married for £1200 (42) – 1/10th of what we spent, putting us to shame.
Indeedably teaches a lesson in business management (43)
And on the game (44)

The kitchen garden:

What I’m reading (affiliate links):

References:

The Full English Accompaniment – Crowdfunding maturing

What’s piqued my interest this week?

Over the past few years I’ve watched the crowdfunding field grow, with various platforms and companies gradually expanding into robust and trusted investment sources. I’ve thought about trying Crowdfunding investments before, the 2011 Brewdog prospectus still sits on my old laptop, but I’ve always been dubious about the liquidity. As a student I chose to spend my cash on beer in my hand, rather than beer in a portfolio. Other bloggers did invest, and have been stuck trying to reduce their exposure and sell up (1). Due to this liquidity risk I lump all crowdfunding and P2P investments together, including all of the stock, property and loans in one big, high risk, ‘invest and don’t expect to get it back’ bucket. They’re all basically junk bond grade investments. The percentage returns on these investments supposedly account for this risk of losing your money.

I think my concerns are largely justified. If you look past the odd moment a few months ago when Seedrs stopped it’s own investment round due to it’s own rules, there’s been plenty of warning signs (2). We’ve had Lendy’s collapse, and there could be more on the way (3, 4). In response the FCA is bringing in new rules to clamp down on poor practice and protect investors (5, 6). The P2P and Crowdfunding market is maturing, less wild west. P2P and Crowdfunding is going mainstream (7, 8).

So, if everyone’s doing it, I might as well too. I decided it was time to start dipping my toe, as part of my satellite active investments. But for me this wasn’t about attempting to increase my returns with a >10% P2P loan, like the one Monevator affiliated RateSetter offer (9). This was about getting in on the ground floor, like I coudla-shoulda-wounda with BrewDog, with a small amount of throwaway money. I was tempted by a number of options: MoneyDashboard (too many competitors, unclear valuation and monetisation strategy) (10, 11); Curve (not happened yet) (12); Tickr (too many competitors, unclear valuation) (13). I became aware of the gameification of crowdfunding investment, and the methods employed to prey on the ‘fear of missing out’.

My first Crowdfunding investment went on FreeTrade. I missed out on the earlier round after the glitches meant it was closed before I could complete (14). I got in with a small, test the waters, investment sum on the June round (15). This means, like Weenie, I have free stocks to share (16). I have concerns about FreeTrade, not least the proliferation of other free trading apps, and the recent move of Robinhood into the UK (17, 18). If it goes tits up, then I put in enough to be along for the ride. Invest, forget, and definitely don’t bank on the returns. (And if you want a free share, contact me or leave me a comment!)

Have a great week,

The Shrink

Other News

Opinion/ blogs:

I have no idea which genius made it, but it was worth the creation of Monty Python for this alone. It’s perfect. #BorisJohnson #JeremyCorbyn #Brexit #BrexitShambles #SundayThoughts #SundayMotivation #SundayMorning

pic.twitter.com/XlsFL64qr2

— Brendan May (@bmay) August 18, 2019

The kitchen garden:

What I’m reading (affiliate links):

References: