Quarterly Returns – Q1 2021

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

Time seems to be passing so quickly at the moment. I’m sure COVID and restrictions have removed our mental ability to signpost time with activities and events. Through this blur we’re into Q2 of 2021, which means a bit of a financial update…

2021 Net Worth

Q1 Returns:

  • Cash Accounts £12,100 (+£100)
  • Investments £9,650 (+£1,700)
  • Property £49,000 (-£700)
  • Cars £2000 (no changes)

This quarter has mainly been steady-as-she-goes from a financial point of view. I reduced the property valuation for our home to something more conservative, which has resulted in a nominal paper loss. We’re actually up in equity, and moving to a new 5-year fixed rate at 1.69%. Slow and steady has seen my net worth rise by about £3k so far this year, a few percent. Not sure if I’ll match last years 20% rise maintaining this rate.

Investments:

I’m not going to review my goals each quarter this year other than to say I have somehow managed a mean 41.5% savings rate so far (target 35%), I’ve knocked £1.1k off my credit card (£3k to go), and I’m enjoying spending more time pottering with hobbies. Instead the Quarterly Returns will focus more on what I’m doing with investments. I’ve continued to put away £250 in cash/month, building the emergency fund further in the Principality Thank You Saver, which is a 1.4% regular saving offering for NHS workers in South Wales (1).

Rough Global Asset Allocation
Cash-Equity Split in Portfolio
Passive Core vs Active Satellite Ratio

Core/ Satellite Passive/ Active Split

Been busy in my Freetrade account this quarter (fancy a free share? Sign up to Freetrade using this link, and we both get one). January just saw further purchases into iShares MSCI EM and Vanguard FTSE All World. February was much more active. I added to previous holdings of Unilever, whom I am mainly buying as a solid, dividend paying consumer staple. I do not see Unilever going anywhere any time soon (see Warren Buffet school of thought – buying something you can forget about for 10 years and expect to still exist), and they have a very strong corporate sustainability goals which I approve of. I also bought a small amount of IQE, a South Wales computer chip firm. Their share price is volatile (++) and I’m currently down about 15% on the beer money that went in there. This was a bit of a home market bias purchase, but also a potential future growth buy as they’re in the 5G game and chip manufacturers are currently struggling to keep up with demand. There’s also massive investment into S Wales computer chip foundries by Welsh Gov, so thought I’d get some skin in.

Towards the end of Feb I sold out of DS Smith (held for about a year) at a 45% profit. That money got put back into further Vanguard FTSE All World. Around this time I was nosing around r/wallstreetbets, and jumped on the AMC/GME bandwagon, riding these meme stocks up for a 65% return. I bought a small amount of Palantir, another meme stock, again beer money. This one is at a fairly daft PE ratio, but as I dabble more in big data through work I can see the difference this will make to retail/ government/ industry in the future, and this small holding is a gamble towards that. I sold out of GME at the end of March, buying further Vanguard FTSE All World with the stake and profit. GME continues to be a casino, waiting for that lift off to the moon that may never come.

The final note is to say that this portfolio calculation does not include my CrowdCube gambles/investments. I recently had an email to say that Freetrade are offering a share sale opportunity as an institutional investor buys in. The share valuation from that sale puts my holding up about 80%. I’ll continue to hold that to see where it goes.

Happy spring everyone,

The Shrink

References:

  1. https://www.principality.co.uk/savings-accounts/everyday-savings-accounts/thank-you-online-saver

Quarterly Returns – Q4 and 2020 in review

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

So that’s 2020 done and dusted, a global annus horribilis. For some it’s seen mounting debt, for others an opportunity to save. I’ve spent a lot of time reflecting. Here’s the update.

Q4 Returns:

Net worth excluding my DB pension & student loan
  • Cash Accounts £12,000 (-£1,300)
  • Investments £7,950 (+£1,850)
  • Property £49,700 (+£1,100)
  • Cars £2000 (no changes)

This quarter we finished some major house renovations, had a tiny UK-based holiday, and spent the rest of the time locked down and hermit-like at home gorging on fancy food. House renovations sucked up some saved cash, but my net worth was boosted by my continued investment and the stock market bounce back.

As a result of the above my net worth now sits at ~£67,500. This has continued the rough progression of £20k/year increases; my end of 2018 net worth was ~£28,500, and end of 2019 was ~£49,700. Unlike previous years this increase hasn’t been smooth, and has seen decreases in some months (renovation spending, stock market falls). I’ve mean averaged a monthly net worth increase of 1.7%, combining to a year total of ~20%.

Yearly Targets:

Goal 1: Build an emergency fund

My first 2019/20 goal was to build an emergency fund, as per the r/UKpersonalfinance flow chart (1). My goal emergency fund is three months total household expenses (£6k) in my name, plus a further three months (£6k) held jointly.

I currently hold £12k in cash accounts, so by rights this goal should count as complete. I’ve learnt over the course of the year that holding cash in our joint current account is not sensible, as it tends to evaporate purchasing nice things for our house/ life. Lifestyle creep I suppose. £8,800 of my emergency fund is in my name, split about 50% premium bonds, 40% cash saver, and 10% Starling ‘pot’. The Starling emergency pot is the instant access option, with the cash saver available in 24-48 hours, and the premium bonds <5 days.

For 2021 £12k remains my emergency fund target. Our stripped back monthly household expenses run around £1,800-2,000, so £12k allows a six month buffer. I plan to make my emergency fund (almost) entirely separate from the rest of my cash accounts. This means upping a few pots to be about £6k premium bonds and £4.5k cash saver, with the rest in my Starling pot and our joint current account. I also need to get my unsecured debts back to £0. So for 2021, the goal is: Finalise emergency fund structure and pay off credit card.

Goal 2: Save 30% of my income

I calculate my savings rate using this formula:

Savings rate as % = ((Income – spend) + Cash savings + Investments + Pension contributions) / (Income + Pension contributions)

2020 Savings Rate

Despite the wobbles thanks to (a) NHS payroll and (b) house renovations, I’ve smashed my savings rate goal with an end year mean average of 34.7%. This is way above previous years (2018 15%, 2019 23.5%). I blame lockdown. In line with my plan for incremental goals, 2021 will be: Save 35% of my income.

Goal 3: Calculate savings made by growing my own food

This goal proved to be harder than expected for two main reasons. First, it’s kind of hard to work out how much you’re actually savings; it requires tabulating all your produce and then cost comparisons with supermarkets. It’s a level of spreadsheeting that I couldn’t bring myself to. My little gardening notebook goes bare when the renovations took over my time, but I kept a rough tally. I spent ~£50 on seeds (yes, a lot) over the course of the year, and grew about ~£80 worth of veggies. Second, my own apathy as a result of the first.

I’ve learnt something important from this goal. Making targets, goals and objectives for hobbies can make them a chore. Gardening, cars and blogging are all hobbies I enjoy. They’re supposed to be relaxing. If I’m trying to reach a target then it stops being something to enjoy. The Mad Fientist covered this well in his recent post “A Better Alternative to Resolutions and Goals(2). Instead I need to just make time for the process, and let outcomes result as they will. Goal 3: Make goalless time every month for hobbies.

Goal 4: Make changes to reduce carbon footprint

It feels like lockdown has enforced this on so many people. We have not flown or been abroad for holidays. My commute is a fraction of what it was. We continue to eat local produce, and we use Splosh for our household cleaning (3). If you want to give them a go use referral code YQL240THX1 to get 15% off. We use Bulb for our energy. We rarely buy new clothes, and if we do they are organic sustainable cotton or wool. We’ve been buying gifts and household items from the local zero-waste shop. Our veg/ fruit comes from either the local organic co-operative, or if from a supermarket we only buy seasonal UK stuff. Our meat comes from a fantastic butcher who only sources local, high welfare animals. We’ve reduced our meat consumption so it’s a treat, roughly now three veg, two fish, two meat/ week. Next steps will be switching to milk bottle delivery, and getting our fish delivered by the local fishmonger from UK catch. Overall, I feel like we’ve made quite a few low-hanging lifestyle changes.

From here, it’s thinking about bigger impact changes we can make. Switching to an electric car is tempting, but probably not meaningful given the tiny amount of driving we do in efficient, older cars. Installing solar panels/ ground source heat pumps etc are probably not economical until we have a larger home. Suggestions welcome.

Goal 5: Automate investments and savings

Another success from this year, automating things so I pay my Freetrade account first. My regular savers have come to an end, and as noted above, I’m pretty close to my emergency fund target. I’ve recently found out about the Principality Thank You Saver, which is a 1.4% regular saving offering for NHS workers in South Wales (4). Lovely stuff. I’ll be using that to top off my emergency funds. In my investments, I’ve mixed adding new funds/ stocks and topping up existing holdings.

Rough Global Asset Allocation
Asset Allocation in Investment Portfolios
Core to Satellite Ratio

Core/ Satellite Passive/ Active Split

I’ve basically spent this quarter topping up my iShares EM ETF and Vanguard FTSE All World holdings (fancy a free share? Sign up to Freetrade using this link, and we both get one). The YTD time-weighted rate of return is 13.44% in my Freetrade ISA, whilst my Vanguard ISA has a 23.15% absolute return. The graphics in my Freetrade account suggest my time-weighted rate of return is a couple of percentage points above VWRL, whilst maintaining a smoother progression thanks to holdings in TRIG, UKW and a couple of consumer staples. I really need to benchmark my investment spreadsheet to properly calculate this.

I continue holding some cash as a buffer. I’ve gradually realised I am actually more risk averse that I thought. I idealise that I am gung ho, and willing to YOLO on individual stonks. My behaviour pattern is quite the opposite, as although I’m holding lots of equities and DIDN’T SELL!!1!!111!, I didn’t buy cheap tech stocks, instead purchasing counter-cyclical holdings. Hindsight is 2020.

Plans for 2021:

Some changes here. I’ve been reading a lot of Slate Star Codex, and in that vein I am going to start assigning goals predictions on whether I will achieve them. I’ll also make some rough predictions with conviction percentages for the next year. I already do this in as part of my Investment Strategy Statement and in a paper diary about my personal life, so I might as well move it here, with passages redacted. This is essentially an experiment analyse my underlying bullish/ bearish traits at future predictions. Therefore, targeted goals:

  • Finalise emergency fund structure and pay off credit card – 80%
  • Save 35% of my income – 40%
  • Make goalless time every month for hobbies – 60%

Predictions.

  1. UK vaccination will be completed before the July – 75%
  2. Greater than 200,000 UK COVID deaths – 30%
  3. UK has worst death rate as percentage of the population in the world – 60%
  4. Under-reporting in developing nations hides significant pandemic effects – 90%
  5. The UK tier system is still in use in December 2021 – 60%
  6. The UK experiences another ‘lockdown’ in winter 2021/2 – 75%
  7. COVID-19 mutates into a form immune to the current vaccine – 40%
  8. I am personally working in office >80% of the time again at some point in 2021 – 10%
  9. Someone I am close to will die of COVID-19 – 25%
  10. Endemic COVID-19 circulates in the population with lockdown easing and shops re-opening – 80%
  11. … and self-isolation becomes normalised – 80%
  12. … and higher death rates tolerated among the over 50s with consistent effect on life expectancy by end 2021 – 75%
  13. Boris resigns – 60%
  14. Keir Starmer above BoJo in the opinion polls – 80%
  15. Inflation above 2% – 75%
  16. … due to Brexit-resultant shipping and food cost rises – 60%
  17. There are resultant food shortages – 10%
  18. Homeless rate rises – 95%
  19. Foodbank usage rises – 95%
  20. House prices continue to increase – 75%
  21. FTSE100 above 7,000 – 60%
  22. FTSE100 remains above 6,500 – 80%
  23. FTSE100 hits 7,500 – 20%
  24. FTSE250 hits 22,000 – 60%
  25. S&P500 hits 4,000 – 75%
  26. S&P500 hits 2,500 – 30%
  27. £ hits $1.40 – 50%
  28. We have £100k in equity – 95%
  29. We start to overpay our mortgage – 30%
  30. I have £15k invested – 30%
  31. I am saving £1k/month – 30%
  32. We have [redacted] – 90%
  33. MrsShrink [redacted] – 75%
  34. We replace one of our cars – 50%
  35. The project car gets repainted – 25%
  36. The project car gets sold – 10%
  37. We have a holiday – 80%
  38. Outside of the UK – 20%
  39. I learn another language – 30%
  40. I continue to exercise at least three times/ week for the whole year – 75%
  41. I can do a pull-up again – 40%
  42. I can do a hand-stand press up again – 20%
  43. I return to [redacted] – 10%
  44. I complete [redacted] – 25%
  45. My ongoing work has not conformed to anticipated plans – 90%
  46. I publish [redacted] – 90%
  47. I publish [redacted] – 25%
  48. I publish on average four posts/ month – 40%
  49. Most page views ever this year – 30%
  50. This blog gets abandoned – 10%

Let’s see how this bit of fun plays out.

Happy 2021 everyone. Let’s hope for a better year,

The Shrink

References:

  1. https://flowchart.ukpersonal.finance/
  2. https://www.madfientist.com/mastery-over-goals/
  3. https://www.splosh.com/how-it-works
  4. https://www.principality.co.uk/savings-accounts/everyday-savings-accounts/thank-you-online-saver

Quarterly Returns – Q3 2020

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

2020 continues to be the weirdest year in a while, so how are we faring financially?

Q3 Returns:

Net worth excluding my DB pension & student loan

  • Cash Savings Accounts £13,300 (+1,100)
  • Investments £6,100 (+£1,000)
  • Property £48,600 (+£5,700)
  • Cars £2000 (no changes)

Slow increases in my cash savings, which comes as a bit of a shock to me given the amount of spending we’ve been doing on house renovations. My investments have actually gone down slightly, with a gain over the three months of less than I’ve put in. Reasonable jump in our property equity consistent with an increase in local house prices, and this has driven the rise in my net worth.

Yearly Targets:

Goal 1: Build an emergency fund

My first 2019/20 goal was to build an emergency fund, as per the r/UKpersonalfinance flow chart (1). My goal emergency fund is three months total household expenses (£6k) in my name, plus a further three months (£6k) held jointly.

Source: https://flowchart.ukpersonal.finance/ (1)

This has steadily increased, but recent DIY and impending builders/ plumbers/ electricians fees mean that attempts to stay above £10k are unlikely. The goal remains achievable.

Goal 2: Save 30% of my income

I calculate my savings rate using this formula:

Savings rate as % = ((Income – spend) + Cash savings + Investments + Pension contributions) / (Income + Pension contributions)

YTD Savings Rate

My savings rate has been all over the place this quarter, thanks to some early/ late payment of my salary, and then a subsequent overpayment and underpayment. Wish my payroll department could sort itself out. I’m still averaging 37.17% over the year, so on track to beat my goal.

Goal 3: Calculate savings made by growing my own food

This goal has been somewhat forgotten, as I got distracted from the garden by house renovation. We have had a good glut from the harvest; toms, potatoes, courgettes, marrows, pumpkins, french beans, peas, carrots, onions and plenty of salad veg. I have failed to maintain my spreadsheet, but I have been keeping a diary of what’s grown well (or not). I’ve had great success with varieties bought from the Real Seed Company, so would recommend them for next year (2).

Goal 4: Make changes to reduce carbon footprint

I continue to work from home, we’ve only had a couple of long weekends away in the UK (so no foreign hols), we continue to eat local produce, and we use Splosh for our household cleaning (3). I’ve spoken about them before; they’re a zero waste refillable start-up, and unlike most of the eco washing stuff we’ve tried, their stuff actually works really well. We’ve found we actually save money as well, as the concentrate is strong stuff even watered down, and we use less. If you want to give it a go use referral code YQL240THX1 to get 15% off.

Goal 5: Automate investments and savings

My regular savings account and FreeTrade investment is all now automated and working nicely. A few of the savers have come to an end, and I’ve pivoted that money to pay off new credit card debt from house renovations. My final regular saver comes to an end in December, and I’ll need to have a think about the best direction for that cash. In my investments, I’ve mixed adding new funds/ stocks and topping up existing holdings.

Core/ Satellite Passive/ Active Split

After purchasing a few stocks and active funds in Q2, it was back to slow and steady drip feeds into my iShares EM ETF and Vanguard FTSE All World holdings. Both have hovered around my buy price through the quarter, and I wouldn’t be surprised to see losses. I’m currently holding a reasonable chunk in cash to deploy if necessary and as an extra buffer for the next 3-6 months. Or at least that’s the cognitive trick I play on myself to tell myself that I’m not timing the market.

Fancy a free share? Sign up to Freetrade using this link, and we both get one.

Hope everyone else (outside of lockdowns) are seeing gains,

The Shrink

References:

  1. https://flowchart.ukpersonal.finance/
  2. https://www.realseeds.co.uk/
  3. https://www.splosh.com/how-it-works

Full English Accompaniment – Embracing change

I am increasingly frustrated by state and institutional approaches to long-term planning. Working in the NHS means I’ve long known the government takes a quick fix strategy, rather than actually calculating the most effective long-term solution. I naively assumed that this would not be the case for industry, or industrial planning. Proper industrial & financial planning has worked for so many countries, surely we would look at five-ten year plans in the UK. I was wrong, and it makes me sad.

What brought this to the forefront of my thinking? Government announcements this week about strategies to help with housing. Since the 1950s there has been low levels of housebuilding in the UK, and much of the UKs property market is underutilised. What is the Governments strategy? Fanfare-laden ‘Generation Buy’, a tagline for a plan to remove the financial risk restrictions imposed after the 2008 housing bust-up (1). 95% mortgages here we come. BoJo told the Telegraph he wanted to “create a “Generation Buy” of young people enabled to engage in the world of capitalism by investing in their own home” (1). I mean the only reason they can’t invest in their own home at the moment is the disequilibrium of house price/ earnings, but much easier to create further debt and financial risk than either a) increase earnings or b) decrease house prices. Plus the tory bedrock are satisfied as their house prices continue to increase after the COVID lockdown uptick (2).

All the while the world burns. Literally in some places. You’d be forgiven for missing the massive toxic waste spill that’s occurred in Kamchatka this month (3). Huge swathes of seabed sterilised. Only coming to light after surfers come ashore blind due to chemical burns. That doesn’t matter though. Much more important things going on that deserve column space, like mineral firms potentially becoming pawns in geopolitical battles (4).

Thankfully a few people pay attention to natures warning signs. Crusty suits and stuffy politicians may be avoidant of new ideas, but the market isn’t. Plenty of investors and companies, including among the FI community, are putting funds into change. DIY Investor UK is a great example, investing in a fossil free portfolio that follows his convictions (5). Gentleman’s Family Finances documents his experiences with Abundance, a platform that enables you to invest in bond/loan-type products for sustainable projects (6, 7). Both Abundance and rival Clim8invest are currently raising money through Seedrs/CrowdCube (7, 8). Where the is interest, there is a market.

I am left with a speck of hope. People will vote with their feet, and if enough people invest or spend sustainably then progress will follow the money, not Governmental plans. Change will happen.

Have a great week,

The Shrink

N.B. This is likely to be the last Full English for some time, for NHS/ personal reasons. The UK FIRE Blog RSS tracker will remain here for your weekly fix of posts: UK FIRE Blog Feed

News:

Opinion/ Comment/ Blogs:

References:

  1. https://www.independent.co.uk/news/uk/politics/boris-johnson-generation-buy-mortgage-deposits-b754599.html
  2. https://www.theguardian.com/business/2020/oct/07/uk-mortgage-approvals-at-12-year-high-as-house-prices-keep-rising
  3. https://edition.cnn.com/2020/10/07/asia/russia-kamchatka-toxic-marine-life-death-intl/index.html
  4. https://www.telegraph.co.uk/business/2020/10/04/us-invests-british-miner-fight-chinese-control-rare-metals/
  5. http://diyinvestoruk.blogspot.com/2020/10/fossil-free-portfolio-update.html
  6. https://gentlemansfamilyfinances.wordpress.com/2020/10/05/literally-investing-in-abundance/
  7. https://www.abundanceinvestment.com/
  8. ww.telegraph.co.uk/business/2020/10/04/us-invests-british-miner-fight-chinese-control-rare-metals/
  9. https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/dgd8/ukea
  10. https://www.thisismoney.co.uk/money/saving/article-8786339/Rate-cuts-come-fast-brutal-NS-blow.html%E2%80%A8
  11. https://www.theguardian.com/business/2020/sep/27/bank-of-england-rate-setter-backs-negative-interest-rates
  12. https://www.independent.co.uk/arts-entertainment/films/news/cineworld-close-cinemas-after-no-time-die-delayed-b772792.html
  13. https://www.fca.org.uk/news/press-releases/fca-bans-sale-crypto-derivatives-retail-consumers
  14. https://www.telegraph.co.uk/money/money-makeover/money-makeover-33-nine-buy-to-lets-can-retire-40/
  15. https://www.bbc.co.uk/news/business-54370026
  16. https://www.bbc.co.uk/news/newsbeat-54432739
  17. https://finance.yahoo.com/news/achieve-financial-independence-170047857.html
  18. https://earlyretirementinuk.blogspot.com/2020/10/end-of-month-report-september-2020.html
  19. https://sparklebeeblog.wordpress.com/2020/10/01/monthly-update-sep-2020/
  20. http://quietlysaving.co.uk/2020/10/03/september-2020-plus-other-updates-2/
  21. https://firelifestyle.co.uk/2020/10/03/financial-update-19-summer-is-over-october/
  22. https://playingwithfire.uk/september-2020-big-spending-alert/
  23. https://awaytoless.com/monthly-spending-september-2020/
  24. https://www.onemillionjourney.com/savings-september-2020/
  25. https://firevlondon.com/2020/10/04/sep-2020-update-on-a-zero-month-and-on-q3/
  26. https://pathtolife2.com/2020/10/05/financial-independence-update-september-2020/
  27. https://sassenachsaving.home.blog/2020/10/05/september-net-worth-and-goals-update/
  28. https://www.moneymage.net/2020-september-savings-report/
  29. https://www.thefrugalcottage.com/dividend-income-september-2020/
  30. https://thesavingninja.com/savings-report-27/
  31. https://adotium.co.uk/2020/10/03/autumn-2020-report/
  32. https://moneygrower.co.uk/third-quarter-dividend-income-2020/
  33. https://obviousinvestor.com/p2p-lending-portfolio-update-september-1st-2020/
  34. https://southwalesfi.co.uk/2020/10/09/fees-and-fire/
  35. https://averagemoneymanagement.wordpress.com/2020/10/09/cost-vs-value/
  36. https://www.itinvestor.co.uk/2020/10/10-years-of-fundsmith-equity/
  37. https://bankeronfire.com/office-puppet-show
  38. https://indeedably.com/millionaire/
  39. https://moneybulldog.co.uk/do-you-really-need-pet-insurance/
  40. https://littlemissfire.com/how-to-get-paid-to-walk/
  41. https://lifeafterthedailygrind.com/lifestyle-inflation-how-luxuries-become-necessities/
  42. https://sassenachsaving.home.blog/2020/10/11/the-true-cost-of-having-children/
  43. http://eaglesfeartoperch.blogspot.com/2020/09/conservatory-design-build-part-3.html
  44. https://www.ukvalueinvestor.com/2020/10/best-and-worst-performing-stocks-through-the-pandemic.html/
  45. https://simplelivingsomerset.wordpress.com/2020/10/09/padawan-recency/
  46. http://fiukmoney.co.uk/21-year-old-net-worth-and-fire-plan-update-2/
  47. https://diseasecalleddebt.com/what-are-the-financial-concerns-of-relocating-for-love/
  48. https://gentlemansfamilyfinances.wordpress.com/2020/10/02/month-end-september-2020/
  49. https://gentlemansfamilyfinances.wordpress.com/2020/10/07/home-improvement/
  50. https://gentlemansfamilyfinances.wordpress.com/2020/10/09/will-covid-affect-your-future-spending-patterns/
  51. http://diyinvestoruk.blogspot.com/2020/10/ocado-portfolio-addition.html
  52. http://diyinvestoruk.blogspot.com/2020/09/ceres-power-full-year-results.html
  53. http://diyinvestoruk.blogspot.com/2020/09/green-homes-grant.html
  54. https://asimplelifewithsam.com/2020/10/01/your-future-self/
  55. https://monevator.com/the-slow-and-steady-passive-portfolio-update-q3-2020/
  56. https://monevator.com/low-cost-index-trackers/
  57. https://monevator.com/are-you-ready-to-spend-all-your-money/

The Full English Accompaniment – Wheat from chaff

I stepped away from the blog for a few weeks. Clinical work got busier, home life got busy, and I had a short break away. In that time everything and nothing has changed.

Day-to-day life continues in a sort of limbo. Never quite knowing what you’re allowed to do or not. Constant slight thrill of risk, if you’re so inclined. Constant irritation if you’re not.

The markets are still bonkers. While tech companies run rampant, the rest of the market is stagnant. The NASDAW/ S&P500 are concentrating in a small number of very valuable companies. Tesla is doing a 5:1 stock split (1). AirBnB plans to float on the stock market, along with a host of other IPOs (2). Meanwhile high street stalwarts like WHSmith are cutting staff left, right and centre (3).  The UK has seen a GDP fall of 20% for the last quarter (4). Not unexpected given furlough etc, but how many of those jobs will come back? Furlough is coming to an end and the Gov can’t keep footing the GDP bill, even if it does foot your cheeky Nando’s bill (5). I’ve finished reading The Intelligent Investor, and Jason Zweig’s comments on the dot-com crash relating to tech IPOs ring prophetic.

Image Credit: A person on reddit (6)

Doom, doom, the end is nigh!

Always an easy call to make. This was a reckoning of our own making.

As a fellow member of the UK Finance community put it, the UK Government made a Faustian bargain, trading low unemployment numbers for zero-hours contracts and underemployment of the individual. UK productivity has been crap for years. In the last decade it’s been the worst since the industrial revolution, and it continues to fall (7, 8). Output per hour fell dramatically during the last quarter, and not just due to furlough (9). There’s been talk for the last decade of the benefits of improving productivity, but no clear routes to that goal (10).

The growth of the last decade has been bought through cheaper tech, offshoring, zero-hours contracts and credit. Zombie companies have continued to function thanks to cheap credit. MrsShrink works for one. They were told if the site shut down with COVID-19 it would not return, so they worked through and went cap in hand to investors. Now if I was one of those CEOs, and I had staff on furlough with low productivity, I would be very tempted to use the end of the furlough scheme as a way to cut the dross. The move to homeworking has shown who was really working in the office. It’s also a hell of a way for companies to cut overheads. Giants like BP are talking about slashing their real estate bill (11). I would not want to be in REITs.

Likewise, if I was an investor in one of these zombie companies I would be quite tempted to let it go to the wall. Ploughing millions into a staid institution with minimal innovation into changing markets? Sorry Debenhams, House of Fraser, WHSmith (though their airport/ hospital/ petrol station arms are doing a killing), etc.

Households have been able to buy new cars and new furniture due to cheap credit. Shares rose on Wall Street last week as the Fed said it will tolerate higher inflation (12). I’ve said before that inflation is probably the way out of the insane COVID government debt, but it’s not good for consumer credit. Higher inflation means higher interest rates. Amigo and other sub-prime lenders are sounding warnings due to the COVID payment holidays (13). Banks are setting aside massive sums to cover projected bad debt (14). The UK Government is mooting removal of the triple lock on pensions (15). Warning signs of increases in interest rates in the medium term.

So we may lose the zombie companies, the unproductive companies, and the unproductive individuals at companies. It probably won’t make much of a dent in tax receipts. The companies are unproductive, and the top 1% of UK earners account for a >1/3rd of income tax (16, 17). The death of bloated companies leaves markets for lean new ones. There’s the potential for a big boom in new industries (18). Maybe this is what the stock market is pricing in. Ultimately it feels like we’re on the precipice of a period of great financial change, after a couple of decades of stability. That change will bring opportunity, but also plenty of downsides. Exciting times.

The Shrink

News:

Opinion/ Blogs:

There’s been too many UK finance blogposts in the past month for me to condense them all here. My RSS feed for UK finance bloggers can be found here.

References:

  1. https://www.barrons.com/articles/tesla-stock-split-today-what-to-expect-51598620837
  2. https://www.thisismoney.co.uk/money/markets/article-8648013/Airbnb-pressing-ahead-floating-stock-market.html
  3. https://www.bbc.co.uk/news/business-53661767
  4. https://www.theguardian.com/business/2020/aug/12/uk-economy-covid-19-plunges-into-deepest-slump-in-history
  5. https://www.bbc.co.uk/news/business-53675467
  6. https://i.redd.it/zj5u6myjmnh51.gif
  7. https://www.theguardian.com/business/2020/feb/03/uk-productivity-slowdown-worst-since-industrial-revolution-study
  8. https://www.bbc.co.uk/news/business-49971853
  9. https://tradingeconomics.com/united-kingdom/productivity
  10. https://www.cityam.com/tackling-uk-productivity-crisis-could-yield-83bn-a-year-for-economy-says-pwc/
  11. https://www.theguardian.com/business/2020/aug/12/bp-mulls-radical-reduction-of-office-space-in-move-to-flexible-working
  12. https://www.theguardian.com/business/2020/aug/27/wall-street-shares-rise-after-fed-announces-soft-approach-to-inflation
  13. https://www.theguardian.com/money/2020/aug/28/lender-amigo-profits-dive-as-covid-payment-holidays-extended
  14. https://news.efinancialcareers.com/uk-en/3004265/writedowns-banks-covid-19
  15. http://www.thisismoney.co.uk/money/pensions/article-8666859/amp/Triple-lock-guarantee-state-pension-increases-curbed.html
  16. https://www.ifs.org.uk/election/2019/article/how-high-are-our-taxes-and-where-does-the-money-come-from
  17. https://www.theguardian.com/business/2019/nov/13/richest-britain-income-tax-revenues-institute-fiscal-studies
  18. https://www.cnbc.com/2020/08/12/depression-backdrop-will-spark-a-wartime-boom-market-bull-jim-paulsen.html
  19. https://www.bbc.co.uk/news/av/business-53534922/why-stock-markets-are-defying-a-shrinking-economy
  20. https://www.bloomberg.com/news/articles/2020-08-03/boe-avoids-repeat-of-2008-schism-for-now-even-as-split-widens
  21. https://www.bloomberg.com/news/articles/2020-08-06/goldman-says-time-to-think-about-a-shift-in-market-leadership
  22. https://www.cnbc.com/2020/08/05/nikolas-entire-quarterly-revenue-of-36000-was-from-solar-installation-for-the-executive-chairman.html
  23. https://www.theguardian.com/uk-news/2020/aug/12/dr-martens-repays-uk-furlough-cash-after-strong-lockdown-sales
  24. https://www.theguardian.com/technology/2020/aug/14/partys-over-airbnb-restricts-under-25s-in-uk-france-and-spain
  25. https://i.redd.it/jskjkodg3se51.png
  26. https://www.bbc.co.uk/news/business-53781515
  27. https://www.reddit.com/r/wallstreetbets/comments/i1u3rm/the_dollar_standard_and_how_the_fed_itself
  28. https://www.reddit.com/r/UKPersonalFinance/comments/i42of0/anyone_else_having_major_issues_with_premium
  29. https://www.businessinsider.com/personal-finance/obsessed-with-fire-movement-wasnt-right-for-me-2020-8?r=US&IR=T
  30. https://www.thisismoney.co.uk/money/investing/article-8651885/Baillie-Giffords-Scottish-Mortgage-Investment-Trust-soars.html
  31. http://www.scmp.com/comment/opinion/article/3099052/beware-us-china-technology-war-about-burst-tech-bubble
  32. https://www.thisismoney.co.uk/money/investing/article-8675409/Why-Buffetts-investment-philosophy-cause-celebrate.html

The Full English – Tesla doesn’t need advertising

I covered Tesla’s share price last week briefly. This week I will continue to be a fanboi, demonstrating exactly the point of my title. I’ve been idly browsing electric cars on the usual motor sites, and I’m now bombarded with adverts for the Renault Zoe, Honda electric thing (I signed up for the mailing list for that to be fair), and the VW E-Up (Yorkshire accent engaged). No Tesla adverts though. They just don’t need them.

For one, they’ve got Musk, who is a law unto himself. My considered view is that he is a maverick genius, gifted of the unique talents required to truly become a world-leader; self-belief, intelligence and funds. I think his self-belief, once confidence and always bordering on arrogance now oscillates into narcissism. He has got too high on his own supply, spent too much time reading his own hype. That does not stop him being successful.

Nor does it stop him leading a company in a disruptive direction. Which leads to hype, interest in the media, and first-mover advantage. Musk and Tesla generate their own hype by moving in ways the rest of the auto industry do not, and continuing to do so. There are parallels with Steve Jobs in the Ipod and Iphone era. There’s been a swathe of copy written this week trying to justify or make sense of this for the old guard. Arguments that Tesla is still undervalued (1), that it represents the start of a new era (2). Tesla is true capitalism at work, identification of a new disruptive direction and completely shifting the commercial conversation in that direction; to use quasi-management speak (3). People believe the hype generated. They buy the hype, in equity form and in material motors. Tesla’s profitable (4). But does that hype justify it’s inclusion in the S&P 500 and a greater valuation than Toyota. That is pure speculation and gambling.

If you fancy a shot at a free Tesla share, sign up to Freetrade with this link,

The Fire Shrink
News:

Blogs/ Opinion:

References:

  1. https://www.investmentweek.co.uk/news/4018198/value-remarkable-tesla-underappreciated-markets-fund-managers
  2. https://uk.reuters.com/article/us-autos-tesla-newera-insight/how-tesla-defined-a-new-era-for-the-global-auto-industry-idUKKCN24N0GB
  3. https://unherd.com/thepost/is-tesla-all-that-remains-of-real-capitalism/
  4. https://www.theguardian.com/technology/2020/jul/22/tesla-profit-shares-fourth-quarter
  5. https://www.wsj.com/articles/everyones-a-day-trader-now-11595649609
  6. https://www.bbc.co.uk/news/business-53201204
  7. https://www.theguardian.com/business/2020/jul/21/robinhood-cancels-uk-launch-of-its-investment-app
  8. https://www.cnbc.com/2020/07/24/zooms-marketing-chief-on-the-companys-rise-through-the-pandemic.html
  9. https://www.bbc.co.uk/news/business-53528653
  10. https://awealthofcommonsense.com/2020/07/generational-wealth-inequality/
  11. https://medfiblog.wordpress.com/2020/07/24/pay-rise-half-truths/
  12. http://quietlysaving.co.uk/2020/07/20/lockdown-dogs-of-the-ftse/
  13. https://firevlondon.com/2020/07/20/what-has-lockdown-done-to-my-finances/
  14. https://drfire.co.uk/lockdown-impact-on-finances/
  15. https://indeedably.com/pandemonium/
  16. http://diyinvestoruk.blogspot.com/2020/07/the-carbon-budget-introduction.html
  17. https://www.ukvalueinvestor.com/2020/07/ftse100-sp500-cape-ratio.html/
  18. https://thesavingninja.com/employee-share-scheme-which-option-to-take/
  19. https://tuppennysfireplace.com/how-to-save-money-without-a-budget/
  20. https://playingwithfire.uk/air-bnb-diaries-side-hustle-or-not/
  21. https://www.crackingretirement.com/retirement-isnt-static/
  22. https://earlyretirementinuk.blogspot.com/2020/07/life-in-times-of-cholera-just-kidding.html
  23. https://www.foxymonkey.com/jobs-vs-robots/
  24. https://moneygrower.co.uk/robinhood-cancels-uk-launch-similar-app/
  25. https://thefifox.wordpress.com/2020/07/21/how-much-money-should-you-have-in-your-savings/
  26. https://lifeafterthedailygrind.com/the-ikea-effect-why-diy-brings-happiness/
  27. https://www.itinvestor.co.uk/2020/07/debt-investment-trusts-for-the-brave-only/
  28. http://bankeronfire.com/zeroing-in-on-your-workplace-pension-returns
  29. https://www.mouthymoney.co.uk/how-my-simple-thumbprint-trick-can-stop-you-becoming-a-victim-of-identity-fraud/
  30. https://monevator.com/cash-versus-bonds/
  31. https://monevator.com/weekend-reading-just-the-links-maam-4/
  32. https://www.moneymage.net/7-thoughts-low-cost-living/
  33. https://www.finumus.com/blog/how-to-sell-a-house
  34. https://gentlemansfamilyfinances.wordpress.com/2020/07/25/more-agony-of-woodford-investors/
  35. https://gentlemansfamilyfinances.wordpress.com/2020/07/22/stamp-duty-cut-property-frenzy/
  36. https://youngmoneyblog.co.uk/here-are-5-apps-to-upgrade-your-post-lockdown-finances-spon/

Quarterly Returns – Q2 2020

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

A quarter of lockdown, three months blur of work, DIY and our own four walls. Did we save well?

Q2 Returns:

July Net Worth

Net worth excluding my DB pension & student loan

  • Cash Savings Accounts £12,200 (+1,900)
  • Investments £5,100 (+£,1900)
  • Property £42,900 (+£1,300)
  • Cars £2000 (no changes)

Gradual increases across the board. My net worth excluding my NHS pension continues to climb, though I expect a plateau over the next few months with property renovation spending.

Yearly Targets:

Goal 1: Build an emergency fund

My first 2019/20 goal was to build an emergency fund, as per the r/UKpersonalfinance flow chart (1). My goal emergency fund is three months total household expenses (£6k) in my name, plus a further three months (£6k) held jointly.

This has steadily increased, but recent DIY and impending builders/ plumbers/ electricians fees mean that attempts to stay above £10k are unlikely. The goal remains achievable.

Goal 2: Save 30% of my income

I calculate my savings rate using this formula:

Savings rate as % = ((Income – spend) + Cash savings + Investments + Pension contributions) / (Income + Pension contributions)

Savings rate July

YTD Savings Rate

Lockdown has pushed my savings rate up, to a best ever rate of 57% in May. This has now dropped back, but my year average to date is still 40%, well above my target.

Goal 3: Calculate savings made by growing my own food

So I started my garden notebook at the start of the year, charting what I’d sown, what grew well and didn’t, and spending/ returns. As things were sown in Q1 it was all expenses, but now I’m starting to get some growth and profit! The first tomatoes, potatoes, lettuces and other salads have been harvested. I’m estimating about £20 worth of home-grown produce consumed so far, so still negative on my £30 of seeds. Roll on the harvest, and a spreadsheet of produce.

Goal 4: Make changes to reduce carbon footprint

Working from home to an extent, no foreign travel, no major new purchases means our carbon footprint should be well down on last year. We continue to eat local produce, and use Splosh (2). They’re a zero waste refillable start-up, and unlike most of the eco washing stuff we’ve tried, their stuff actually works really well. You order a starter pack which includes refillable plastic bottles, and then they send you the concentrated product which you mix in the bottle. When the concentrate is done you send it back to them and they recycle it, or some of them are compostable. After several months of using their stuff I’ve found we actually use less than we would if it was shop bought, so it ends up cheaper. If you want to give it a go use referral code YQL240THX1 to get 15% off.

Goal 5: Automate investments and savings

I’ve automated my FreeTrade investment and building society regular saver this quarter. The bounce back in the markets means I’m currently sat at total absolute return across my investments of 7.62%. Note this is absolute figure for what has my invested figure returned, without inclusion of time/ rate of return. No XIRRs here. Good returns for my ex-UK Dev World holdings have been handicapped by purchases at the start of the year of Emerging Markets and Global All-Cap, fairly near high water marks. Those are only now back in the green.

ActivePassive

Core/ Satellite Passive/ Active Split

At the start of the Quarter I bought further into Vanguards ex-UK Dev World, pretty close to the bottom of the dip. That small purchase is up 22%. In my FreeTrade account I bought Greencoat UK Wind (UKW) and The Renewables Infrastructure Group (TRIG). This brings me closer to my 80/20 passive/active split. My active investment choices have several purposes. UKW and TRIG are both in there to provide long-term stability (particularly present in my thoughts at the time of purchase), diversification and potential dividends. They’re also part of an attempt to purchase and invest my money sustainably. I won’t go into the fund particulars in detail, as both DIY Investor UK and GFF cover UKW (3, 4), whilst DIY Investor UK has covered TRIG a fair bit (5, 6). Both holdings were purchased at a premium, and they continue to run ~109% price/NAV. I still need to integrate my crowdfunding investments into my portfolio spreadsheet, along with tidying up my global allocation data. For now I’m holding a bit of cash spare in case of another crash, and will continue to drip feed every month in an automated way.

Fancy a free share? Sign up to Freetrade using this link, and we both get one.

Hope everyone else is seeing bounce back bonuses,

The Shrink

References:

  1. https://www.reddit.com/r/UKPersonalFinance/
  2. https://www.splosh.com/how-it-works
  3. http://diyinvestoruk.blogspot.com/2019/07/greencoat-uk-wind-portfolio-addition.html
  4. https://gentlemansfamilyfinances.com/2019/05/17/green-money-greencoat-uk-wind-share-offer-may-2019/
  5. http://diyinvestoruk.blogspot.com/2019/02/renewables-infrastructure-new-addition.html
  6. http://diyinvestoruk.blogspot.com/2020/02/trig-full-year-results.html

The Full English Accompaniment – Uncoupled from earnings expectations

I wish I had bought into Tesla in March. So does everyone who didn’t. Well… most people. From a low of $361, it’s now up around $1,500. I seriously considered it, but stuck to my portfolio plans, and have now missed out. Meteoric doesn’t quite cover it.

Tesla

Image Courtesy of Google Market Summary

So I missed out, and I’m disgruntled. Fear Of Missing Out, FOMO, has been cited as a major reason for moves in the Nasdaq over the past few months. Entitled millennial’s wanting to not miss the bandwagon with their US stimulus cheques, so the trope goes. There’s a nice piece in this week’s Wall Street Journal (1), demonstrating that FOMO ain’t a new thing. From the tulips to the South Sea Bubble, most generations will get a little FOMO. We tell ourselves we’re intelligent investors, and we won’t get caught up in this hype.

Instead, we will try to intellectualise a position. Tesla does make sense in our head, as well as our gut, because reasons. It justifies a $300 billion dollar valuation, the greatest of all automotive manufacturers, at >60 times it’s earnings, because reasons (2). It’s beating sales expectations, and expanding it’s factories (2). It’s piggy-backing a rise in Chinese EVs, following a move in China towards a predominantly electric vehicle market (3). We must be right, as (confirmation bias) Piper Sandler, a proper legit firm, reckons that Tesla is worth $2,322 (4). We can make it make sense.

Last week I mentioned the TQQQ in my news. For the uninformed, the Invesco QQQ (ticker: QQQ) is an ETF that tracks the Nasdaq 100 index (5). It’s done very well with the rise of tech, thank you very much. TQQQ is a Powershares ETF triple-leveraged QQQ, just in case your risk tolerance wasn’t sated. The QQQs and the Nasdaq are again interesting this week, as following their colossal climb, we’ve seen a short, sharp drop. The options market is looking pretty negative. Valuations have been climbing, creating larger and larger multiples on the price/earnings outlooks. As the earnings come home to roost, there’s bets that the valuations are too high (6).

So, on the one hand, FOMO and other psychological biases and influences are pushing certain stocks higher. On the other, people are betting against these biases continuing, and reality (whatever that is), asserting itself on stock market prices based on valuations.

The Gestalt Market

This is basically the core philosophy of the Efficient Market Hypothesis (7).

“…asset prices reflect all available information. A direct implication is that it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.” (7)

Either some of the people amongst those on the bandwagon know something the others don’t, and the out-sized pricing is justified, or they don’t, there’s no info, and market forces will re-assert themselves via a fall in price.

This theorem has plenty of criticism laid on it, by lots of big names. It doesn’t account for behavioural psychology. It doesn’t account for the various anomalies caused by small neglected stocks, or bubbles. The claims of Paul Samuelson, that the market is “micro efficient”, not “macro efficient”.

As I’ve been slogging my way through The Intelligent Investor, a comment from Benjamin Graham has laid this bare:

“Corporate accounting is often tricky; security analysis can be complicated; stock valuations are really dependable only in exceptional cases.” (8)

If corporate accounting in the ’70s, when Ben Graham wrote, was “tricky”, corporate accounting in 2020 is downright shady. My mate is effectively the CFO of a moderate SME. He’s an honest man. He’s spent the last three years tearing his greying hair out as he uncovers deeper and deeper accounting errors by his predecessor and relays them to the owner. How many companies out there are sitting on mis-carried noughts and odd write-downs? This is stuff the market cannot know.

Instead I find myself thinking of the market as the sum of all knowledge and cognitive biases. The sum of wisdom and collective financial thought. Not just knowledge, but also hunches, gambles either way, suspicions and beliefs. You can gamble for or against Tesla or TQQQ. There is likely to be someone out there doing the opposite. Given money and investment follows interest, science imitates and replicates art, we end up at the sum total of belief. We may like to intellectualise and make the company financial data (the science!) echo or challenge the news, but ultimately that is our own bias. The gestalt market doesn’t care. Your beliefs are gristle to it’s mill.

Have a great week,

The Fire Shrink

Fancy a free share? Sign up to Freetrade using this link, and we both get one.

News:

Blogs/ Opinion:

References:

  1. https://www.wsj.com/articles/from-1720-to-tesla-fomo-never-sleeps-11594994422
  2. https://www.theguardian.com/technology/2020/jul/18/tesla-valuation-elon-musk-profit
  3. https://www.forbes.com/sites/michaeltaylor/2020/07/16/tesla-inc-share-price-boom-might-not-be-all-it-appears-to-be/#478ac7272a28
  4. https://markets.businessinsider.com/news/stocks/tesla-stock-price-street-high-target-piper-sandler-raise-musk-2020-7-1029393184
  5. https://www.investopedia.com/ask/answers/061715/what-qqq-etf.asp
  6. https://seekingalpha.com/article/4358915-qqq-selling-may-only-begun
  7. https://en.wikipedia.org/wiki/Efficient-market_hypothesis
  8. Benjamin Graham. The Intelligent Investor (Revised Edition). 2003. Chapter 12, page 318.
  9. https://www.eurekalert.org/pub_releases/2020-07/p-epr070220.php
  10. https://www.bbc.co.uk/news/health-53392148
  11. https://www.thisismoney.co.uk/money/news/article-8535085/230bn-commercial-property-crash-Treasury-watchdog-sounds-alarm.html
  12. https://www.bbc.co.uk/news/business-53400721
  13. https://www.thisismoney.co.uk/money/pensions/article-8530101/Government-faces-17bn-bill-fix-age-discrimination-pension-blunder.html
  14. https://www.forbes.com/sites/soonyu/2020/07/14/how-one-fintech-unicorn-became-a-fashion-destination/
  15. https://www.forbes.com/sites/nathanlewis/2020/07/10/modern-monetary-theory-goes-mainstream/#5fdf246621e5
  16. https://www.theguardian.com/food/2020/jul/14/nespresso-coffee-capsule-pods-branding-clooney-nestle-recycling-environment
  17. https://southwalesfi.co.uk/2020/07/17/5-tips-to-f-i-r-e/
  18. https://igniting-fire.com/2020/07/17/why-you-need-a-raspberry-pi/
  19. https://gentlemansfamilyfinances.wordpress.com/2020/07/17/2-year-blogging-anniversary-and-38th-birthday/
  20. https://monevator.com/find-the-best-online-broker/
  21. https://monevator.com/weekend-reading-is-cash-kaput-post-covid-19/
  22. http://eaglesfeartoperch.blogspot.com/2020/07/garden-update-summer-2020-six-on.html
  23. http://bankeronfire.com/the-low-effort-high-impact-way-to-do-well-at-work
  24. http://diyinvestoruk.blogspot.com/2020/07/personal-assets-trust-full-year-results.html
  25. https://theescapeartist.me/2020/07/19/every-time-you-see-a-small-business-someone-made-a-brave-decision/
  26. https://asimplelifewithsam.com/2020/07/19/june-review/
  27. https://sassenachsaving.home.blog/2020/07/13/june-2020-net-worth/
  28. https://www.thefrugalcottage.com/30-frugal-living-tips-that-will-save-you-thousands/
  29. https://www.moneymage.net/5-reasons-childfree-and-happy/
  30. https://playingwithfire.uk/covid-19-in-the-uk-its-still-an-emergency/
  31. https://theenglishinvestor.com/and-the-english-investor-is-back/
  32. http://www.cantswingacat.co.uk/2020/07/16/neverspoons-boycotting-wetherspoons/
  33. https://thefifox.wordpress.com/2020/07/16/fail-to-plan-plan-to-fail/
  34. https://www.itinvestor.co.uk/2020/07/mello-virtual-welcome-to-the-new-age/
  35. https://earlyretirementnow.com/2020/07/15/when-can-we-stop-worrying-about-sequence-risk-swr-series-part-38/
  36. https://www.finumus.com/blog/bye-to-let-its-not-1994-any-more
  37. https://indeedably.com/deliberate/

The Full English Accompaniment – Gamble your COVID days away

Opinion: We’re in a stock market bubble driven by bored amateur traders (speculators)

The market has come a long way since mid-March.

We’re now almost back to post COVID-crash valuations. Some of my investments are actually higher than they were then. Yet our economic situation, though now clearer, are no less dire.

Why?

COVID-19 is not as terrible for the global economy as the markets thought?

QE and other government/ central bank policies have propped things up?

Tech companies are making bank?

Perhaps some of this.

There’s a lot of news and opinion calling the current climb the ‘FOMO rally’. Driven by people who saw others ‘buying the dip’ and don’t want to miss out. Novice investors testing the ‘buy low- sell high’ off the back of the March fall (1). Some of that is new users of trading apps and platforms. Freetrade hit 100,000 users in February (2). By their latest crowdfunding raise they had reached 150,000 (3). Small fry compared to Robinhood’s 13 million active users (4).

Image Credit: /u/theycallmeryan (5)

I have skin in the game with Freetrade, having invested in their crowdfunding and using them for my ISA. If you would like a free share for signing up, drop me an email.

The number of trades per day is shooting up. Small traders, for the first time since 2000, have made more than 50% of the daily trades (6).

Image Credit: /u/theycallmeryan (5)

Some of that money is going into funny places. As bond yields fall people are investing in riskier corporate bonds, (1, 7). Robinhood users are making interesting plays and swapping more. They piled into Hertz (the car rental company) after it declared bankruptcy, sending the stock market sky high (1, 4, 8). See also JC Penney. These weren’t long term purchases to hold. This was pure speculation on the price rising during bankruptcy proceedings, as many economic authors in classic tomes describe.

Image source: (8)

And as people are sat at home, furloughed or out of work, with no sport to watch or bet on, they’re turning their amateur hands to the markets. The number of searches for ‘how to trade options’ has shot up:

Image Credit: /u/theycallmeryan (5)

And the number of small time traders buying options is climbing (6). As a result of delta hedging the price of the underlying securities of the options traded rises (5).

This has the effect of uncoupling market valuations from underlying stock value; the speculative options are irrelevant of value, and as others buy stocks as a hedge against the risk introduced by the speculation the stocks themselves become separate from the value. To make this picture even more complicated, the Fed’s policy of QE this time has also included corporate bond ETFs right the way down to junk bonds, offering direct loans to risky companies, buying dodgy mortgage-backed securities, and buying the debt of the riskiest companies (5, 9). The QE methods taken by international central banks have basically eliminated risk from the equation by supporting those companies which should have bankrupted, in an effort to stop a depression.

This drops interest rates. It drives people to take more risk for returns. The risk averse pay down debt, which explains the falls in consumer credit debt we’re seeing.

Debt is very cheap, and cashflows are uncertain due to Coronavirus, making the Discounted Cash Flow Model and underlying values difficult to calculate (10).

The Buffett indicator; composite market value of the market compared to GDP, is currently back at dotcom levels. Then they were 71%, now they’re 74%, where >30% is overvalued.

So things are likely to remain rocky for a while.

The sensible course of action remains to ignore the movements, and bet on the gradual returns. Drip feed and dollar-cost average.

We live in interesting times.

Have a great week,

The Shrink

N.B. I aim to keep this blog apolitical. Some issues transcend politics. I share my voice as an ally. Black Lives Matter.

News:

Comment:

References:

  1. https://www.marketwatch.com/story/heres-how-investors-think-fomo-could-power-fresh-gains-in-the-stock-market-2020-06-13
  2. https://blog.freetrade.io/there-are-now-100-000-freetraders-c12a27ee2843
  3. https://freetrade.io/crowdfunding-2020
  4. https://www.techradar.com/news/robinhood-growth-is-floating-the-stock-market-despite-pandemic
  5. https://new.reddit.com/r/wallstreetbets/comments/h0ytcy/the_liquidity_trap_how_qe_and_low_rates_might_be/
  6. https://www.bloomberg.com/news/articles/2020-06-09/speculative-fervor-in-u-s-stocks-surges-to-stunning-levels
  7. https://www.cnbc.com/2020/06/11/treasury-yields-fall-after-gloomy-fed-outlook.html
  8. https://uk.reuters.com/article/uk-global-markets-themes-graphic/take-five-pump-it-up-idUKKBN23J1RC
  9. https://www.theguardian.com/business/2020/jun/10/its-not-capitalism-why-are-global-financial-markets-zooming-up
  10. https://new.reddit.com/r/wallstreetbets/comments/gynyi8/dddd_equity_valuations_and_why_they_no_longer/
  11. https://www.bbc.co.uk/news/science-environment-52973089
  12. https://www.theguardian.com/business/2020/jun/10/uk-economy-likely-to-suffer-worst-covid-19-damage-says-oecd
  13. https://www.bbc.co.uk/news/business-52977098
  14. https://www.bbc.co.uk/news/business-53005454
  15. https://moneyweek.com/economy/inflation/601481/ten-reasons-inflation-could-be-set-to-return
  16. https://www.wsj.com/articles/vanguards-new-robo-service-offers-low-cost-financial-and-retirement-advice-11591873200
  17. https://www.theguardian.com/money/2020/jun/13/ethical-investments-are-outperforming-traditional-funds
  18. https://www.independent.co.uk/life-style/motoring/boris-johnson-driving-electric-car-scrappage-scheme-2020-a9558361.html
  19. https://earlyretirementnow.com/2020/06/10/passive-income-through-option-writing-part-4/
  20. https://www.moneyforthemoderngirl.org/black-lives-matter-power-control-and-money/
  21. https://indeedably.com/complicit/
  22. https://cashflowcop.com/policing-without-consent/
  23. http://quietlysaving.co.uk/2020/06/08/goodbye-dogs-2019/
  24. https://theescapeartist.me/2020/06/09/its-in-the-price-the-stockmarket-has-already-taken-that-stupid-internet-article-into-account/
  25. https://thesavingninja.com/the-fire-movement-wasnt-for-me/
  26. https://gentlemansfamilyfinances.wordpress.com/2020/06/13/were-not-going-on-a-summer-holiday/
  27. https://hustleescape.com/open-plan-offices/
  28. https://monethalia.com/matched-betting-with-multiple-accounts/
  29. https://www.moneymage.net/what-is-a-pension/
  30. https://playingwithfire.uk/how-to-not-lose-friends-and-alienate-people-with-fire/
  31. https://sparklebeeblog.wordpress.com/2020/06/12/the-world-of-work/
  32. https://www.firemusings.org/the-memories-in-photos/
  33. http://fiukmoney.co.uk/21-year-old-net-worth-and-fire-plan-update/
  34. https://www.muchmorewithless.co.uk/grow-your-own-veg/
  35. https://moneygrower.co.uk/using-furlough-to-practice-being-fired/
  36. https://simplelivingsomerset.wordpress.com/2020/06/12/a-walk-on-the-wild-side/
  37. https://www.ukvalueinvestor.com/2020/06/dividend-growth-rate.html/
  38. https://monevator.com/new-account-how-to-make-money-in-shares/
  39. https://southwalesfi.co.uk/2020/06/13/learn-from-my-f-i-r-e-mistakes/
  40. http://diyinvestoruk.blogspot.com/2020/06/nibe-industrier-portfolio-addition.html
  41. http://bankeronfire.com/how-people-get-rich-with-real-estate
  42. http://bankeronfire.com/reach-financial-independence-faster

The Full English Accompaniment – Cold turkey interest rates

A few weeks back I considered the deflationary risk weighing on the global economy. A discussion on the This Is Money podcast, and comments from the BoE have taken me in the other direction this week. Why would we end up with high inflation and high interest rates?

First we need to talk about debt. Consumer debt has actually seen a record fall since the start of Coronavirus, something to do with not being able to spend and no need to keep up with the Jones’ (1). The same can’t be said for Government debt. As I write this The Economist’s Global Debt Clock is rising through $61,594,467,000,000 (2). This was a problem before COVID-19. 2019 saw record global debt to GDP ratios (322%), following slight falls in 2017 and 2018 (3, 4). China’s ballooning debt was of particular concern, with plenty of tenuous business loans supporting growth (4, 5).

The word addiction had been bandied about with reference to debt. Below is a favourite short that I use to explain addiction when doing teaching sessions about the dangers of gambling and drugs. You come to rely on the object of abuse to feel normal. Credit cards and lifestyle anyone?

Credit: Andreas Hykade, Filmbilder & Friends (6)

The reasons for increasing debt woes are country specific. In Europe and the US it’s a combination of household spending, QE and zombie companies. There’s the massive junk bond bubble scare brewing; corporations kept going in 2008/9 through borrowed money now being refinanced, on the verge of reaching junk bond status, at the same time low yields push people to riskier bonds in aid of returns (7, 8, 9). Yet people keep buying bonds (10). China is just straight up building infrastructure projects that are getting abandoned or never used, while Japan can’t get it’s GDP to grow (11). Individual investors continue to seek returns. Interest rates on savings are minimal, with decent returns disappearing (12, 13). Bizarre investment structures, like this Buy-to-Let-Cars scheme, hoover up those desperate for income on their holdings (14).

And then there’s COVID-19. The Government were very happy to deny a massive money tree for the NHS/ social care. Then they’ve opened their metaphorical chequebook and are handing round a whole forest of blank cheques. Which is needed. But the cost could be £298 billion in debt for Apr 2020/21 alone (15). Analysis from the Resolution Foundation suggests that currently £80 billion has been raised with no deterioration in cover ratio (16). Predictions therein suggest a further extension to QE in June (16).

Image Credit: Resolution Foundation (16)

So we’ve got a mounting pile of government debt as we borrow our way out of trouble. Low, or even negative interest rates are helpful for the Gov here. Favourable to continue borrowing. As TA at Monevator covered this week, we’re seeing some negative UK bond yields (17). The noise from the BoE is that proper negative interest rates are unlikely, but not impossible (18). Certainly there’s no push towards an interest rate rise (19).

Why should there be. Inflation sits at 0.8% for April 2020,(20) well below the BoE’s goal 2.0%. We’re worryingly close to stagflation; rising prices due to rising demand with static growth (21). There’s an argument that there’s a lot of pent up demand due to lockdown, with limited supply also thanks to lockdown. The QE money creation rears it’s head.  Deflation is a feedback loop international governments definitely do not want (22). It will only increase their debts.

The magic bullet

So what about inflation. Measures of inflation like the CPI may not have spiked since the 2008/9 financial crisis because Joe Bloggs in his northern terrace has practically seen little inflation of prices. Consumer goods have probably decreased in cost. But the high ticket items like sports car, larger houses in certain postcodes, watches, wine, art and even gold have all risen in price.* The QE wealth got stuck on it’s trickle-down in high net worth owner’s assets. It created a high net worth inflationary micro-environment.

How are we getting out of this mess? A survey of top UK economists suggests that they feel there is no need to tackle public debt soon, and tax increases may the best method in the end (23). We can keep borrowing in the short term. In the long term there is the suggestion that inflation is the only sensible answer (24). QE and other factors are likely to push towards inflation anyway (25). Running inflation higher than 2.0% would reduce that Government debt burden. This method has been used before; after the second world war inflation ran at 4-5% for a good couple of decades (26).

My generation is just not used to that sort of inflation. One of my takeaways from The Intelligent Investor is the change in financial policy/climate. Graham wrote in a period where 4-5% inflation was not unheard of, and savings accounts could yield 5-7%. I vaguely remember those sort of numbers from my childhood building society, but I’ve never been conscious of that financial world. The risk of a 1970s/ Weimar Republic style inflation spike is present (27). The fear of that sort of inflation seems greater than the 1950s 4-5%, maybe due to recency bias, or because those with the most to lose are those who remember the 1970s (28).

Ultimately it seems we’re unlikely to see interest rates or inflation change in the short term. But maybe, in the medium-long term, we’ll see 5% interest rates again. We’re preparing for such eventualities (29). We can tolerate up to 12% on our mortgage with some belt-tightening. I’m sure many can’t. Those zombie companies would go to the wall. The BTLs may struggle. Perhaps a period of 4-5% inflation is the economic reset we need.

Have a great week,

The Shrink

*Gold is slightly more interesting because of just how much the price has rocketed, the argument for it’s use as a hedge, and it generally being the ultimate lesser fool’s gambit (30, 31). No-one wants to be left holding the hottest potato.

N.B. Again, as a more involved speculative post, I would love feedback and opinions on these thoughts.

News:

Comment:

References:

  1. https://www.thisismoney.co.uk/money/cardsloans/article-8380019/Consumer-debt-falls-record-7-4bn-April-borrowing-spend-slumps.html
  2. https://www.economist.com/content/global_debt_clock
  3. https://edition.cnn.com/2020/01/13/economy/global-debt-record/index.html
  4. https://blogs.imf.org/2019/12/17/new-data-on-world-debt-a-dive-into-country-numbers/
  5. https://www.ft.com/content/d93a95d0-2ee9-11e9-80d2-7b637a9e1ba1
  6. https://www.youtube.com/watch?v=HUngLgGRJpo
  7. https://en.wikipedia.org/wiki/Corporate_debt_bubble
  8. https://www.independent.co.uk/voices/coronavirus-economy-wall-street-debt-boeing-shares-junk-a9513176.html#gsc.tab=0
  9. https://www.barrons.com/articles/the-corporate-debt-death-spiral-shows-no-signs-of-stopping-51584023200
  10. https://www.cnbc.com/2020/02/07/junk-bond-scare-is-rising-no-one-cares-people-are-buying-everything.html
  11. https://www.forbes.com/sites/peterpham/2017/11/24/why-are-we-addicted-to-debt/#136e4b2515fd
  12. https://www.thisismoney.co.uk/money/saving/article-8381231/Top-fixed-rates-disappearing-Average-account-pays-just-0-3.html
  13. https://www.theguardian.com/money/2020/jun/05/savers-uk-covid-19-lockdown-cash
  14. https://www.buy2letcars.com/
  15. https://www.bbc.co.uk/news/business-52663523
  16. https://www.resolutionfoundation.org/publications/the-economic-effects-of-coronavirus-in-the-uk/
  17. https://monevator.com/negative-yields-bonds/
  18. https://www.thisismoney.co.uk/money/news/article-8357383/BoE-not-remotely-close-decision-negative-rates-Haldane.html
  19. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  20. https://tradingeconomics.com/united-kingdom/inflation-cpi
  21. https://www.theguardian.com/business/2020/may/31/for-all-his-woes-at-least-sunak-does-not-need-to-worry-about-stagflation
  22. https://foreignpolicy.com/2020/04/29/federal-reserve-global-economy-coronavirus-pandemic-inflation-terminal-deflation-is-coming/
  23. https://cfmsurvey.org/surveys/covid-19-and-uk-public-finances
  24. https://www.independent.co.uk/news/business/news/coronavirus-recession-bank-england-inflation-mandate-change-jim-o-neill-a9539796.html#gsc.tab=0
  25. https://moneyweek.com/economy/global-economy/601179/heres-why-the-coronavirus-crash-is-likely-to-end-in-inflation
  26. https://www.bloomberg.com/opinion/articles/2020-05-07/inflation-is-the-way-to-pay-off-coronavirus-debt
  27. https://simplelivingsomerset.wordpress.com/2011/03/15/when-money-dies-a-1975-cautionary-tale-from-the-weimar-republic/
  28. https://simplelivingsomerset.wordpress.com/2020/06/03/at-some-point-during-this-bear-market-i-realized-that-i-probably-shouldnt-keep-doing-this/
  29. https://www.moneyadviceservice.org.uk/en/articles/how-to-prepare-for-an-interest-rate-rise
  30. https://fee.org/articles/which-is-the-best-inflation-indicator-gold-oil-or-the-commodity-spot-index/
  31. https://pureadmin.qub.ac.uk/ws/portalfiles/portal/120196463/gold_inflation_s.pdf
  32. https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)31142-9/fulltext
  33. https://www.thisismoney.co.uk/money/news/article-8372271/Homes-face-14-price-slump-says-Nationwide.html
  34. https://firelifestyle.co.uk/2020/06/01/may-2020-financial-update/
  35. https://firevlondon.com/2020/06/02/may-2020-a-sunny-month/
  36. https://thesavingninja.com/savings-report-23-back-to-break-even/
  37. http://earlyretirementinuk.blogspot.com/2020/06/end-of-month-report-1st-of-june.html
  38. https://playingwithfire.uk/may-2020-savings-and-spending-update/
  39. https://obviousinvestor.com/p2p-lending-portfolio-update-for-may-2020/
  40. https://www.foxymonkey.com/property-partner-coronavirus/
  41. http://quietlysaving.co.uk/2020/05/31/may-2020-plus-other-updates/
  42. https://www.moneymage.net/2020-may-savings-report/
  43. https://awaytoless.com/monthly-spending-may-2020/
  44. https://thesquirreler.com/2020/06/06/may-2020-net-worth-update/
  45. https://asimplelifewithsam.com/2020/06/06/may-review/
  46. http://diyinvestoruk.blogspot.com/2020/06/mcphy-energy-portfolio-addition.html
  47. https://www.itinvestor.co.uk/2020/06/20-global-investment-trusts-compared/
  48. https://lifeafterthedailygrind.com/buying-used-electronics-can-earn-you-money/
  49. https://monevator.com/what-is-behind-the-coronavirus-trading-boom/
  50. http://bankeronfire.com/who-is-smarter-than-the-stock-market
  51. http://bankeronfire.com/it-wont-happen-to-you
  52. https://medfiblog.wordpress.com/2020/06/05/chasing-inflation/
  53. https://monevator.com/weekend-reading-boom/
  54. https://igniting-fire.com/2020/06/05/the-joy-of-creation/
  55. https://drfire.co.uk/building-wealth-in-my-20s-successes-and-failures/
  56. https://money-side-up.com/will-coronavirus-infect-the-fire-retire-early-movement/
  57. https://hustleescape.com/hindsight-bias/
  58. https://www.ukvalueinvestor.com/2020/06/dividends-and-dividend-cover.html/