Welcome back, Dear Reader, to the latest quarterly missive from Nick Lincoln. This edition has FIVE articles.
If for some bizarre reason you enjoy “The Hat-Tip Newsletter” please do forward it to family and friends.
TRADERS OF THE LOST ARKK
AN OBJECT (ABJECT) EXAMPLE OF HOW INVESTORS CAN UNDERPERFORM THEIR OWN FUNDS.
Disclaimer: the headline above is NOT MINE. I first saw it (I think) on Twitter. I cannot track down its source. So I’ve copied it but can’t attribute it. My bad.
When investing, there are two types of fear:
Fear of permanent loss of capital (almost impossible with a diversified portfolio over any meaningful time period but don’t let that get in the way of a good story), and
Fear of missing out (FOMO), which goes along these lines: Wendy at the golf club has made a gazillion in the last year via her adviser’s “XYZ Incomprehensible Fund”. She’s just regaled you with stories about how uber-rich she has become, and now, green to the gills, you want some as well.
Here we will focus on FOMO, specifically in form of the US-based “ARK Innovation” fund. This fund - known by its ticker symbol ARKK - invests in the fruitier end of mainly US tech and biotech stocks. Often startups, these are companies with little chance of showing a profit for many years (if at all).
There’s a prize for anyone who can translate that garbage into Plain English.
For the five years towards the end of 2021, the fund delivered an annual return of over 41%! That made it - out of thousands - among the top-five best performing US equity funds in that time.
But did the vast majority of investors in the fund get that return? It would appear not. Morningstar tracks investor inflows and outflows into funds. Having done this with ARKK, it would seem that most investors in this fund over that period saw an annualised return of just under 10%.
10% per annum is nice enough, I guess. But when the fund you are invested in has delivered over 41% a year, how do investors manage to underperform their own investments by such a wide margin?
The answer is FOMO. As the fund’s performance became more and more noticeable, more and more people piled in. Trouble was (is), performance is in the past. As the article notes, stellar returns in 2017 (up 87%) and 2020 (up 152%) tailed off just as the fund size peaked at around US$26 billion in June 2021.
The fund had grown in size nearly 20-fold between 2019 and the end of 2021. And, now laden with all these Johnny-Come-Lately investor monies, in 2021 the fund fell in value by over 22%.
Hence why the investors in the fund had such disparate year returns to their own investments:
And it was ever thus: mass FOMO mania was last seen around the turn of the century. Millions of people poured millions more of cash into tech stocks and related investment funds, just as the party was running out of steam.
Remember what happened?
The NASDAQ dropped by around 80% between March 2000 and September 2002. Cue an immense and permanent loss of capital, as these performance junkies cashed out their speculations investments, screaming “I can’t take it anymore.”
This is where proper financial planning and behavioural coaching plays such an important role. People with a financial plan tend to act in accordance with that plan; the plan guides their investment principles and hence portfolio construction. If the plan doesn’t change, the portfolio doesn’t change.
People without a plan - in my opinion (and yes, it’s self-servicing, I confess) - react to events (see: Ukraine) or, via FOMO, chase past performance (see: ARKK). These saps are like rudderless boats on the ocean, tossed this way and that by the prevailing storm of the day.
Not only is this a ghastly way to live (imagine checking your portfolio positions every few minutes, every hour of every day). It’s also a surefire way to destroy your wealth.
CHASING PAST PERFORMANCE IS LIKE RUNNING AFTER THE LEMMING IN THE FRONT OF YOU: IN TIME, THE CLIFF ARRIVES AND GRAVITY does the rest.
“Riches do not exhilarate us so much with their possession as they torment us with their loss.”
PERMANENT LOSS - A TRULY HUMAN ACHIEVEMENT
PERMANENT LOSS OF CAPITAL IS NEAR-IMPOSSIBLE WITH A WELL-DIVERSIFIED PORTFOLIO. but add “homo sapiens” to the mix…
There was a time when the Daily Telegraph and Sunday Telegraph were broadsheets of some repute. Those days are long gone, however. Now the brand is synonymous with woke-leaning left-wing “journalism” of the worst sort, as it panders to a small but vocal section of society who will never buy it anyway.
This wasn’t always the case, as per this glorious excerpt from “Yes, Prime Minister” 35 (!) years ago:
To those who still buy the Telegraph (I’m looking at you, Mother-in-Law in-waiting): you’re doing so purely out of habit. Like my cricket, you know it’s well past its prime. I forgive you. But repent forthwith and we’ll not mention it again. OK?
Having cleared the air, the Telegraph’s decline into irrelevance does throw out the odd gem. Here is a recent headline that caught my eye, as much for its base journalism as anything else.
The only humane answer to the question posed is “a brain”. Sadly, I doubt if this was given as a response in the article itself, which is buried behind a paywall. We’ll never know.
However, assuming the gist of the piece is true, Mr “Sam Jenkins” (yes, I wouldn’t use my real name either) has committed multiple investor sins and managed to create a permanent loss of capital in his pension fund. These evils include:
Having all his pension pot invested in one concentrated, actively-managed fund. For the avoidance of doubt: this is not diversification.
Mistakenly thinking a friend has access to some otherworldly crystal ball.
Acting on “a tip” from said friend.
Letting three years slip by before trying to rectify his mistake.
You can probably add in a fifth, namely “FOMO” as outlined in the previous article. I’d wager a small fortune that Mr Jenkins originally invested in the Fundsmith Equity fund purely on the back of strong past performance, fearing he was “missing out”.
Well, he truly has missed out now. In committing the above follies, Mr Jenkins has seen a 38% return Fundsmith Equity delivered from May 2019 to the end of January 2022 go permanently down the drain (source: FE Analytics). This must be the “lost £100k” in the headline, or as near-as-dammit.
It gets worse. Since committing financial harakiri, Mr Jenkins has had his entire pension pot in cash. From experience, Dear Reader, I can tell you that this is earning what we financial boffins call “three-fifths of bugger all”. With inflation running at over 7%, the real value of his cash - its purchasing power - has declined by that amount in a year. Thus £241,000 a year ago is around £224,000 today, in real terms.
Of course, he has been sitting in cash for nearly three years, so the above car crash is actually worse.
In all, this is an exquisite orgy of investment ghastliness. I don’t relish Mr Jenkins’ situation. Nor do I enjoy beating up on him so (well, maybe a little bit).
in life, we learn lessons from our mistakes. sometimes we learn from the mistakes of others. this is one such time.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
SPRING PRACTICE UPDATE
if we could look past war in ukraine….
Nick Lincoln, IFA and owner of V2VFP Ltd
Say what you like about the Chinese Lab Leak Flu: it knows when it can’t compete with a war.
One minute it’s front and centre, in full “we’re all going to kill Granny unless we get quadruple jabbed” mode.
And the next, it’s miraculously gone, thanks to one The Evil Dictator V. Putin, c/o The Kremlin, Moscow.
Our thoughts are understandably consumed by events in Ukraine. However, despite the hysteria from The Dying Legacy Media, I don’t think this will escalate to nuclear war.
If it does, we’re all goners, so it’s moot as to whether we should worry about it, given that it’s completely out of our control. I think the worst likely outcome is that somehow we get further dragged into the conflict.
If that sounds like burying your head in the ground Stoicism on steroids, that’s the way I’m wired. I appreciate many people seem to be genuinely terrified.
But many were also terrified by Omicron, which was at worst a nasty winter cold. So who knows what real terror is anymore?
On that uplifting note, do enjoy the changing of the season. Speak soon.
“Government breaks your legs, hands you a crutch, and says, “If it weren’t for the government, you wouldn’t be able to walk””
STAMPING ON YOUR RETIREMENT?
RIGHT ON CUE, ROYAL MAIL DELIVERS (PUN INTENDED) A ZINGER!
Regular readers of The Hat-Tip Newsletter will be familiar with the closing article in each edition, in which, among other things, I witter on about stamps.
I even reference the little pieces of sticky paper in my email signature small print:
Sad, I know.
But there is a method to my madness. I am on this planet to educate people about evil inflation (Lex Luther) and its kryptonite: owning a portfolio chock full of The Great Companies of The World (Superman/Woman/him/he/she/her/they etc).
To help me in this mission I use the humble stamp to demonstrate the insidious effect inflation can and will have on the purchasing power of your cash over a typical three-decade retirement. It’s perfect, as everyone knows:
What a stamp does.
What it looks like.
It costs the same whether you’re buying it in Belgravia or Barnsley.
In short, it’s ubiquitous and so an effective way of demonstrating how an easily comprehensible, everyday item increases in price over time.
And lo, just last week, Royal Mail announced an inflation-busting increase to the price of stamps! The price of a First Class stamp is to rise 10p to 95p from 4th April. That’s a rise of 12%.
You can read the next and final article to find out what the price of the exact same piece of sticky paper cost thirty years prior, in 1992. Suffice to say (spoiler alert), the stamp has risen in price four-fold.
Over any meaningful period of time, inflation is dangerous to your real wealth. At current levels, if it persists, it will decimate people’s retirement lifestyles. You can read more about the last great inflationary period from 1962 to 1991 here.
If “decimate” sounds dramatic, it’s because it is. People will only realise the truth - that risk has nothing to do with temporary volatility and everything to do with the destruction of purchasing power - when it’s too late. When they go to the bank to make another withdrawal from their “safe” cash stash, to be told it’s gone, exhausted, kaput. Because everything that once cost “y” now costs “y” x 4.
So, thanks to Royal Mail and at great expense and involving a whole team of software coders, I’ve updated my email signoff:
If you’re a client reading this, you know your portfolios are positioned, through ownership of The Great Companies of The World (TGCOTW), to ward off inflation as best we can. You and I are the lucky ones: unfortunately, generations of retirees and soon-to-be retirees are sleepwalking into a pit of penury. I can save some of them if given enough time.
I’d welcome the opportunity to talk to your friends the way I talk to you: with ruthless honesty; zero pandering; proficient, profligate use of plain English.
You have my details: do pass them on. Consider it your good deed for the day (“get over yourself, Lincoln”).
“There is no dignity quite so impressive, and no independence quite so important, as living within your means.”
INFLATION IS TO RETIREMENT WHAT CARBON MONOXIDE IS TO HEALTH
This is a recurring piece. Each quarter the figures will be appropriately updated. Why? because while the numbers will change around the edges, the message is eternal!
A typical retired couple may well see one partner live for three decades or more. Over such a long period, the annual cost of Lifestyle could more than triple. Says who? Says me: financial planning involves enormous ambiguity. If you want certainty, die now.
So an example Lifestyle cost of £50,000 per annum entering retirement could later escalate to £150,000 a year, just to keep standing still, to keep buying the exact same amount of “stuff”.
If you really must, some prosaic evidence: in 1992 a First Class stamp cost 24p. From April this year? 95p. See the detailed graph below:
Some nuggets to lessen the gloom (past performance is no guarantee of future returns etc):
Three decades ago - Spring 1992 - the S&P 500 (The Great Companies of The USA) was valued at 407;
Today, 30 years on - Spring 2022 - The Great Companies of The USA are valued at c.4,200;
In three decades these Great Companies have grown in value by a factor of 10;
In addition, the dividends paid by these Great Companies have risen five-fold in those 30 years.
The last three decades have seen three severe "get me out of here I can't stand it anymore" bear markets (2001-3, 2007-9 and Q1 2020) and numerous smaller temporary declines.
Source for US market figures here. Why US data and not the UK? Because the Yanks have this kind of thing publicly available and we don't - yet. Also, the US market is enormous. By comparison, the UK market - at under 5% of worldwide market capitalisation - is tiny.
Dear Reader, the big risk to a dignified, independent retirement Lifestyle is the destruction of purchasing power via inflation. Like carbon monoxide, you can't hear it, smell it, see it, taste it. Yet inflation will silently, stealthily kill your wealth.
The cure? Possessing a Financial Plan fueled by ownership of The Great Companies of The World: equities.
The problem with the cure? It's really really hard to stick with your Plan and stay invested through the horrendous-but-always-temporary-declines. The cure for the cure? Having a tough-loving, empathetic counsellor to stand between you and "the big mistake".
Having stated the problem, and maybe scared you witless, I hope the above figures give you a glimpse as to the only rational, moral solution for a healthy couple facing a three-decade plus retirement!
“Inflation: odourless, tasteless, and utterly poisonous to a dignified, independent retirement.”
