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.
"PLANE LANDS SAFELY"
more GOOD NEWS THAT somehow DIDN’T MAKE THE HEADLINES
On the 16th of February 2023, the FTSE-100 closed at 8,013 points. It was the first time the FTSE had gone past the 8,000 mark. A historic all-time closing high. It was that rarest of things: good news.
Yet my sources tell me that the Dying Legacy Media’s (DLM) response to this was a figurative shrug of the shoulders. Tumbleweed makes more noise. The DLM has obsessed for years about how the index has not recovered from its early turn-of-the-century peak of just under 7,000. Endless talk of “lost decades” and other gibberish.
You can be sure that, on the 16th of last month, if the FTSE-100 had a sharp bout of downward volatility (because volatility is both down and up, and mainly the latter) then adjectives like “crash”, “plummet”, and “panic” would be strewn into every bit of copy.
Now, when the FTSE-100 not only crashes (see what I did there) through the 7,000 barrier but keeps on going until the pesky swine is another 1,000 points to the good, there is radio silence. It’s as if the DLM isn’t interested.
Captain Chuckles wishing the worst back in 2012.
Now, for context: the FTSE-100 is a pretty poor proxy for The Great Companies of The UK (GCOTUK). The FTSE-AllShare is a better guide to the broad UK stock market as it includes not 100 but over 600 of said companies. But no one seemingly cares about the FTSE-AllShare, so we’ll leave it alone. The FTSE-100 is the good-looking one and she gets the attention.
Further, in terms of investment returns, if you have a massively diversified portfolio based on world market capitalisations, it doesn’t actually matter much what happens to UK share prices.
What do I mean by “world market capitalisations”? I mean a portfolio that effectively buys The Great Companies of The World in line with their market value. For my clients, this means that around 60% of your pensions and ISAs etc will be invested in American companies, for these account for around 60% of the total market value of The Great Companies of The World (CGOTW).
By contrast, the entire UK stock market’s valuation is around 4-5% of the CGOTW. So although it’s nice when the FTSE-100 goes to a new high, the effect on your investments is marginal.
As a client, you have such a portfolio, as do I: I take my own medicine.
“You make most of your money in a bear market. You just don’t know it at the time.”
Why do we invest in this way? The advantage of having your money invested on this so-called “market cap basis” is that we don’t fall into the trap of making bets. We don’t need to have a view on whether Emerging Markets will beat the US or UK or European ones. We don’t care. We are invested in all of these markets, all of the time.
Some advisers prefer having a home bias in their advice, meaning they overweight UK exposure, perhaps to as much as 50% of a portfolio’s value. I’ve yet to discover a robust reason for doing this other than “that’s the way we’ve always done it”.
Reinforcing the home bias, the DLM talks about the FTSE-100 as if it is the only investment in town. And it only talks about it (or prognosticates about it, per The Pessimist’s Pessimist Paul Lewis above) in a negative frame. This is yet another reason (number 4,346) to avoid all contact with the DLM. It serves no purpose other than to agitate, to get clicks and to keep you watching the Screen of Doom.
THE PLANES THAT CONTINUALLY TAKE OFF AND LAND AT HEATHROW DON’T MAKE GOOD COPY. THE FTSE-100 HAS “CRASHED” THROUGH 8,000 AND WILL EVENTUALLY ARRIVE AT and fly safely beyond 9,000. When is another matter.
“If you spend 13 minutes a year on economics, you’ve wasted 10 minutes”
(N)EGATIVE (E)VENTS (W)ORLD (S)ERVICE
THE N.E.W.S: INSTANT PESSIMISM, ALL DAY, EVERY DAY
For some people, having the news on is so ingrained as to be part of who they are. I’m visiting my parents in Spain in April. Both are now in their eighties, and they totally agree with their insightful firstborn that the news is generally awful and depressing. And as sure as night follows day, each and every day, whoever is in their lounge first each morning turns on the Screen of Doom and - lo - BBC News 24 or Sky News is on and burbling away its negative nonsenses quietly in the background.
The only break from the Three-Headed Cerberus KPR (that evil nexus of Kuensberg-Peston-Rigby) is when Mater or Pater fancies watching a bit of sport (tennis for Mother, rugby and cricket for Father). Once the sporting japes are over, it’s back to the N.E.W.S.
My parents are not going to change their habits and I don’t want them to. I’m just glad they’re around. Plus, they are as cussed as their offspring and would only dig their heels in. If I said “I think you should watch more news” this might get them to watch less. You get the drift.
So my parents aren’t going to change their habits. But what about you, Dear Reader? Research from the USA shows that adults over the age of 38 (youngsters to me now, sadly) consume 30,103 minutes of news a year. That’s 502 hours, or, if you prefer, 14 weeks of nine-to-five with an hour off for lunch.
Excuse me but that amount of Screen of Doom consumption is obscene in its own right (“get off the sofa and do something”). But to spend the equivalent of 14 working weeks sat on your arse solely taking in relentless bad news is only going to have one outcome: you become a pessimist: you need not be a social scientist to understand that the news is heavily skewed toward the negative over the positive (see the first article in this missive above).
Adam Mastroianni’s superb article from June last year breaks this down even further. The poor sod looked at two weeks of New York Times (awful, awful place) front pages and colour-coded the articles based on their content. Green articles are about good news. The rest are either bad (red) or neutral (grey).
You really have to squint to see the good:
“So in the summer of 2020, I stopped. I swore to only read the news on Saturday mornings. Since then, I’ve given it up almost entirely.
And I feel better. Way, way better. It feels like a war that used to be fought in my backyard is now being fought on Neptune instead. I feel relieved of my duty to keep track of the whole world, and I now realize I never had that duty in the first place. My brain got quieter and I started hearing myself think instead of hearing myself worry. And I stopped imagining myself choking people to death, which was a big improvement.
I also became more fun to be around. I stopped importing my grand anxieties into conversations with friends, punishing them with my sullenness because I just read an article about climate change or bad senators, as if nobody was allowed to feel good as long as bad things are happening. I lost the urge to extract my phone from my pocket during lulls in conversations, tap the News app, and see if maybe something awful had happened. I could fill my freed-up attention-space with more important things, like my niece and nephews’ various misadventures.””
What is wrong with being a pessimist?
Let’s answer that with another question: what’s the point of planning for your future life if you think the world is a terrible place and getting worse by the day? If you really believe that today’s "Catastrophe-of-Catastrophes"© is the mother of them all, then, of course, you are going to sell everything, hunker down in your bunker, and wait for the good times to roll again.
Then you sheepishly emerge, look around you, see the world is still going on as before, and plunge your inflation-savaged cash savings back into a market well and truly ahead of where it was when you cashed out. Rinse and repeat until broke.
But it gets worse.
Forget about yourself for a moment. Why would you be bothered with leaving a legacy of significance for your children, if the world you are leaving behind has been destroyed for them by you, you evil Western middle-class Mother Gaia-desecrating baby boomer (per every climate scare story going)?
So your finances and your legacies are washed overboard by a wave of pessimism. Perhaps this explains (yet again) why the average US investor obtained a return of 6.2% per annum for the thirty years ending 31st December 2020, whilst the S&P500 churned out 10.7% per annum. This gap between what the typical investor gets and what the market returns is driven largely by investor behaviour, or rather: misbehaviour.
As Mastroianni says: “Our ancestors never had more videos than they could ever watch or more books than they could ever read. We, their hapless descendants, are evolutionarily unprepared for a world where we can binge on content until we hurl. We need the mental equivalent of chicken wire: a barrier to let the sunlight in while keeping the varmints out. For now, that barrier must come from deliberate practice. But perhaps one day it can come from a cultural distaste for the mind-rot of news.”
As we consume more N.E.W.S we become more anxious. This leads us to panic and make terrible money mistakes. Put up the chicken wire.
“That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
SPRING PRACTICE UPDATE
the season of renewal and looking forward - hallelujah!
Nick Lincoln, IFA and owner of V2VFP Ltd
Life is a series of short victories. One of them is waving goodbye to Winter each year, which we can just about do now, even if it is lightly snowing outside the bunker presently.
Some cold weather was overdue, as it’s been a rather benign season. Which is just as well, given our well-known energy problems.
I sincerely none of you have been too badly crippled by rising gas and electricity costs these last few months. In conversations with clients, this does come up as a cause for concern more than an actual one, at least for the moment.
A real and actual cause for concern is the tsunami of tax rises coming into effect from the 6th of April. As I ranted wrote here in the last issue, if you’re of employment age and working, you’re fodder for the machine. So do everything you legally can to shield as much as you can from HMRC. You owe it to yourself and to your future self: the less tax you pay, the more you can save for that day when you want to walk away from work on your terms.
The Lovely Penelope (TLP) is going through her Cubist phase. Or something.
Over the last few weeks, we have gone through an exercise with certain clients to harvest profits within their portfolios, essentially using up their Capital Gains Tax (CGT) allowance of £12,300. As this figure is set to more than halve (!) on the 6th of April it was the right thing to do.
Financial planning involves a fair amount of tax planning. Judicious use of CGT, pension and ISA allowances makes a significant difference to your long-term financial well-being.
Similarly, ignorance of our stupidly massive tax statute can lead to very expensive mistakes, mistakes a competent financial adviser can help you avoid.
If you are not a client presently then no doubt your adviser (you have one, right?) is on top of both the financial and the tax planning for you. If not, get in touch. But not until after the new tax year starts on 6th April - it’s too tight for us to do anything for you now.
Practicing Gratitude
As ever, I’m trying really hard to maintain a grateful state of mind. I really have nothing more to ask of my life presently, and I need to be mindful of this when the vicissitudes of life make me want to scream into the abyss.
Typically this happens about three times a day and often involves the name “Matt Hancock” (unlike me, TLP does sometimes watch the news, and I can’t always avoid the audio).
To my clients: I thank all of you for your continuing faith in my services. To the casual reader: thank you for your time.
Until the Summer then, Dear Reader. Take care.
“My brother thinks he’s a chicken but we don’t discourage him. We need the eggs.”
WHAT DID WE LEARN IN 2022?
that, Yet again, HUMAN BEINGS ARE iRATIONAL INVESTORS
In the Autumn 2022 Hat-Tip Newletter I wrote about investors running for the hills after a dismal start to the year for the prices of The Great Companies Of The World (TGCOTW). As markets declined by 13% by mid-March panic mode set in, and otherwise mainly rational people sold out of their investments, instantly turning a temporary decline into a permanent loss.
Still, despite Ukraine and other worries, world markets enjoyed a recovery of sorts over the subsequent three quarters. Redemption was on offer. It was a time to admit our past failings and quickly get back into owning a quality, beautifully diversified portfolio chock full of TGCOTW. Get in while the price was still just about right!
Right?
Wrong.
The figures for the whole of 2022 are in. And they ain’t good (unless you like buying stuff when it’s expensive and selling when it’s not).
Last year saw the biggest outflow on record from UK funds, at £53.9bn. Almost £35bn of that was from equity funds (funds investing solely in TGCOTW). This is despite the fact that both of the UK’s most well-known and reported-on stock market indicators (the FTSE-100 and FTSE-AllShare) enjoyed positive returns for 2022 (including dividends).
The only pleasure I can derive is that not one of our clients was involved in this - to coin a psychoanalytic phrase - “idiocy on stilts”. As ever, and perhaps in deserved fear of getting a damn good telling off, here at Values to Vision, clients continued to behave themselves towards wealth and not misbehave towards poverty.
Almost as insane: in 2022 one sector alone enjoyed inflows exceeding outflows. And this was the money market sector. Cash, in other words. As the lemmings flung their share portfolios over the cliff, they were simultaneously investing in cash funds returning roughly a quarter of the rate of inflation, thereby guaranteeing a permanent loss of purchasing power (the only type of measure that’s worth a damn over the long term, typical three-decade retirement).
This can be expressed in the form of a complex, four-pronged equation. Bear with me.
Invest £10,000 in a money-market fund returning, say, 2.5%.
Let’s ignore taxes and fees, for simplicity’s sake.
The “investment” is worth £10,250 on paper a year later.
Deduct annual inflation at, say 10%, and this “investment” is worth £9,225 at the only place that matters: everywhere where you try to spend it.
As long as inflation exceeds the money market rate of return then you have that most prized possession: a guaranteed return. That the return is negative seems to be a trifling matter to the hordes who will do anything not to expose themselves to the “risk” of owning shares in the Great Companies, whose products and services they use day in, day out.
ONCE MORE: AS PRICES FALL, VALUE RISES. YET “INVESTORS” DON’T WANT VALUE - THEY WANT EXPENSIVE. THEY ALSO WANT THEIR BRAINS EXAMINED.
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 1993 a First Class stamp cost 25p. Now? £1.10. See the detailed graph below:
Some nuggets to lessen the gloom (past performance is no guarantee of future returns etc):
Three decades ago - Spring 1993 - the S&P 500 (The Great Companies of The USA) was valued at 442;
Today, 30 years on - Spring 2023 - The Great Companies of The USA are valued at c.4,050;
In three decades these Great Companies have grown in value by a factor of nine;
In addition, the dividends paid by these Great Companies have risen five-fold in those 30 years.
The last three decades have seen four "get me out of here I can't stand it anymore" bear markets (2001-3, 2007-9, Q1 2020 and right now) 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.”
