For over 25 years I have either managed money, advised portfolio managers or written investment research. Why aren’t you retired then, I hear someone shouting in the back. This is a good question to ask all financial “experts”. My answer, for what it’s worth, is: four kids, divorce, and always be first at the bar.
During my career, I have learned that giving advice suffers from two problems. First, it is often wrong. Trump as president? Will never happen. Buy emerging market stocks — oops. And second, the giver rarely suffers when he is wrong.
This new weekly column will do its best to minimize the number of bad calls. Better yet, why don’t we agree that sometimes we’ll be extremely late for a good idea, or so far ahead of the curve that we won’t be alive to celebrate our wins? I will never say the word “wrong” if you don’t.
As for not having a skin in the game, there will be no recommendations that I do not participate in – whether it is to buy, sell or buy tools for the game. ‘summer. We are in the same boat. And by leaving single-name stocks to the Reddit brigade — sticking only to sectors, indices, and major asset classes — we can’t be accused of market manipulation.
To make sure my money is where my pen is, you’ll be able to see my portfolio performance every week. Except for a small investment in a friend’s data business (Essentia Analytics), I have no other savings. Just as playing poker without money is for kids, investing without the joy and fear that comes with putting your own assets on the line is just a fantasy.
This is why so many model wallets turn off the lights. They are not real. Which is, as I experienced in 1999, a five percentage point underweight in News Corp as it rose and rose during the dotcom bubble. I was sure it would burst, but my doubts grew. What was I missing? Co-workers stop looking you in the eye. You are not sleeping. Barely eat. Eventually, my relative returns were so bad that I was forced to buy. Then it plummeted.
It wasn’t even my money. Customers were the losers. That’s why I consider writing a personal finance column such a responsibility. Some readers will be hit, others will experience unimaginable financial pressures. There’s no way I’d consider offering recommendations if I didn’t follow them myself.
Let’s start with a target. I want to double the amount of my pension within a decade, in real terms. That’s an inflation-adjusted return of just over 7% per year. Long-term stock returns are a bit below that, so it might not seem ambitious. But we are coming out of a decades-long bull market, valuations are still rich and the world is facing many crises. I think it’s a sensible aspiration – not too greedy, realistic and with room for improvement.
Now to open the book. My only investments are in two defined contribution pension schemes of about the same size, totaling £438,000. The biggest bet is a 27% exposure to UK equities, then cash at slightly less, followed by a non-UK global equity fund. Then it drops to 11% Pacific ex-Japan stocks and the same weighting in Japanese stocks. That’s it. No fixed income. No alternative. No gold.
Over the next few months, we will analyze these posts and any news related to them. What made me buy? Does the investment case still make sense? What’s better there? But in the fall reporting week, how about starting with that huge exposure to UK equities?
I had moved out of risk assets before the pandemic (a fluke) and when equity markets crashed in the first quarter of 2020, I wanted to rebuild my equity exposure. But what to buy first? I didn’t necessarily care where, only that the market had to be cheap enough to compensate for the still extreme uncertainty around Covid.
The US S&P 500 forward price-to-earnings ratio had fallen 20 to 14 times. But the British indexes, whose prices had fallen by a quarter, were nine times higher. Someday I’ll write about PE ratios and why they’re silly. But single-digit stupidity is often a buy signal.
So it turned out. My FTSE All Share ETF has grown by a third since then. And now? Unusually, the index is cheaper on an earnings basis today than when I bought it, despite the rally. One reason is that oil company stock prices have simply doubled since 2020, while their profits have skyrocketed. Similarly, banking and pharmaceutical stock prices followed dramatic rebounds in earnings.
The low multiple also reflects fears that profitability could plummet next year – by as much as a third based on consensus estimates. It seems harsh. Moreover, earnings fell far more than that in 2020 and stocks rebounded. Also, don’t forget that the UK has a rump of amazing companies that no one has heard of. These are typically low-asset pharmaceutical and technology companies with valuable patents and impressive R&D pipelines. The median cash flow return on invested capital for UK indices is world class.
Since the majority of UK equity income comes from overseas, a weak pound is good for converted earnings. If the fall statement fails to convince the markets, then equities should be a good hedge. Indeed, there is a 60% inverse correlation between the quarterly returns of the FTSE All-Share Index since 1969 and the pound sterling against the dollar. Be warned, however, over the past five years the correlation has reversed.
I will maintain my weighting in UK equities. Experience tells me that the best time to own something is when it makes me terribly uncomfortable. I have that feeling now, for sure. Not you ?
The author is an investment columnist and former banker. E-mail: firstname.lastname@example.org; Twitter: @stuartkirk__
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