- Income is King
- Crypto Currency Speculation
- Open Offer Update
- Suicide from Day Trading
- Cash Balances
- British Government Debt v Japanese Debt
- Claims Management
- Ethical Investment
- Risk Warning
So, another quarter has passed. These dates don’t reflect the ‘worst’ low points in March but did you know that for the UK and the US (as most world markets) the indices have enjoyed their biggest quarterly gains for ten years? Bigger indices globally and in the US especially have been swollen by the Tech giants as I have shared before so it is great testament to the UK (which doesn’t have many of those and instead has depressed banks and oil companies) that the FTSE100 has done the same with an 8.8% gain. The US S&P 500 rose by 19% with tech stocks driving that now well into seriously over-bought territory. Just think too – we had the quickest ever Bear Market (a drop of 20%) after the US market peak and then one of the quickest ever Bull Markets (where the market bounced over 20% from the worst).
So why did this recovery take place? Not only have literally trillions been poured into support and credit by central governments/banks but inevitably after such an awful problem, there is over-reaction downwards and then a rebalancing to a better perception of ‘normality’. Certainly however, we are not back up ‘there’ yet and many stocks are still way too undervalued. Let me give an example of how this manifests itself. Amigos Holdings Plc, a direct loan company which floated quite recently has some problems. Its shares plummeted so the whole Company was only worth some £23million on the market. Yes, it has some claims against it which could cost £40million or even more but last Friday the company has cash of £135million (and its assets) and even its trade would have a value to another business too. No, I am not saying buy these shares but there are many similar situations with direct companies and indeed quoted funds as well and which are trading below such real values simply because there have been more sellers than buyers and where investors remain hesitant. So if Amigo Holdings’ shares were ‘only’ four times higher than this low level, they would only reflect the cash sitting in its bank after debts paid! That would be a gain of 300% (and it is likely as the Company is likely to be taken-over or wound-up).
Income is King
As investors will know, many companies have cut their dividends to shareholders this year. Some is understandable, some unacceptable. Some companies will not be forgiven easily and very few showed any dynamism in considering alternatives like scrip dividends – issuing shares (which could be sold) instead of cash. Even collective investments have been impacted of course, Investment Trusts less-so as the rules give them more flexibility and a few stars are continuing with constructive policies so investors know they can rely upon their payments. For example, from our stable Seneca Global Income and Growth is committed to its present quarterly payments. With plenty of reserves, it can use capital (if it needs) to shore-up any deficiencies in the interim. Others like Value Income and Growth also has a generous yield and with a portfolio of properties (not concentrating upon retail either) it can afford a good level of payment to investors. There are many and I am pleased that we hold several though clearly some have also cut payments altogether, especially the ‘loan funds’. It is more of a struggle but if we can secure an expected annual income from a widely balanced portfolio of assets in the region of 4% into the future, that is very good. These entities also need to remember that investors who need the dividends to top-up other income, to help pay the bills can always reinvest a surplus. I should like to feel that a year ahead there will be a catch-up as well as companies which have stopped payments make-up for the losses when they realise things were not quite so bad for them. GRIT Real Estate Trust is another with a high payment level and where the shares are available at a deep discount to the underlying value of all the properties it owns, even after allowing for inevitable downgrades on the retail and holiday parts. Yes, you have to watch-out for borrowing in these entities too but when interest rates are so low, that can be very attractive to boost your return potential and it is not a negative in that context.
Crypto Currency Speculation
Unfortunately the numbers who have admitted to having a small exposure to ‘crypto currencies’ have been on the increase, almost doubling last year. The FCA is warning people that most of the schemes in which they participate are not regulated either so regardless of what your speculation may yield, things could all go horribly wrong with the provider/holder of your ‘money’ and you lose the lot to some scam. Yes, we have had some horrible tales recounted to us including one poor person who, when he was at a low ebb, responded to one of these scams and lost all the inheritance he had received from the sale of his Mother’s home on her death – over £160,000. Investors in this ‘exchange’ below must also by now have realised that this $170million has all disappeared for example:- https://www.financemagnates.com/cryptocurrency/exchange/quadrigacx-collapsed-as-late-ceo-gambled-clients-money-says-osc/ (And watch-out but then scammers abound offering to ‘help you’ retrieve your losses…).
If you really must, there are regulated providers of accounts which allow you to speculate on these things – use one of these. However, my advice is that these are NOT investments. You may as well be speculating on antique Steiff Teddy Bears, stamps from Pitcairn Island or some other short-term fad which will fade away with no or little future interest but at least with these examples you’d have something nice to admire – even if the value had rocketed and then came back to earth. Crypto currencies don’t even ‘exist’ in tangible terms! Indeed, maybe the best analogy is ‘chocolate buttons’ – in the short-term if demand outstrips supply (however artificially created by pretend ‘mining’!), the prices will rise but in the end, the things will lose their taste and will melt away… so if you are holding them, you are relying upon the ‘greater fool theory’ – you trust you will have been clever enough to have passed these things onto some ‘greater fool’ in good time to repay your investment (still, maybe US tech shares are in that same camp at the moment…).
Open Offer Update
Well done those clients who responded to the De La Rue open offer. Despite all shareholders having the chance and we bought all we could, only 78% of shareholders bought their special shares at £1.10 despite them being £1.38 on the day. We applied for excess too so a few more will be coming our clients’ way for those who had the cash available. SIG is also trading about its Open Offer level.
Suicide from Day Trading
The acute volatility has encouraged many to bet speculatively on the markets whilst they have been bored on lockdown at home. Crypto currencies are prime targets but also the tech stocks in the US where novices see that they can only go upwards, epitomised by their favourite, Tesla and it rockets into space and for only a few pounds or dollars, they believe they will emulate that. Sadly, twenty-year old Alex Kearns took his own life. He could not cope with having speculated on something which went so horribly wrong and which he thought had lost him $730,000 (which he didn’t have). In fact, his account was still in credit and he had miscalculated the trade he had placed. https://www.ft.com/content/45d0a047-360f-4abf-86ee-108f436015a1
This is a very sad matter. What the firms offering these opportunities have realised is that all the younger people (especially) are keen on pressing buttons and playing online games and this is just another way of doing that. The entities feed information to ‘players’ constantly, updating their positions and they begin to wait on any and every last piece of information as if they have gained some imaginary skill at the game. Exaggerated by a Social Media frenzy and the players exchange thoughts, followers and actions leading to more addiction. A little confidence in a few which win and this sucks the speculator deeper into the experience. It’s great that such cheap ways of investing exist but DAY TRADING IS NOT INVESTING. You cannot predict what is going to happen on the one day and trade at a profit consistently simply by playing with the small movements which may arise on that day. Oh sure, there are lots of pretend theories out there and ‘if you use sophisticated algorithms you’ll beat the market’ but what a load of twaddle, to be frank. Yes, there can be technical trading opportunities from time to time and we look to take advantage of those if we can in our management of our clients’ funds but this is not that. Oh yes, Tesla was around $200 a year ago and is now almost $1500 and as buyers crowd-in, there is only one way for the share price to go till that all turns and burns. (Yes, a company which is not earning a profit yet and is now ‘worth’ more than Toyota, the biggest car producer in the world, or bigger than Exxon Mobil). Day traders think they are something special if they buy shares in the morning at say $1,400 and sell at $1,420 later as if that is guaranteed to happen and what they do is deposit say their $5,000 in the account and use that as ‘margin’ meaning they may invest $50,000 in the stock and instead of making ‘just’ $20 on an investment in one share, they were able to buy thirty-five and made $700 without even touching their stake money! Then the next day what happens when that becomes Wirecard or the bubble bursts (and it is a bubble in these types of over-hyped stocks). If you make a Social Media post against something like Tesla saying it’s going to plummet as it is so artificial, it is almost as if you will have a hit squad at your door as that opinion counters what they believe is a permanent state of ascent and any negativity could upset their game. It is very frightening and when the losers realise they have lost far more than ever they could afford, the consequences are very serious. Many a very experienced, wealthy and wise investment manager have lost everything simply by attempting to hedge positions and being caught short by events and the markets.
A quick profit from a speculation like this has the same impact on the brain’s functions as cocoa substance apparently. The ‘get rich quick’ idyll (and with no work) appeal defies logic and inhibitions in some. If it is ‘play money’ fair enough but can you control the beast? Studies galore show that ‘day traders’ end up losing all their money. A study in Brazil between 2013-15 found that 97% of those who had traded for at least 300 days lost everything. Only 1.1% of the players made over Brazil’s minimum wage from their gambling.
And feel some sympathy for we fund managers – the impact of trading on health can be marked too. Big drops are associated with worsening mental health, binge drinking and fatal car accidents involving alcohol, according to a University of Chicago study. ‘Trading is a psychologically taxing activity’ says Professor Lo. ‘The amount of stress which trading imposes on the human body is very significant’. As for me, I hope that as one of the longest in the tooth in the industry managing the same funds that I have been able to manage these attributes a tad better but it is worthy to recognise them!
Well, following my revelation last time about the amount of cash in ISAs, the Pandemic has meant that people have cut-down on their credit and have been reducing debts as well as increasing their savings. Bank balances are swollen and the banks can’t use the money deposited with them. The total on deposit now exceeds £1.5trillion and that does not include cash/quasi-cash funds either. Yes of course there are many struggling financially at the moment as well of course and those who have fallen between the stools as far as Government compensation is concerned but many whose normal lives have been suspended but where their expenditure has dropped dramatically and they have big surpluses they couldn’t spend.
Of course, as our economy is so dependent upon the consumer’s spending too, this explains a big part of the hit. It will come back – and with a vengeance of course. Meantime, may I suggest that if you have allowed your cash balances to accumulate that you put some of this to better use in market-linked investments of which many remain very attractive (even if I continue to implore you not to go overboard on the over-priced sectors and stocks like US tech).
British Government Debt v Japanese Debt
Interesting…. Last week, for the first time ever, British thirty-year Government Stock was more expensive than very wealthy Japan’s thirty-year government stock…https://www.ft.com/content/cfc3f73a-36e6-4b73-8387-168774ed958a This is curious in a year when our debt needing to be sold this year probably exceeds £400billion and the Bank of England can’t buy all of it… so that is £225billion already this fiscal year and a cool extra £50billion in August.
I really can see two ‘imaginary’ things becoming a reality to repay all our colossal debt. The first is negative rates of interest so effectively it costs you money to keep deposits in that you are taxed on your cash (that will help sustain very low government borrowing costs and repayment). The second is a dose of inflation which eats away the value of cash and reduces the real value of the debt. How hyper could this be? If that hit 10% it would be bad enough. Shares would be very attractive as companies can increase their prices to react and save on borrowed money but those with cash deposits would lose big-time. Residential Property should rise slightly but really it should stagnate (or drop less severely instead as fewer can afford to buy) as it is already acutely over-priced.
A financial adviser has lambasted claims management companies again and this time in a sister publication of the Financial Times. Hold on a minute… it was me! https://www.ftadviser.com/pensions/2020/07/03/adviser-slams-aggressive-cmcs-as-he-bags-client-52k/?page=2 Please do NOT appoint one of these and lose what is your rightful compensation but engage the FSCS/FOS directly and for free!
Ethical investors have been left crying over their funds’ exposure to Boohoo after serious allegations of slave labour and abuses of the minimum wage legislation let alone abuses of the Lockdown in Leicester. It is the sort of problem of which so-called investors and their funds need to be aware and many pundits are saying they SHOULD have known as these sorts of issues have been raised many times previously. As I have said though, ESG funds have chunky exposures to the tech giants and to be frank, these cannot hand-on-heart say that all their practices and behaviours satisfy the moral and ethical dimensions demanded of investors entrusting their funds for ‘the greater good’. In some ways though, it is not your ‘investing’ which counts as that is typically ‘passive’ but where you spend your money – that is a demonstration of your ethical dimension. Do you buy Boohoo fashionwear because it is cheap for example… we now know why.
Sadly too this was right after the Wirecard debacle – another popular stock in ethical investors’ portfolios and it seems that company won’t be around much longer now and with giant frauds.
Unrelated to this but showing that chartism and trend-following investors will have had a hard hit too – the ‘charts’ only the week before were recommending an investment in Boohoo as it was being predicted to go higher still – not a 40% drop instead.
Thanks as ever for the trickle of comments from appreciative recipients of the missives, including Andrew who says “well done with your regular e-mail ‘missives’. First class.”
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Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers