Eight behavioural biases

Dear Friend

So amidst the ‘new’ gloom, it is worth remembering that UK employees on payroll are at the highest ever, just under 29.5million and beating the 2020 peak. This is good for the economy and individuals’ financial well-being and sense of purpose (and no, I am not criticising the rafts of those who are not and the figures ignore the self-employed too of course).

There are still the most ever vacancies and whilst there are some major employment gaps (eg hospitality and care) they are almost across the board. During Lockdown that figure drifted back to 28million and even the cessation of Furlough (‘abused’ in the end, shall we say, by some?) did not create a blip in unemployment (which is at 4.3%). The biggest quantity of those leaving the workforce was, curiously, youngsters and perhaps that was exaggerated by the explosion in Universal Credit claims amongst this same group; maybe such individual generosity of the system is not so good for their long-term well-being at all. Then what about America’s highest inflation for forty years; 6.8% – that will start to have an effect and impact soon – how are your investments positioned to compensate – that means your cash and fixed interest assets are ‘taxed’ at 6.8%pa in real terms – ouch!

I hear too that $12billion a day is traded in Apple shares and $21billion in Tesla. The whole Euronext Exchange trades $8.1billion and the London Stock Exchange a mere $6.1billion. If that isn’t pointing to a gamblers’ paradise in these big US stocks where real ‘value’ was forgotten years ago, I don’t know what is (some pundits are suggesting Tesla’s ludicrous valuation is the Trojan Horse to explode in the belly of the Passive funds). Then I am reminded of short-term investor euphoria which chased lockdown stocks on the back of wonderfully lucrative business as a consequence of the pandemic – ‘Just Eat’ is off 50% for example but wait – Peleton, AO World and Zoom are down by between three-quarters and two-thirds so that wasn’t such a good idea buying them on the hype was it? Hands-up if you will admit that you did – we certainly didn’t!

Always on the look-out for adages and quips, I like what competitor Pharon’s founder noted. It’s a quality which I hope we replicate and where the proof of the pudding is in the eating. He said ‘integrity is doing the right thing when no-one is watching’. Can’t that just apply to every business of all types – none of us is perfect but why sadly do so many (and people) have a flawed moral compass?

And more technical good news to report for clients – Majedie Investment Management is being acquired by Liontrust – another good manager. However, the Investment Trust holding we maintain owns 17.6% of the parent company so that’s an extra bonus (9% today) for our investors and I should not be surprised to see the discount narrow as Liontrust takes the overall helm! As I say, these extra, technical ‘bonus opportunities’ are in there for free as we are buying good investments in the first place. We haven’t owned Majedie long either! That’s an extra £200,000 for our clients. Likewise, Jupiter could be taken-over too… we have added a few shares in this cheap fund manager in advance.

Eight behavioural biases which affect your financial/investment decisions
If you recognise these in yourself, then you have slain one of the biggest barriers to sensible investing. Not only that but not realising they exist will lead you to making some awful judgements or indeed inaction and potentially costing you your whole financial stability – we have seen it time and time again sadly. You are more open to superstition and not fact, scams and pure gambling when the odds are not in your favour – they never are. We are here to help you realise these psychological traits are not helpful for prudent investing for example! I shall list them all and perhaps over a series elaborate on each! Loss Aversion Gamblers’ fallacy Attribution bias Endowment bias Bandwagon bias Recency bias Confirmation bias Blind-spot bias For the investment manager, one of the best tools to engage is ‘patience’ in that sometimes, the lunatics can run the asylum for much longer than they should. However, recognising these human traits and that they are indeed applied to the markets can help secure the optimum outcomes for our clients – we are not perfect and no-one is but this helps us with our fundamental decisions too. So, here goes!

Loss aversion – this is the emotional fear of loss, which says we feel a loss up to five times more than the pleasure of a gain. Of course, none of us wants to lose on our decisions (also relationships, jobs, homes, interests…) but sometimes the best thing to do when say a share has fallen is to buy more. That’s not because of superstition but if analysis shows that this fundamental decision (even if the facts have deteriorated) is the right one. Many of our best investments have been hoovering-up from desperate sellers after an investment’s value has fallen and yes, often even then, the price can keep drifting till it finds a new ‘floor’ for recovery (sometimes yes, a sale at a loss is the right and best thing to do too). Don’t hold something ‘just because’ though it is only a paper loss till you crystallise a sale too. Remember too that there is an opportunity risk – would that money be better somewhere else anyway, rather than simply stagnating? We don’t believe in rigid stop losses (where you sell if say something has dropped 10% (maybe we would if the investment is owned by loads of buyers who have followed such chartist trends upwards, as then collectively they fulfil their own predictions!). Still, we spread money very widely etc to cut impact of individual loss anyway. Remember too, you invest wisely in your decision because you assessed the risks of that and the rewards are a consequence.

I am always thinking of practical demonstration of ‘risk’. Let us say that ascending stairs equals a risk, the higher you go the more dangerous it becomes and the more perilous if you fall. However, we do that because we wish to visit the next floor because the benefits of doing that are worthwhile. If you don’t go up the stairs and manage the danger of that action, let alone the risks of being higher, you limit your outcomes to the ground floor only. Yes, you still manage the risks of the action so that then you can enjoy the rewards (and it can be safer upstairs too, especially if there is a flood!). That is also like investment, managing the risks, spreading your eggs very widely and so on, across different asset classes and types, funds, shares, commodities, currencies, etc. Sometimes too it is amazing how someone can say they have 100% loss aversion but their personal history which may have created that investable pot has come from very high risk – eg speculative/developmental residential property investment, large share save schemes with no diversity, a large shareholding inherited so a financially irrational family tie, even a lottery win or some other ‘speculative’ windfall. It makes no rational sense really!

Non-investments
As yet more people seem to have joined the baying hordes trying to encourage more to join this giant Ponzi scheme of typically unbacked cryptocurrency, the prices paint a sobering and different picture. To be an asset, let alone having some actual ‘use’ and substance behind it, rather than sheer faith in the future collective interest by new subscribers being greater than yesterday’s, the volatility and in such short timeframes tells the biggest truth. To have such extremes (whether upwards or downwards) in only a matter of days or weeks does not paint the right picture. It seems no longer to be painted universally by the enthusiasts as a ‘currency’ anymore (despite the maverick Ecuador President declaring Bitcoin the National Currency and then crypto zealots trying to suggest to the tax authorities that gains on currency bank balances are free from tax (as it must be a currency if Ecuador has declared it so)) and recent joiners have been made to realise that an upward vertical line can easily be followed by a similar descent. So a Bitcoin fetched $68,000 at its peak and at time of writing is off 32% in a month. Please don’t become involved… unless it is like a flutter for you on the horses and won’t mater whether the horse even dies in its stall – that’s the closest to ‘stable’ that these types of cryptocurrencies will be! This enthusiast below is telling people to encourage everyone to sell other property to invest in Bitcoin so it becomes a self-fulfilling prophecy (sorry, fantasy…!). https://twitter.com/BitcoinMagazine/status/1468215601055387652

New FCA Duty To Consumers
Firms must demonstrate by 2023 they have adhered to this new duty. Sorry but what on earth have they been doing up till this point? We have always strived to demonstrate our duty to our consumers and if the firm you use hasn’t or doesn’t, well maybe it is not a firm you should be with at all… it is similar to when the regulator brought out a requirement to ‘treat customers fairly’ – what else were firms doing… do they not know that long-term success is made from doing just that and not fleecing customers? We shall not be changing anything as a consequence of this new rule as we don’t need to do anything and our mantra is to always strive to improve what we do, however good it may be already. Curiously though, with one of the highest charging structures in the industry (up to 6% initial fees taken from your investment as opposed to our own at Zero), St James’s Place thinks it doesn’t have to review its charging structure… I should love for the Regulator to decree rather differently, I assure you and let’s make all the restricted-to-SJP products’ ‘partners’ ‘employees’ as well to bring them into line! The Company’s structure, with ‘exit fees’ particularly targeted, is as close to the old and very expensive ‘commission’ structure as any charging terms I know! Please don’t be duped by the nice salesman in a nice suit…

Buying Life Insurance
I thought you’d all enjoy these – for me, it is recognising the real gap there could be in the event of the unfortunate and then insuring against it (but don’t overlook free cover you have already (insurance salesmen often ignore that, conveniently) – like death-in-service benefits, the value of pension plans or the fact that your property, land or business may be sold and not continued etc – there’s no need paying more than you need to an insurer):-

‘If life insurance was free, how much would you have?’; ‘You don’t buy life insurance because you’re going to die, but because those you love are going to live’; ‘If you had a money-making machine in the corner of your room, would you insure it?’; ‘This is something you have to buy when you think you don’t need it. When you know you need it, you often can’t buy it.’; and ‘Would you buy the cheapest parachute on offer…?’.

Sweet Justice For Christmas We were approached by a new client who had a problem with a fraudulent investment sale. He had appointed a Claims’ chasing firm which was going to extract 36% plus VAT of his compensation. We told him to cancel that immediately, which he did. However, the Claims firm, Karmen Funding (aka ‘Claiming 4U’), went ahead and completed the claim (which was very simple) then tried to keep £11,000 of the client’s rightful compensation. We took the Complaint to the Financial Services’ Ombudsman and it has now ruled that the maximum Karmen can take is £450 – its early cancellation fee, so what a lovely Christmas present for the investor! If only other claimants from the same fraud had listened to us… many did but some didn’t and these claims’ parasites have extracted millions from their due compensation which was just waiting for them to collect. Sadly we have not been as successful with the Legal Services Ombudsman over bad solicitors and barristers’ firms working in this space, as their Ombudsman and the Solicitors’ Regulation Authority are not as interested sadly, so you have been warned. (The LSO has little jurisdiction or teeth anyway). Karmen had been censured by the FCA earlier this year too. Would I ever trust it? No. https://citywire.co.uk/new-model-adviser/news/cmc-blocked-from-contacting-collapsed-db-ifas-clients-by-fca/a1451577

Gearing
Emotionally it is nice to not have debt but rationally, if borrowing rates are on the floor and you can make that money go further then it is wise to borrow – at least some – if you then deploy it wisely. Borrow long and invest short are also good adages! Why have most people made lots of money on residential property? Because they used mainly someone else’s money and profited from that too! If you cannot subscribe the maximum to pensions and save higher rates of Income Tax for example, then borrow as much as you can!

Yes of course it can go wrong but that’s where prudence and a wise spread of assets are necessary but it is a reason too why we prefer buying Investment Trusts for clients than open-ended Investment Funds, as most other advisers sell instead to their clients instead. No, that’s not to add extra risks at all but if a quoted company borrows a little money and can make a return above the interest cost then that extra profit comes back to you. F&C Investment Trust, capitalised at just under £5billion, has just borrowed £140million at fixed rates around 2%, with repayment up till 2061, forty years away. What a wise move! If the Trust then simply throws all that at, say, the FTSE All share Index, the dividends alone will be almost double the interest charge in year one alone and as sure as eggs is eggs, the capital and the income will rise and inflation meantime will whittle-away the real value of the debt and that little extra helps pay the management fees on the whole pot. Maybe we should have a look at that one! If you are our client, you’ll have a bevy of similar funds in your very widely spread pot. If you are invested with the average manager or adviser somewhere else (well almost all of them actually), or you are the average self-investor doing your own thing on a platform, you won’t have these – it’s as simple as that really. (And yes, if the economy is so bad in forty years then the debt is irrelevant anyway…).

Defence, Core Energy and ESG
A new problem is emerging…companies which provide our defence are recognising that the new pious brand of investing is beginning to cause them troubles in raising capital and securing the necessary following on the world’s stock markets. Banks are suffering terrorism against them by extremists trying to force them to not lend to fossil fuel companies and ‘unethical’ businesses too, so what is going to happen if this plays-out to the end? It is actually a worrying development whereby well-intended but naïve investors (and the institutions selling them their expensive ESG wares) could starve these necessary businesses of capital and what then happens to our fluffy businesses which don’t have any protection from the nasty elements around the world which are always keen to extract money illicitly or cause terrorism, war and havoc? We need to watch this space carefully, though maybe in the end and first, the ESG bubble will erupt big-time with the inevitable melt-down in US tech especially and then those investors will realise that it wasn’t a very good bubble to follow anyway, as what they had been ‘sold’ wasn’t what they thought they were buying after all, especially when they didn’t really understand what they thought they were doing at all. And anyway, won’t all businesses have to demonstrate appropriate suitable aplomb even just to survive – and that includes ESG?

Risk Warning

Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

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