Category Archives: Stock Market Investing

2018 – A long term Investor’s review

This image has an empty alt attribute; its file name is Screenshot-2018-12-15-at-09.47.21.pngWow. What a year 2018 has been from an investment perspective. The main theme has been a surge of volatility in the stock markets. For the long term investor, such volatilty is not a problem. In fact it presents some of those rare opportunities to pick up stocks at bargain prices. As Warren Buffett said in 2008: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”  

Indeed 2018 has a lot of similarities with 2008. Unfortunately, as back then, today investors are pulling out of the stock markets as fast as they can instead of doing the opposite. If you are striving for financial independence, lower stock prices are the best thing that can happen while you are in the asset accumulation phase.

Where is the Santa Rally?

With only one week or so to go before the end of the year and no Santa Rally in sight it looks like most investors’ portfolios will turn out a little negative for the year. Here is a snapshot of my portfolio’s performance.

Globally diversified portfolio performance to 14 Dec. 2018 (YTD) GBP

As you can see, the portfolio is currently 10% off the high point in September; this is a major relief as I am now able to capitalise and obtain more units at a bargain. The only problem is not having enough spare cash to deploy.

Some of the portfolio movements can be attributed to fluctuations in the exchange rates as the portfolio is globally diversified.

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GBP to 15 Dec. 2018

The GBP has dropped in value over the past year. This not ideal as it means that foreign stocks are more expensive to buy but it also boosts the overall value of the portfolio as global stocks are worth more. This concept and impact of home bias is explored in an earlier post.

Net worth impact

The major revelation of the year for me came up when I was reviewing my net worth

I calculate a snapshot of net worth every 3 months in-order to develop a long term trend chart. Previously, due to the relatively small size of my holdings, the trend has been only going up. However, in the first quarter of 2018 there was a drop. This is nothing to be alarmed by and here are two reasons why.

First it illustrates the magnitude of the portfolio. As your portfolio grows larger the less and less your regular savings will have an impact on net worth.

The other reason is that it can make you reconsider or reaffirm you risk tolerance. It looks like there may be another drop in the fourth quarter leading to a relatively flat annual return.

A point to note is that there was also the largest record quarterly gain in the second quarter. This too had little to do with my regular savings but was mostly a direct result of a brief market resurgence.

Ignore the noise

There are always many distractions in the media about all sorts of events going on with the world economy or politics and predictions of how they will affect investment returns. The investment industry is mostly a giant marketing machine so it is crucial to focus on the fundamentals of business rather than sensationalised articles and a get rich quick mentality.

It is never a good idea for the long term investor to diligently follow the news and even worse act on what they see. Instead, the best thing to do is to focus on a high savings rate while investing regularly into low cost index funds.

I think 2019 will be another interesting year but have absolutely no idea where the markets will go. Focus will be on the things that matter; earnings growth of business, maintaining a good savings rate and keeping an eye on dividends. Speculative return is just a distraction.

£3000 for a new iPhone – no thanks

It is September again which means that Apple will be releasing its latest and greatest iPhone, their best selling product. Many will splash out a lot of cash on this gadget without assessing how this may impact their finances in future. After doing some assessment of my own I was astonished at how big the impact is due to the huge costs involved.

I have to admit that as an iPhone 6 user I have been tempted to jump on the bandwagon and upgrade to the new version of the product after watching the slick Apple 2018 keynote product launch presentation which was streamed from the Steve Jobs Theater in Cupertino.

The average selling price for iPhones is now higher than ever before following the release of the Xs, Xs Max and Xr versions with starting prices at $999, $1,099 and $749 respectively in the US. The annoying thing is that the same number (£999, £1,099 and £749 ) is used for the price in the UK despite the pound being stronger than the dollar. These prices are obviously crazy if you consider what other phones with similar specs are currently on the market.

Buying on contract

Costs are even crazier once you realise how much people end up paying by getting these devices on contracts as most cannot afford to pay cash upfront. My strategy is to buy a phone SIM free for cash and buy a separate monthly contract which is suitable for my needs. Currently I have a contract for just £10 a month and purchased an iPhone 6 for £260. The phone was refurbished but you couldn’t tell it apart from a brand new one.

To see how much a new iPhone would cost I logged on to my mobile service provider’s website. In-order to have the new iPhone Xs Max on a typical contract you would need to pay £100 cash and then £103 a month for 24 months. Over the 2 year period total costs would come up to £2,572.

As it is such an expensive purchase, the service provider suggest that you insure the device, at £14 monthly. This would result in a total cost of £2,908! This is shocking as I would have paid only £240 on my current plan over the same period by not doing anything. I might be missing something but the iPhone 6 seems to be pretty fast, runs the latest quicker IOS 12 software, has a good “retina” screen, decent battery life and perfect camera.

Investment impact

Being a personal finance geek, I decided to plug the numbers for the contract for upgrading into an investment calculator to find out how much someone could have from investing all the payments in the stock market (or better yet in Apple stocks) at a typical 10%  annual return rate.

Phone contract payments invested over 2 years

Phone contract payments invested over 2 years

The figures keep on rising and the final total cost for the insured gadget comes in at £3,364.24. This is definitely not worth it. I don’t  even want to go into the impact over a 10 year period.

Moore’s Law

While studying electronic engineering I got acquainted with Moore’s Law. Moore’s Law is an observation that the number of transistors in a microchip doubles every year while the costs are halved.

This is why computers have gotten smaller, better and cheaper with time. For this reason, the £3,000 iPhone we are considering here would have greatly devalued and seem outdated compared to new devices by the end of the contract. Some may consider taking a further hit then by buying the latest device.

I would prefer to maintain my current device for as long as practicable and invest in real assets for now. After investment, some of the proceeds may be used to get a good device at a good price in when the need arises.

Why you should invest globally when aiming for financial independence

As the 2018 FIFA football World Cup heads to a thrilling climax it has reminded me of the importance of having a globally diversified investment portfolio. Not surprisingly, as in football or any other sport, investors tend to be very home biased by usually holding the majority of their investments in stocks which are based in their home country. This is often not the most optimum strategy and I will go over my reasoning for this here.

Key financial independence principles

Having financial independence requires that you own a collection of assets which are capable of providing you with passive income which is more than your expenses. Once you reach this stage working for money becomes optional as you will be free to do what you want with your time. Using principles explored on this site and others it can take a relatively long time (typically 8 to 15 years) to achieve this therefore it is paramount that the most optimum strategies are applied. The key principles include:

  • Spend less than you earn and invest the rest
  • Maintain a very high savings rate
  • Invest in low cost stock market index funds
  • Diversify your portfolio
  • Keep investing costs very low
  • Avoid trying to time the market

The power of diversification

The  principle I am focusing on is portfolio diversification. A common way to diversify is by constructing a portfolio composed of stocks and bonds. Bonds should only be included to reduce volatility and protect a portfolio’s value from market downturns for the short term. As a young person striving for financial independence I reduced my bond allocation to almost zero in-order to maximise investment returns. The few bonds I hold are within micro portfolios which may be deployed in the near future for short term goals such as buying a car or property.

As a UK based investor only 20% of my portfolio is made up of UK stocks. The rest consists of international holdings (approx. USA 35%, Europe 20%, Japan 15%, Pacific excluding Japan 10%). This proportion is roughly in line with the weightings of global GDPs (Gross Domestic Product) of these developed economic areas. GDP is a measure of the total value of goods and services produced by the region.

GDP list

Top Global GDPs. source – Wikipedia

With a global portfolio influenced by the above statistics, you can ensure that to a large degree you will benefit from any growth within these regions.

Currency risk – is it worth it

It is important to note that by investing outside you home country you will gain exposure to currency risk. If your currency gains relative to other currencies the portfolio will reduce accordingly and if your home currency loses value then your portfolio will increase in value. I experienced this personally in 2016 when my portfolio jumped by +20% after a drop in the pound sterling.

This is a double edged sword so you should try to get a balance by not overexposing yourself to one region. However, I believe that in the long run currencies in stable economies generally revert to a certain valuation and have low volatility. The benefits of diversification and our inability to predict the future outweigh this risk in my opinion.

Another side of the argument is that for investors in major economies such as the US or UK there is no need to invest internationally as the companies in the major indices (S&P 500 and FTSE 100) already do a lot of their business overseas. This is entirely true but it is not a guarantee that these investments will keep on performing as well as in the past. An interesting article on this is on Morningstar.

Like in this year’s football world cup, expected results are often far from the reality, with all the big teams (Spain, Argentina, Portugal, Brazil, Germany) crashing out unexpectedly. We simply don’t now where the next big gains will come from. It is best to globally diversify, tune out the noise and keep investing.

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Good investing does not require super intelligence or advanced learning

What does it take to be a good investor? I have been considering this question while learning from Warren Buffett as he addresses the 2018 Berkshire Hathaway annual shareholders meeting. You will probably get many different answers to the question depending on who you ask.

Some may say that you need luck; so that you can buy the next Google or Amazon stock at a low price and then go on holding it before cashing out when the price is highest. This idea of “timing the market” is extremely difficult and not many can have been in the right place at the right time.

Speculation and Investment Pros

Others may point to all sorts of speculative “investments” such as gold, cryptocurrencies or commodities. Of course these are really not investments as they do not have the capability to intrinsically generate value. The differences in price are often due to speculation and what others are willing to pay. No wonder why the prices vary wildly and volatility is high.

Another popular point of view is that only those employed as professionals in the finance sector on Wall Street or the City of London are qualified to invest wisely and have some kind of crystal ball as to how to make money with investments. This is very short sighted as most fund managers are salesmen who generate their huge incomes by marketing certain investments and charge rip off fees. [see Where are the customers’ yachts]

It is understandable why this is as the individuals can come up with fancy titles, designations and may have studied at prestigious institutions. I won’t name names but “star” fund managers come and go, usually taking with them millions of customer fees when they disappear. Same is true with many exotic investment funds and strategies which have cropped up over time.

The key is to learn from the best teachers and apply a few basic principles

During the meeting, Buffett  and Charlie munger were challenged as to why they think little of business schools and all that, along with fancy designations like CFP or CFA. The question also queried if the to advice laid out the Buffett in the 1984 article The Superinvestors of Graham-and-Doddsville, which is critical of academia and details results obtained by value investors in comparison with the S&P 500, still holds today.

In response, Buffett stated that good investing requires a disciplined approach, should not be complicated and can be learned from great teachers. By teacher, it does not necessarily mean an academic, but someone who understands the best approach to a subject. Buffett gave Charlie as an example of someone who has been a good teacher to him.

It is also important to educate yourself about what good investing is all about. investing in stocks should be seen as buying parts of a real business which generate profits and provide value. it was also interesting to note that Buffett prefers someone with full understanding of Chapter 8 of The Intelligent Investor by Benjamin Graham (below) than a top graduate of a top five business school.

It was interesting to watch these two great investors speak again and I look forward to applying more newly learned principles in the near future.

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