WTF? Not one but Two ETFs?

I’ve always felt the active versus passive investing debate has been overdone. There is no such thing as pure passive investing, rather differing distributions of investment decision-making along the spectrum of possible decision points between fund manager, index compiler, algorithm constructor, rebalance operator, end investor.

That said, unlike many in the online Financial Independence community - notably Monevator and such luminaries as Lars Kroijer (see his Investing Demystified videos) Warren Buffett, at least in his advice to other investors, if not his own practice; see for example page 20 of his 2013 annual letter:

“The goal of the nonprofessional should not be to pick winners — neither he nor his “helpers” can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”

- I’ve been instinctively averse to passive funds for fear of ending up as a ‘mannequin’ investor; trapped inside an investment black-box until the next rebalance whilst the model on which the passive fund is based stops working in the face of a geopolitical shock or paradigm shift in market sentiment.

So why have I recently invested in not one but two ETFs? In a word, evidence.

Reviewing the performance of a few funds I was intending to retain whilst switching to a lower-cost platform confronted my intuitive distaste for so-called passive funds with the evidence of their superior past performance, but also the possibility of tilting my holdings in a [possibly] more yield-friendly direction.

Both the ETFs I’ve recently invested in are with Wisdomtree.

Established for more than a decade in the US, Wisdomtree has begun to make its offerings available in Europe, including direct listings on the LSE.

My first investment stemmed from a desire to finally invest directly in a US-focused fund. For several years I’ve been wary of the elevated valuations in the US market, and for several years have missed out on the upward progress of various US indices (although not completely as I have some biotech and global dividend fund exposure to US companies).

Trump’s recent victory and the potential return of fiscal activism prompted an exploration of how to invest in US small cap stocks whilst gaining some dividends. Even allowing for the historically lower payout ratios in the US market, the active funds on offer (e.g. Legg Mason IF Royce US Smaller Companies; Schroder US Smaller Companies) seemed to offer low or non-existent yields.

This is where ETFs come in. Searching for small cap ETFs on justetf.com, 

not only did Wisdomtree’s US Small Cap Dividend ETF outperform other small cap ETFs in the last 12 months, it also outperformed the above mentioned OEICS even before taking the dividend into account.

The fund’s most recently quarterly distribution announcement implies an annual yield of about 2%, not huge, but about as much as a US fund is likely to yield without option-generated income enhancement.

That same justetf.com search on “small caps” led me to Wisdomtree's Emerging Markets Small Cap Dividend ETF.

Like its US Small Cap Dividend stablemate, this Wisdomtree ETF is also dividend-weighted rather than market-capitalisation weighted.

In this version of ‘smart beta’, rather than share price performance driving the index weighting of individual stocks within the proprietary index through which the ETF’s holdings are calibrated, Wisdomtree weights each holding according to its contribution to the overall dividend stream and rebalances with that dividend tilt once a year.

Again in terms of capital value (excluding dividends) the Wisdomtree Emerging Markets Small Cap Dividend ETF has outperformed the OEIC I’d been holding in this area in the last 12 months: Newton Emerging Income (37.51% versus 24.65% for the Newton Emerging Income W Inc unit class).

With this ETF having switched to a twice yearly dividend payment pattern it’s hard to judge how comparatively income-generative it will be, but I’m prepared to experiment.

I still have some reservations:

- The dividend payment policy of ETFs is a little opaque: do they pay out all the dividends received like OEICs? Do they have revenue reserves like investment trusts?

- Each of these ETF portfolios being so market-embracing (709 stocks in the US Small Cap ETF and 592 stocks in the emerging small cap ETF) means the portfolios doubtless contain some of last year’s successes and next year’s relative failures until the next rebalance.

It is impossible to know in advance whether the recent outperformance in these two cases will persist, but the combination of lower charges, the absence of platform fees, and the liquidity of immediate trading on the open market merit at least this experimental foray.

Indeed my ongoing search for ‘value’ investments in what will become the small ‘growth’ portion of my post-retirement portfolio is leading me towards the ETF offerings in this area, which will be the subject of a future post.

Polar Opposites? A Fund Management Firm and an ETF

I read too much – an occupational hazard of a soon to be ex-academic. Although famed investors like Warren Buffett and Charlie Munger regard deep and wide reading as fundamental to sound investment decisions, too many ideas can spur too much trading.

I may have committed this error in recent days as frustrated by my current account turning from 1-2-3 to 1-2-1.5 I’ve committed a very small amount of incremental capital in search of yield.

To my surprise, my disparate reading prompted me to make my first ever investment in an ETF (to be discussed in a future post). It also alerted me to an intriguing test case of the value opportunity versus value trap question that haunts many investment decisions.

Another recent investment I’ve made is in the shares of Polar Capital  (LSE ticker POLR) a small(some might say ‘boutique’) fund management company. I can’t deny that the current yield of over 8% was a major attraction.
However the shares may be a longer-term recovery prospect with a clear potential catalyst for re-rating emerging in early 2017.

One of several frustrations of 2016 was the sudden departure of George Godber and Georgina Hamilton from Miton, and thus from managing their successful Miton UK Value Opportunities Fund, in which I’d invested with some success.

It quickly became apparent that they were headed for Polar Capital, although both had to serve long notice periods of 12 and 6 months respectively.

The recent interim results from their new employer confirmed that Georgina Hamilton will be running the new Polar Capital UK Value Fund due to launch in January with Godber joining in April.

It might seem rather speculative to base an investment case on two relatively young fund managers operating in a new institutional context. Yet not only is the macro-investment climate arguably more favourable to their style of value investing today than when they launched their Miton fund, there is more to Polar Capital than this new fund.

The steady decline in the Polar Capital share price from a peak of over £5.50 in early 2014 to just under £3.00 today mirrors a decline in assets under management, some of which stems from the relatively poor performance of a Japan fund, and related outflows, as well as “difficult industry conditions” in the first half of 2016 as the active fund management industry as a whole suffered outflows.

Yet according to the December 2016 results a number of the company’s funds, Biotechnology, Healthcare and the long/short UK Absolute strategy experienced inflows in more recent months.

Most of the Polar Capital funds are in the first or second quartile of their respective sectors since inception, and their Technology investment trust recently reported strong benchmark-topping results.

Admittedly the stated intention to hold the full year dividend for the current year at 25p (implying a 19.5p final dividend) may outstrip cashflow and the 2018 dividend could well come under pressure.

The interim results presentation describes the 2018 dividend as “expected to be defended, even uncovered" subject to: Evidence of return to growth and imminent EPS coverage anticipated; a strong balance sheet (although ‘strong’ is not defined) and there being no compelling alternative use of cash.
Reading between the lines potential investors should steel themselves for a dividend cut. But even if the 2018 full year dividend became 15p, this would be a yield on current share price of 5%.

Both profits and earnings per share in the half-year to September 2016 were down by around 20%, but the chief executive ended the interim results on an optimistic note: “Overall we have become somewhat more positive on the outlook for our business over the second half of the financial year.” In addition, although not at the forefront of my thinking, it’s easy to think of a number of larger fund management firms who are weak in the specialist niches (biotech, health, technology) where Polar Capital seem strong, making Polar Capital a possible takeover target.

So there is more to this investment than depending on the success of two ‘value’ fund managers to increase the underlying value of the company.

As ever, the following disclaimer applies: the above is an attempt to explain my investment strategy, not to be taken as advice suitable for anyone reading this site.

From Biotech to...erm...Biotech

The closer I get to leaving full-time work the more yield-hungry I become.

Yet like many investors I've learnt the hard way that eschewing 'growth' investments in favour of high current yield can impair the real terms rise in portfolio value which is a necessary condition of long-term prosperity (one day I will document here some of my ill-fated flirtations with high yield shares).

I've also suffered in relative terms in recent years from having very little exposure to technology companies among my fund and equity holdings.

Given that the Office for National Statistics life expectancy calculator estimates I will live for another 37 years I'm starting to ponder the wisdom of jettisoning all my zero-dividend paying 'growth' funds for income-generating vehicles.

In 2013 I invested in the much-vaunted biotech sector with a small 'punt' - and it was only ever a speculative adventure - in the Biotech Growth Trust (BIOG). Over the next three years the share price bounced from my entry point of 378p to nearly 900p in 2015, then to below 600p, before settling near 700p in September 2016.

Amidst concerns over a possible Clinton presidency clamping down on pharmaceutical pricing, in September 2016 BIOG's rival investment trust, International Biotechnology Trust (IBT) announced the introduction of a 4% dividend starting in early 2017, paid out of capital, and calculated on the trust's Net Asset Value of the previous August 31st.

Comparing the recent capital performance of the two trusts, if anything IBT has the edge over BIOG (e.g. over 3 years to 2nd December 2016 share price growth was 88% for IBT versus 65% for BIOG).

Some familiar biotech companies are common to each trust: e.g. Celgene, Biogen. The differences lie in BIOG's more concentrated, large-cap focus, with IBT having 14% in unquoted companies, against just 1.2% in unquoted for BIOG.

I recently switched my BIOG holding for IBT and look forward to receiving the first dividend in early 2017.

Of course paying a 4% dividend from capital may impair capital growth, but the opportunity to retain exposure to the biotechnology sector whilst earning a relatively attractive yield is too good to overlook.

On Discovering The Art of Speculation (1930) by Philip Carret

An investor lauded by Warren Buffet as possessing “the best truly long-term investment record of anyone I know” deserves more attention than he’s hitherto received. 

Philip Carret’s under-appreciated classic The Art of Speculation – published in 1930 - was a welcome serendipitous discovery on a recent visit to one of the university libraries I occasionally frequent.

Published four years before Benjamin Graham’s The Intelligent Investor, Carret’s text is pithy, stylish and full of timeless investment insights.

Who was Philip Carret?

Born in 1896 and living to the age of 101, Carret founded what became the Pioneer Fund, one of the first mutual funds in the USA. Under Carret’s 55 year management of the fund an initial investment of $10000 became $8m. The firm he established in 1963, Carret Asset Management, still trades today.

What I’ve learnt from The Art of Speculation

Firstly, and fundamentally, Carret questions the sharp distinction Benjamin Graham went on to make in The Intelligent Investor between investment and speculation. As Carret rightly points out, as we face an uncertain future all investment decisions involve an element of speculation. The difference between the two is a function of temperament and time horizon.

Secondly, Carret sprinkles The Art of Speculation with many illuminating remarks about how financial markets work:

“Limitless horizons stretch before the would-be speculator”.

“Successful speculation requires capital, courage and judgement”.

“Like the ocean, the stock market is never still”.

“Fashions play their part in the stock market as in other affairs of life”.

“Finance has its anatomy and its physiology. The former is studied through the medium of balance sheets, the latter through income statements”.

“One of the essential qualifications of the successful speculator is patience”.

“The most important factor affecting the value of any single security at any given moment is the unknown factor”.

Thirdly, the very title “The Art of Speculation” embodies Carret’s view of investment as a thoroughly human activity which should not be reduced to the dogmatic and mechanistic application of formulae and rules:

“The speculator will never be a success if he attempts to follow any set of rules blindly. There will always be exceptions, he must apply his intelligence keenly in any given situation”.

Fourth, although not all of Carret’s Twelve Commandments (listed below) are either applicable today or beyond question, each is as stimulating as I found The Art of Speculation as a whole. Available for about £7 online Carret’s book is at the least the equal of Graham’s better-known text.

Carret’s Twelve Commandments for Speculators

(1) Never hold fewer than ten different securities covering five different fields of business.

(2) At least once in six months reappraise every security held.

(3) Keep at least half the total fund in income-producing securities.

(4) Consider yield the least important factor in analyzing any stock.

(5) Be quick to take losses, reluctant to take profits.

(6) Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available.

(7) Avoid "inside information" as you would the plague.

(8) Seek facts diligently, advice never.

(9) Ignore mechanical formulas [such as price-earnings ratios] for valuing securities.

(10) When stocks are high, money rates rising, business prosperous, at least half a given fund should be placed in short-term bonds.

(11) Borrow money sparingly and only when stocks are low, money rates low or falling, and business depressed.

(12) Set aside a moderate proportion of available funds for the purchase of long-term options on stocks of promising companies whenever available.

More on Philip Carret

Interview with Jason Zweig, Forbes Magazine, June 20^th 1994.

Value Walk Carret Resource Page.

New York Times Obituary.

Extract from 1995 TV interview on Wall Street Walk.

Learning from Keynes the Investor

I’ve always been fascinated by John Maynard Keynes. 

A formative intellectual experience was discovering his General Theory in the now sadly demolished Birmingham Central Library whilst studying A-Level economics in the 1980s.

Chapter 12 of the General Theory is essential reading for any investor – with Keynes’s stylishly prescient prose vividly animating the very human dimensions of investment with ideas that still resonate today:  ‘animal spirits’, the ‘beauty contest’ metaphor, the fragile state of expectation.

Yet Keynes was not just a theorist, he was one of the foremost investors of the first half of the twentieth century - both on his own account and in his capacities as Bursar of King’s College Cambridge and Chair of the National Mutual Life Insurance Company.

Recent data compiled by Chalmers, Dimson and Foo has built on the impressionistic understanding of Keynes’s investing strategy in past biographies to provide a comprehensive portrait of Keynes the investor.

Here are five lessons I’ve taken from a brief analysis of both Keynes’s qualitative approach and quantitative record:

1. Flexibility: “When the facts change I change my mind”

It’s not entirely clear whether Keynes actually spoke those few words routinely attributed to him. In practice Keynes did change his mind about investment strategy. In his early investing career Keynes attempted a top-down market-timing approach to shares, currency and commodities. He prospered for a while but twice lost heavily in the 1920s, in both currency and commodity speculation.

In 1938 after a bruising few months in which the King’s College share portfolio fell by over 20% he concluded that market timing was impossible:

“Most of those who attempt it sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind”.

He set out a revised investment strategy in a memo for the Estates Committee of King’s College, 8th May 1938:

“I believe now that successful investment depends on three principles:

i) A careful selection of a few investments (or types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time;

ii) a steadfast holding of these in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake;

iii)  a balanced investment proposition, i.e. a variety of risk in spite of individual holdings being large, and if possible opposed risks (e.g. a holding of gold shares amongst other equities since they are likely to move in opposite directions when there are general fluctuations).

2. Temperament is more important than technique or market timing

 “I do not believe that selling at very low prices is a remedy for having failed to sell at high ones […] it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself […] An investor is aiming, or should be aiming primarily at long-period results and should be solely judged by these.”

(Letter to F.N. Curzon, 18^th March 1938).

3. Prepare for, learn from and minimize serious investment mistakes

“It is important in conducting a post mortem to be sure what is one’s test of success. One important test is the avoidance of ‘stumers’ with which many investment lists are disfigured. I mean by this definite mistakes where the fall in value is due not merely to fluctuations, but to an intrinsic loss of capital […with] no particular reason to expect a subsequent recovery […] It is particularly useful for future guidance to make a list of these and remember how they arose”.

(Letter to Francis Scott 7^th June 1938).

4. Arbitrary asset allocation percentages are not a coherent investment strategy

“I am strongly opposed to rigidities […] Fixed percentage – particularly within each group of industry etc is surely altogether opposed to having an investment policy at all. The whole art is to vary the emphasis and the centre of gravity of one’s portfolio according to circumstances. Subject to a minimum in government securities and a maximum in ordinary shares I would strongly urge the desirability of the greatest possible flexibility”.

  

(Letter to Francis Scott 7^th June 1938).

5. Short-term fluctuations are the necessary price of long-term wealth accumulation:

“It is in the essence of [the long-term investor’s behaviour] that he should be eccentric, unconventional and rash in the eyes of average opinion” (General Theory, Ch. 12).

Applying this philosophy, particularly from the 1930s, with a portfolio of above average yield, tilted to mid and small caps, with decreased turnover as he grew older, Keynes succeeded as both an endowment manager and a private investor.

From 1922-1946 he produced a return of 16% per annum for the King’s College endowment fund and died with a personal fortune of over £400,000 – in excess of £15 million in today’s money.

Sources and Further Reading

Chalmers, D., Dimson, E. and Foo., J. (2015) "Keynes the Stock Market Investor: A Quantitative Analysis", Journal of Financial and Quantitative Analysis, Volume 50, Issue 4, pp. 843-868 

CFA Institute Podcast discussing the above article.

The Collected Writings of John Maynard Keynes (Vol. XII) Edited by Donald Moggridge, Macmillan, 1983.

Wasik, J. (2014) Keynes’s Way to Wealth, McGraw Hill

G.L.S. Shackle and the Investing Imagination

In my first post I cited the English economist G.L.S. Shackle (1903-1992) as a formative influence. I’m in good company for in a footnote on p185 of The Black Swan Nassim Taleb lauds Shackle as a “great underestimated thinker…now almost completely obscure”. So who was Shackle and why should an investor be interested in his work? In a word, “uncertainty”.

Shackle’s career as an academic economist was a life-long attempt to radicalise the insights of John Maynard Keynes and encourage a reluctant profession to reckon with the fundamental human dilemma: we live and act in the present towards a future we cannot know in advance. If we had that knowledge we would not be exercising choice, or by implication living a recognisably human life. As Shackle puts it in a wonderful essay “What Makes an Economist?”:

 “A world without uncertainty would be an utterly inhuman world”.

Why does this matter for investment? 

Shackle, like Keynes, places the fragility and volatility of the “state of expectation” regarding future returns at the heart of economic analysis. Like Keynes, but taking his arguments much further, Shackle questions the core assumptions of neoclassical economics, and by implication the foundations of “efficient market” theory.

Shackle’s signal contribution is laid out in his 1979 text Imagination and the Nature of Choice. There he describes choice not as the logical reckoning of costs and benefits but as a beginning, a creative act, an origination. To choose is to enter the terrain of what he calls “the imagined, deemed possible”. Shackle’s fundamental point is that “choice is not in first place mere calculation, but the work of imagination”. To choose a course of action is to make a commitment, to move towards a “time-to-come” in which the outcomes of that choice will be shaped by circumstances we cannot foretell.

What can an uncertain investor take from this?

Reading Shackle will not provide us with a guide to which particular investment to make or an assessment of macroeconomic policy. Instead like the best thinkers he provides what all investors need: an intellectual disposition of humility faced with the unpredictable events influencing the present and future values of financial assets.

In short reading Shackle encourages the cultivation of what I call the investing imagination: an ability to conceive of possible ‘times to come’ when choosing between possible investments whilst acknowledging that the results of our choices will be partly shaped by the unpredictable choices of others (other investors, policy-makers, company management) and their unforeseen consequences.

The world does not remain constant while we pause over a potential allocation of our capital, and we cannot be certain what the consequences of our choice will be, we have to imagine possible outcomes.

As Shackle puts it:

“Choice is an exploitation of unknowledge (…) Unknowledge confronts the action-chooser in the form of a plurality of rival imagined things deemed possible. Some of these are thoughts which lift his heart and some are ones which sink it (…) Choice throws open the gates of anticipation to the good and to the bad”. (Shackle, 1979, Imagination and the Nature of Choice).

“What the decision-maker wants is access to hope. The greater the possible loss or misfortune, the more exhilarating may be the success which is then brought within imaginative reach. Decision is not, in its ultimate nature, calculation, but origination”. (Shackle, 1974, "Decision: The Human Predicament", Annals of the American Academy of Political and Social Science, 412)

How to find out more about G.L.S. Shackle

Without access to a university library it may be difficult to locate Shackle’s work as he died before the age of electronic journals.

The best sources are (expensive) academic commentaries:

Peter Earl and Bruce Littleboy (2014) G.L.S. Shackle, Palgrave Macmillan

J.L. Ford (1994) G.L.S. Shackle: The dissenting economist’s economist, Edward Elgar

Some of Shackle’s work and comments on it are available online e.g.

G. Shackle (1979) “Imagination, Formalism and Choice”, Chapter 2 in

  

M. Rizzo Time, Uncertainty and Disequilibrium

An interview with G.L.S. Shackle Austrian Economics Newsletter, Vol. 4, No. 1, Spring 1983

My Small Cap Dilemma

I have something in common with the England football team. I may have been made to look better than I really am by a favourable context only to be found out in the most testing conditions.

I’m referring to my until recently successful use of a variety of UK small and mid-cap funds since my accelerated journey to early retirement began in 2012. For the next three years progress was largely serene, indeed the Numis Smaller Companies Index reached an all-time high in June 2015. The diagram below from the 2016 Numis Annual Review  captures the long-term outperformance of UK smaller companies over sixty years:

However look carefully and you can see the down-squiggle of 2007-9 which was far more severe at the time than the graph’s scale expresses (many UK smaller company funds and shares fell 40-60% between late 2007 and spring 2009).

  

Could we be on the brink of another sharp decline in UK small cap fortunes?

Even before the EU referendum vote on June 23^rd there’d been some signs of a pull-back before the severe and sudden mark-down. The partial recovery in some funds and stock prices since early July 2016 still leaves many several percent down, as the prospect of more difficult times for UK-focused smaller firms and funds looms.

So what to do? 

About 10% of my hoped for retirement fund is in non-income bearing UK smaller company funds (e.g. Marlborough Special Situations, Fidelity UK Smaller Companies, River and Mercantile UK Smaller Companies) from which I’d been intending to switch into dividend-generating vehicles (possibly adding to existing holdings in Acorn Income and Small Companies Dividend Trust) either side of the April 5^th 2017 tax deadline (I aim to leave full-time work in late 2017).

One of the many lessons of June 2016 is the importance of geographical/currency diversification and the avoidance of excessive home bias. 

I’d begun to address this in my 2016/7 ISA and the improvement in a number of previously lagging overseas holdings in Newton Emerging Income, Guinness Asian Equity Income, Aberdeen Latin American, and the strong performance of Fidelity Global Dividend, provide some indication of the worldwide array of income-generating options at my disposal.

However, one strategy is becoming more appealing, particularly given the likelihood of my breaching the £5000 dividend taxation threshold in future years. Rather than switching all my capital into dividend paying instruments I will reserve a portion for pure growth investments, selling a small portion of the capital if and when required to supplement the core natural yield of the bulk of my holdings. 

In this vein I am likely to add to what has so far been a highly successful position in Fidelity Asian Smaller Companies. The fund manager Nitin Bajaj has an admirably candid approach as he outlines in this 15 minute Charles Stanley video and this fund (and the very similar Fidelity Asian Values investment trust) provide access to companies I’d be highly unlikely to have found myself.

With (hopefully) thirty years or more ahead of me (perhaps even more according to this book about The 100 Year Life) there has to be a place for growth in my portfolio, and given the rhetoric of the new UK Prime Minister we can’t assume that dividend tax rates and thresholds will be left untouched in the years ahead.

In this possibly higher-tax lower UK dividend environment the ability to realise up to £11,100 per annum free of capital gains tax, as well as natural yield, from globally diverse sources should not be overlooked.

 

Books that Changed How I Invest

As a soon to be ex-academic reading has been my life. As I head towards early retirement I’ve radically altered my book-buying habits to provide a rapid self-taught course in investing. Here are five works that have changed not just how I think but how I’ve invested.

1. Benjamin Graham The Intelligent Investor

There’s a reason why most investing reading lists include Benjamin Graham’s classic text. Chapter 8’s famous personification of ‘Mr Market’ has once again proved prescient in the wake of the EU referendum result: “Often […] Mr Market lets his enthusiasm or his fears run away with him and the value he proposes seems to you a little short of silly”.

The 2003 edition with Jason Zweig’s helpful chapter summaries could do with an update. There is no shortage of recent material to work into the commentaries.

2. Lee Freeman-Shor (2015) The Art of Execution

Manager of the Old Mutual European Best Ideas fund, Lee Freeman-Shor draws on analysis of nearly 2000 investments made for his fund by some leading fund managers. Most of their decisions lost money, but the best managers made up for this with big winners. The key to success is knowing what to do with an initial winning or losing position to maximize gains and minimize losses.

Freeman-Shor provides a helpful typology of investor decision styles:

Rabbits: frozen into inaction, they hold onto losing investments for too long.

Assassins: ruthless with losing investments, they follow stop-loss rules and materially adapt when they are losing.

Hunters: buy more of an investment after an initial entry starts to lose in the conviction of its long-term recovery. Following this strategy emboldened me to add to a losing position in Aberdeen Latin American Income. The incremental addition is up over 20% in three months, bringing the total of three investments to near break-even.

Raiders: grab a small profit, but can sell out completely of winning positions too soon.

Connoisseurs:  sell a small portion of stakes in winning investments, but hold on to the bulk of their successful holdings.

3. Ben Carlson (2015) A Wealth of Common Sense

Ben Carlson’s book takes its title from his invaluable blog.

The text distills several years of wisdom:

- The necessity of articulating a clear investment policy statement: Why are you investing? What is your risk appetite? What is your time horizon?

- Making money in the long-term requires a willingness to endure losses over several short-terms in an investing life-time: “Plan on experiencing uneven results, frustrating periods, volatility, and the occasional crash”.

4. Tobias Carlisle (2014) Deep Value 

A challenging read in the best sense that mixes business biography and back-testing of deep value valuation metrics, ultimately to highlight the power of mean reversion: “investors aren’t rewarded for picking winners; they’re rewarded for uncovering mispricings – divergences between the price of a security and its intrinsic value […] And the place to look for mispricings is in disaster, among the unloved, the ignored, the neglected…”

5. S. Horan, R. Johnson, T. Robinson (2014) Strategic Value Investing

Another data-laden text, with chapters on different methods of estimating the intrinsic value of potential investments and thereby what both Benjamin Graham and latterly Seth Klarman term “the margin of safety”: the potential difference between current stock market price and the underlying value of the business.

As with Carlisle’s book this volume’s historic data illustrate the long-term advantages of small-cap value, together with the attendant short-term volatility -  an important lesson given what’s happened to my overweight in UK small and mid-caps since late June.

Introducing 'The Uncertain Investor'

“Restless and incalculable, the speculative market reflects the wild ambitions, the reckless imagination, the haunted mind and the ever-mutable outlook of the business world and of humanity at large” (G.L.S. Shackle (1982) Means and Meaning in Economic Theory).

Those characteristically prescient words of the English economist George Shackle are an apt opening for 'The Uncertain Investor' amidst the ongoing turmoil of post-Brexit politics and economics.

Who am I?

Inspired by the emerging Financial Independence movement, particularly the writings of Monevator, Simple Living in Suffolk, and fuelled a few years ago by a combination of a sudden inheritance and growing discomfort with full-time employment I plan to ‘retire’ in 2017 but thereafter work on refining the raw thoughts and ideas I will lay out here as a bridge between now and then.

My investment journey

From an unhealthily young age I’ve been intermittently engaged with the stock market. My father set up a Barclays Unicorn financial plan to part fund my university life in pre-student loan days and I gradually became aware of his portfolio: Grand Metropolitan, Smithkline Beecham, Ash and Lacy, Ault and Wiborg, Ocean Wilsons.

As I studied A-level Economics the privatisation of British utilities introduced my mother to the stock market and I became her informal financial ‘adviser’ [no commission…]. I bought my first share in 1984 (12 shares in Applied Computer Techniques, makers of the Apricot PC) adding a rather random collection of unit trusts and individual equities in the following years (e.g. Hays, National Express). The 1990s and early 2000s was dominated by career-building and deposit-saving until the ill-timed purchase of a flat in the mid-2000s, coupled with lack of time and at that point relative financial ignorance, meant I could do little other than watch my savings decline through the late 2000s financial crisis.

The death of both parents, becoming an executor twice, inheritance, and the discovery that extreme early retirement was possible find me here. Since becoming mortgage-free in 2012 I’ve targeted 2017 as the year I walk away from my office for the last time and have been rapidly accumulating capital and knowledge to reshape a still growing portfolio to that end.

What can I add to the many wise words already posted by others on these themes?

However sophisticated I might feel my investment philosophy is, in practice it’s less Warren Buffett or Benjamin Graham, more as Eric Morecambe might put it: ‘I make all the right investments, but not necessarily at the right time’...

So I will use 'The Uncertain Investor' to highlight my mistakes (currently too overweight in UK small caps, too many UK equity income funds, too many investments, why no passives, why no bonds?...I could go on…) and the occasional success (Caledonia Mining, dividend up 22% today!) I will document my dilemmas, share links, resources, reflections and hopefully contribute thoughts to help us all navigate through treacherous times.

Why ‘The Uncertain Investor’?

The reference to, and contrast with, Benjamin Graham’s classic The Intelligent Investor is deliberate. Instructive though Graham and many other investment texts are, I've been revisiting the economic thought I briefly encountered as part of my degree in the 1980s. Keynes's General Theory, particularly Chapter 12, is always worth re-reading, perhaps even more so his 1937 article in the Quarterly Journal of Economics.

Yet as the opening quotation suggests one of Keynes’s lesser-known interpreters, G.L.S. Shackle, is the thinker I’ve found most probing.

Shackle’s distinctive approach to the human condition, “a theory of intelligent conduct in a flowing, enigmatic and elusive world”, regards choice not as a cool calculation of cost and benefit but as an anticipation of an imagined future and a commitment to a course of action in a time-to-come: 

“Choice is a resolve, a moral and not merely an intellectual act […] In the act of choice, the chooser in some degree stakes his own self-esteem”. (G. L. S. Shackle (1979) Imagination and the Nature of Choice).

In choosing where to invest, more is at stake than our money.

My current reading/listening list

You Have to Invest (A Wealth of Common Sense)

How Real are those post-Brexit Gains? (Simple Living in Suffolk) which reminds me of Harold Wilson, 1967, 'The Pound in Your Pocket'

Aswath Damadoran's Musings on Brexit

Where are the Best Global Values? (Meb Faber podcast)