A Damascene Investing Moment: Going into Cash

The trouble is that a single investing lifetime isn't really enough to gain enough experience to handle such situations.  We tend to adopt approaches that have worked in the recent past - a period that can sometimes extend for decades - without realising that we're trapped in a bubble of time.  An appreciation of market history - which I didn't have either at the point the banks started imploding - basically tells us that banks have a nasty tendency to implode and then get bailed out by taxpayers.  This happens on average once every twenty years somewhere around the world.

Very, very good point Timarr!

I've posted a few times recently that I think we are very much in the final stages of the "cult of the equity".....this was a period that started in the 1950s and, IMO, was driven by population growth, technological change, globalisation etc etc - and I now think, as the baby-boomers retire and all/most of the one-off gains have been made, that the old maxims of "buy dips" or "equities are the only way to go for the long term" are basically dying fast! Indeed if you look at the last 10 years (not an arbitrary period - it is also the period since the FTSE100 hit its all-time high at about 6950) there is a case for saying it has already finished.

IMO this makes virtually ALL patterns, norms and rules based on past data completely and dangerously redundant!*

ee

*(especially the sell in May one, where some of my specific holdings are concerned  ;-))

A point of interest (particularly for Timarr) might be that most of the damage to the VSL's performance was done by the repeated selection of RBS as a "top stock pick". Initially I also favoured this pick, despite dire warnings from ee & some others with real investment banking experience.

The trouble is that a single investing lifetime isn't really enough to gain enough experience to handle such situations.  We tend to adopt approaches that have worked in the recent past - a period that can sometimes extend for decades - without realising that we're trapped in a bubble of time.  An appreciation of market history - which I didn't have either at the point the banks started imploding - basically tells us that banks have a nasty tendency to implode and then get bailed out by taxpayers.  This happens on average once every twenty years somewhere around the world.

Ultimately we're pattern seeking creatures, which makes sense when we're scrabbling around for survival in a basically static environment.  In a dynamic, adaptive system like the stockmarket this becomes very dangerous when recent norms are overturned.  We saw, for example, a similar thing happen in the 1970's when the near three decade post-war boom came to an end.  The result of that was the adoption of portfolio theory, efficient market ideas, CAPM and the like: which worked, sort of, for a while.  Now that's all gone wrong, too as the carefully designed quantative algorithms implementing these ideas, which were supposed to fail once in every million years or so fell over after just a handful.

Other, rule of thumb, heuristics like "Sell in May and go away", also have a limited lifespan, even if they're really some kind of folk psychology version of an underlying psychological mechanism (e.g. all the top traders go on holiday for a few months, or something).  Adopting it last year would have been a disaster.  The patterns of stockmarkets act over periods of multiple decades, not the handful of years we typically experience.  Of course, if we're lucky and invest in stable times then our simple rules generated by observation may make us rich and we're accounted investing geniuses: but we don't want to applying those same rules when the iron hand of randomness returns, as it inevitably does.

Mucho gratias Mark re the bond fund suggestions.

http://www.djnewsplus.com/article/0,,SB127298636552415927,00.html?mod=

Maybe sell in May and go away isn't such a bad idea.

(I seem to remember David Schwarz a few weeks ago saying this particular piece of investing advice was outdated!)

Hi Fangorn,

If you're looking at funds for fixed interest exposure, you might want to have a look at these ETFs: SLXX: UK Corporate Bonds, ISXF: UK Corporate bonds ex financials, IGLT: gilts. ETFs offer the benefit of low charges, which is especially important with fixed interest investments.

Looks like tournesol did rather well with his timing on this occasion. Nice one! :0)

Cheers,

Mark

Ah ok, didn't realise all those companies in your VSl only constituted 12.8%. Thanks for letting me know :)

Not got much of the fixed interest exposure myself, am looking into a "Fund" that can take care of that for me, rather than specific investments such as the Natwest prefs you have. Must get me some index linked stock though,at some point.

On the "fund" front I currently own: approx allocations..
Jupiter Absolute Return 5%
Artemis Strategic 5%
Newton High Income 5%
Invesco High income 3%
JPM Brazil 2%
Fidelity Chinese Special Situs. 2%

Most of the commodity related funds currently seem overcooked and up with events. Watching Blackrock Comm though and JPM Natural resources.

BBQ was superb. Monday was a complete washout though.

Hi Fangorn,

Just to clarify, do be aware that ALL the stocks mentioned in the VSL posts currently consititute only 12.8% of my SIPP porty by value.

The top 10 individual holdings by value are:

Looks like rain here. :0( Enjoy your BBQ & the rest of the BH weekend. :0)

Cheers,

Mark

A thoroughly interesting read Mark.

Many thanks for sharing. Perusing the stocks in your various portfolios offered up similar names that make up my portfolio.In similar fashion I tend to focus primarily on Blue chips(preferably high yielders eg BP/Vod/Glax,Utilities) with a smattering of other people's ideas included(eg WCC/CHNS,FCAM) amongst others.

Have to say that thanks to the many people that post here and elsewhere I've invested in companies I'd never have come across through my own endeavours :)

Back to the BBQ and fizzy wine - have a great bank hol one and all.

Hi Fangorn,

The strategy is "semi-mechanical". I.E. changes to the VSL sub-portfolio are made mechanically, with little discretion on my part, but the stock selections are driven by a poll of investors (generally around 50 investors), rather than using some mathematical analysis of published ratios.

The latest facts & figures I've published can be found here: http://boards.fool.co.uk/Message.asp?mid=11737182

The strategy & reasoning behind it is explained here: http://boards.fool.co.uk/Message.asp?mid=10250598 . Coincidentally, that post refers to MY Damascene moment - but it is looking like it was a false one, as you'll see from the following.

At the time that I started building my VSL sub-portfolio (late 2006), I found that my own overall performance was lower than backtesting of the strategy since 2001 showed it would have been, so it seemed worth a try. At the time that I started pursuing the strategy, I determined that around 20% of my SIPP funds should be allocated to it.... this has now shrunk to < 13%, which shows the relative outperformance of other asset classes. NB, though the table in my earlier post shows a percentage of my SIPP allocated to the VSL, I actually allocated a fixed sum to it, at the start of pursuing the strategy and that sum will remain fixed, to allow performance to be judged - so I will vary the "target percentage" according to where this fixed sum stands relative to the other SIPP components.

So far, the experiement has served to improve my confidence in my own portfolio selections - but maybe I've been lucky over the last 3 years? Unfortunately(?) , we only get to live our lives once, so only time will tell. :0)

A point of interest (particularly for Timarr) might be that most of the damage to the VSL's performance was done by the repeated selection of RBS as a "top stock pick". Initially I also favoured this pick, despite dire warnings from ee & some others with real investment banking experience. However, I have to say that I did realise that this selection was a mistake somewhat sooner than others contributing to the VSL. This seems to illustrate the point that people take a long time to acknowledge that they have made a mistake and persist with sub-optimal (to be polite ;0)) behaviours, despite mounting evidence of error. See my post from September 2008: http://boards.fool.co.uk/Message.asp?mid=11254173

Coming back to RBS, I must say that I am shocked that so many continue to pick it: yes, it certainly is a lot cheaper than it was BUT is it cheaper than it should be? Who can put their hand on their heart and say they know whether RBS stock is worth 50p,£1, £2 or £10? In the past, we have used analyst forecasts to judge earnings and hence fair value. We all know that current forecasts for RBS are all but useless. Whilst RBS raised a huge amount of cash at some considerable cost to its shareholders earlier this year, we do not know whether this was enough. Today’s reports suggest that government might be taking equity stakes in the banks, as a quid pro for providing capital to shore them up: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/how_to_solve_the_crisis.html . That would mean further dilution for shareholders. In my eyes, investing in RBS now is little more than gambling.

A consequence of this month’s top 5 selections is that I have had to sell Soco and buy RBS. I am not best pleased.

 

I most certainly will hold my own hand up to being slow to learn, at times - but I hope that I have learnt over the years. Only future performance will show whether I have or not!

Incidentally, I ought to have qualified the remark in my earlier post:

I stuck with value propositions, which limited my losses in the "bust".

Of course, that also meant I didn't make any outsize gains in the boom either!

Best,

Mark

Hi Marben.

What's this VSL (a specific investment strategy that I set out on TMF a few years ago) out of interest?

Always interested in other people's strategies :)

thanks

One thing that would be very interesting is to work out what's the closest you can bring an equity ISA to cash?

How about index-linked gilts? [or, if you're a deflationist, conventional ones.] There is also the IGLT ETF.

Just for information... my main portfolio is held within my SIPP. I manage the contents of the SIPP with an asset allocation strategy, dividing the portfolio into a variety of asset classes. Every 6 months or so, I review whether I am happy with the target allocations and adjust as necessary. My current allocations are as follows:

Overall, this is spread across around 30 instruments, excluding the VSL stocks.

If anyone can think of any other asset classes that I have missed, please let me know! [but not "alternative assets" like stamps, wine or art - those I'll keep out of my SIPP and don't know enough about anyway :0)]

On an almost continuous basis I will buy and sell individual instruments to try to move towards my target allocations. I have recently been much more heavily overweight in Natural Resources, due to gains & some special situations but am gradually trimming back towards my target.

It is actually time for me to review my targets again & I'll probably be inclined to increase the cash element - but only on a short-term basis, so that I'm positioned to take advantage of opportunities should they arise. We are already in negative real interest rate territory... and remembering what happened to cash & (non-index linked) gilts in the 70s, personally I'm wary of staying in cash for too long.

My personal situation is different to tournesol, davjo & ee and I am prepared to ride out the vagaries of wild market swings - sickening as they can be. This is illustrated by the rates of return(dividends re-invested) I've achieved in my SIPP since inception in late 2002 (lucky timing there!*):

It is currently about 30% above its previous 2007 peak.

Other than paying more attention to ee and some other excellent posters regarding banks ;0), my main lessons from 2008/9 were a) to be more patient - don't rush to buy!; b) to take advantage of really undervalued situations - but only if you can see something that the herd doesn't appear to and you fully understand why the price of an instrument is where it is. Doing b) is what led to my best ever performance in 2009.

My view at present is that we are in for inflationary times in the West, with rising nominal but negative real interest rates: the only realistic solution to the sovereign debt crisis IMO. I also do not believe that China, India & Brazil are "bubbles" (though some economic elements, like Chinese real-estate might be). We may be in for a slow down in breakneck Chinese growth in the near term, which could lead to some commodity price collapses - but COULD is the operative word. In the medium/long run, I'd rather hold real assets (i.e. commodities, real-estate, sound businesses) than too much cash. Obviously my investments in miners and oilies are only proxies for the commodities themselves and focussing on those with strong balance sheets & low operating costs is IMO important in the event of short/medium term price declines - that was a valuable lesson of 2008/9.

*I have, however, been running my ISA since 1997 and avoided the "tech boom/bust" being a curmudgeon and just finding the P/Es on offer ludicrous. I stuck with value propositions, which limited my losses in the "bust". The ISA has shown an annualised rate of return of 11.3% since 1997.

Regards,

Mark

Depends on whether you have a 'Funds' ISA or a stockbroker's self-select ISA:

not much you can do with the former, but if you have the latter or transfer to one the rules allow you to be 'temporarily' in cash. That is, to 100% cash so long as you intend to be invested in due course. The time allowed in cash is undefined & I imagine different brokers will get twitchy at different lengths of time, although I don't have personal experience of any broker asking me to be fully invested even if there's been cash sitting there for a number of years. Whilst you wait any interest earned on the cash will be subect to a 20% tax charge which is to discourage using equity ISAs as cash ISA top-ups.

One thing that would be very interesting is to work out what's the closest you can bring an equity ISA to cash?

I have a very significant percentage of my portfolio in equity ISAs, which of course demand that you stay invested in equity and long term bonds (> 5 years, and I feel these may actually be riskier than equity right now) over the long term. What are my options there?

I've trimmed my non-ISA holdings significantly and adopted a pretty defensive posture, with mainly relatively high yielders and large caps - no financials, either. But I still feel a bit exposed.

What a refreshing post .
Its quite rare I've found for serious posters/investors to let others know when they sell down in a big way .
I did exactly the same thing for the same reasons a week last Monday .Having more or less been fully invested since August last Year I I sold nearly all of my large cap/generalist holdings ,retaining essentially small caps which had either a lot of cash on their balance sheets or some expected short term news flow which i believed could ride out any storms.I'm now 30% cash.
There's a useful link here showing (especially in the attached graphs) how things have materially changed in regard over the Greek debt issue over the last few weeks.
http://www.24hgold.com/english/news-gold-silver-could-a-greek-tragedy-morph-into-a-lehman-meltdown-.aspx?contributor=Gary+Dorsch&article=2849120404G10020
A few other thoughts- Davjo's point about cash held in sterling not being a riskless endeavour is well made .
As a hedge on sterling weakness I continue to hold GBP (Global pet I should say ) which effectively has a cash balance of 29m AUD on its books worth 10p per share (cf buy price of 8p) with nothing in for its other small oil interests.If anybody knows of any other shares like this I'd be very grateful to see them .!

Secondly I notice the wunderkind William Little woods popular Strategic assets fund which has a defensive /contrarian outlook (including a short on sterling) and which I've decided to hang on to ,has just moved from 15% cash to 25% cash.

http://www.h-l.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/a/artemis-strategic-assets-accumulation/fund-analysis

RG

I recognise exactly where you're coming from. Personally, I've been selling over the last year or two and am presently about 60% cash. What bothers me with cash though is the double whammy risk of GBP continuing to devalue and inflation rearing its ugly head, hence I'm beginning to wonder whether I've got the balance right. My equities are 100% oil which I consider a good hedge against aforementioned risks. I'm now tending towards reducing cash to 50%, indeed I bought some AEX today, and then re-consider as events unfold...such events being pretty unpredictable at the mo. It's all about balancing risks. 100% cash is definitely not for me in current circumstances. Those blighters in government know exactly where to home in when desperate for the stuff!

Out of curiosity, if you are concerned about currency shocks, why no holding of precious metals?. Would gold not be a better backstop than a cash ISA when (or if) currencies & government creditworthiness are weighed in the balance and found wanting?.

I am not selling anything. I bought some more stock today infact. I only sell during up days and I do so after spending a lot of time thinking about it.

I have been in the markets long enough and I refuse to act on impulse.

Dana and Soco will do just FINE regardless of what happens to Greece and the PIGS.

If the market falls further I am going to keep buying.

Selling overinflated stocks in a tech bubble makes sense. Selling bank stocks in a credit bubble makes sense.

Selling cheap Oil stocks on market jitters is not something I do.

The current correction is no surprise to me.  I said last Thursday

We are clearly in a correction phase in the markets which I expect to last a few weeks followed by a broad Rally on the back of a Conservative win.

http://www.stockopedia.com/content/re-incidental-stuff/28613?comment=125#125

My view is unchanged....the markets will push higher.

tournesol,

I have a similar history re the tech crash and 2008, so know where you are coming from. Similarly, until recently I have been mostly fully invested in equities, but since last year fear has overtaken greed and I have been trimming my equity holdings, favouring holding cash and even a few gilts.

I have had short-term dalliances with FTSE100 high yielders Vodafone Group (LON:VOD), Aviva (LON:AV.), Glaxosmithkline (LON:GSK), National Grid (LON:NG.), and Scottish & Southern Energy (LON:SSE), but no longer until the dust settles.

As of today I am approximately 55% invested in equities, 38% in cash languishing in ISA/SIPP accounts and 7% gilts (soon to be shown the door). You will not be surprised to hear the equities are all oil & gas E&P companies. One difference between us is that I have been adding to my SOCO International (LON:SIA) position recently - reversing my previous rotation of SIA into Dana Petroleum Plc (LON:DNX) , which proved to be basically a neutral transaction due to over-eager selling down of DNX and a subsequent rise in SIA.

I have to say I'm really surprised; I always thought of you as a really level headed person. Reducing leverage I can understand, but are you really considering selling Soco shares now? I hope that 'Tintin in the Congo' nonsense hasn't spooked you. :^}

Buffy

tournesol,

So if Greece goes down, or the Germans decide not to support the rest of Europe, or if the Raving Monster Loony Party win our upcoming election, or there is a hung parliament...

I don't think the Monster Raving Loonies are going to win the election (well, not as members of the party with that name, of course), buit it does seem that the realistic options on offer are either a hung parliament OR a very small Tory overall majority. At the risk of straying off-topic, I would be interested, though, to hear thoughts from those closer to the markets (and the electoral fray) than I about their views of how the markets may respond

a) to a hung parliament (and, therefore, which larger party gets propped up, and by whom)

b) to a small overall Tory majority.

I've seen the suggestions that sterling will plummet in the event of a hung parliament, (indeed a friend with close friends inside the Treasury tells me they're expecting exactly that, or were a couple of weeks ago, anyway) though it's certainly recovered against the US dollar over the past few weeks. Has, perhaps, a hung parliament already been factored in? And, if so, can a further appreciation of sterling, as a sigh of relief, be expected IF a small overall Tory majority actually is achieved?

And what does the 'Market' think about those who seem to be the potential alternatives as a new Chancellor, Darling, Osborne or Cable (or perhaps Clarke instead of Osborne?) I'm not making any direct political points here, just curious, though personally I think I would prefer Clarke (experience) or Cable (who should at least understand the oil and gas industry) to Osborne. I'm assuming that there's a reasonable chance that the current Prime Minister won't actually have an enormous amount of influence on economic policy after 6th May, regardless of whether or not his party does.

Coming back on-topic, I certainly wouldn't put any more money into the market at the moment - and probably not until some time after the result of the election is known and the dust has begun to settle.

I'm not convinced I want to make a rush for cash though

Man Siarad

In relation to Greece it is a question of "when" not "if" imv. For a country where 30-40% of it's salaried workers don't seem to pay any tax whatsoever it's hardly a surprise it's in the financial mess it is. Hopefully the IMF will focus on revenue collection, sorely needed.

Next up, inevitably, will be Spain, Portugal and Italy. and then the UK. There is no getting away from the facts that we have and are borrowing hundreds of billions due to Labour's financial ineptitude and at some point this has to be paid!

Just to completely heighten the confusion... Bloomberg have announced that stocks are cheaper than they have ever been in 20 years: http://www.bloomberg.com/apps/news?pid=20601010&sid=aBxFBilER4Eg

What I do agree with is that markets can only go so far for so long. The rally has been in a practically continuous uptrend since the March lows last year with 2 minor corrections. Statisticians tend to analyse market rallies across 2 metrics - number of days, and percentage gain. On both metrics this rally is long in the tooth.

Statistically speaking, a protracted pause must be expected some time soon - but I've a feeling that the stimulus that's been applied will continue to protect on the downside for some time yet.