It's as easy to Lose Money etc Part 4

9th Nov '16 by Ken Lowes

3 comments 6615 reads

Now sometimes Never----In November 1999 I suggested to a Senior Executive with a major insurance company that we had come to the end of the bull run and markets had to readjust the FTSE Index was sitting around 6500. He asked what I expected the magnitude of the fall to be and my reply was FTSE 3200. Now, I am no expert so why should he accept what I say. His retort was “If that happens I am out of a job and we will be closing the shop” Well he was and they did.
My analysis was not based upon the Dot Com market which everyone was talking up on huge valuations, but that is what got blamed for the collapse. All markets have got to correct and all shares have got to adjust, it is a universal law, nothing goes up forever.
Dot Com, Bexit or Trump are simply happenings upon which the hindsight experts can hang their hat. We are facing an economic catastrophe and all of the experts know it. Some will discuss it others won’t for fear of being listened to. It is crazy to accept what is being said by those who have a vested interest. Hargreaves Lansdown and the rest within the investment industry are not going to talk down the markets, they have too much to lose. My company did advise clients to seek safer waters in 1999 and many did, for a while, but then some saw that they were not making as much money and asked to go back into the market, only to see their capital decline when the market turned. After all we were only Independent Financial Advisors interested in commission as suggested by some on this site recently. The thing is after 45 years the company is still in existence and the clients still love it and therefor they know “it is not just about the money”.
What we are experiencing is the final throes of a mature market and when it goes a warning bell may not ring, in fact it is unlikely to ring, it will just glide up and bite… hard.
So what do you do? Rule ONE get out of high priced low cap stocks, they will get hit the hardest. Move away from high priced markets and find low priced ones, last week right here…

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Carey Blunt

10th Nov '16

Hi Ken,
I (kind of) see what you are saying but I would be interested in knowing more about what you think the reasons for the market to turn are.

At the moment I think we are in a situation where low interest rates are meaning that there is no-where else to put your money than the stockmarket. Additionally, due to uncertainty about Brexit and other factors there are only a small number of UK based shares which are seen as "safe" and so there is a lot of momentum in those shares which are driving those beyond sensible valuations. So the question is: when will that come to an end and what should you do about it when it does.

I'm going to use the terrm "doomsaying" here, which I don't mean with any type of disrespect to you but just as a convenient term for suggesting that that "winter is coming" - which I think is what you are saying.

The problem with Doomsaying is that all Doomsayers will eventually be right but they will only be right very very infrequently. You could say that a bear market is coming and then wait 5 years for it to happen and then when it does happen say "I told you so". In the meantime, you will have lost 5 years of a growth in doing so.

I think that in order to prepare a "Bear Portfolio" you would need to understand what the trigger for a dark day might be and what might be effected as a result. This seems like its a bit like crystal ball gazing.

Surely we are just better off with some sensible hedges for our current portfolios, good portfolio diversification and then to roll with the punches as we go?
regards
Carey

JamesrWilson1989

I really enjoyed reading your post Carey as I am of the same opinion.

This is not going to be news to anyone but nobody truly knows where the market is going over the next 1/3/6/12/60 months and I wouldnt believe anyone who say they do know.

I am more of a believer of likelihood - you need to be flexible in these situations and a diverse portfolio, blend of growth, value, defensive, blue-sky with stop-losses gives you this flexibility to react to any market conditions. Now if I think the likelihood that a recession or a drop is on the way, I would have more % of my portfolio in defensive stocks but not neglect the other areas.

Ken Lowes

Hi Carey
Much of what you say is absolutely correct and is the mantra of most professional investors. When I write this stuff I have in mind the many who have seen their money disappear not the few who have the special emotional gene to ride the storms and the discipline to realise that to be an investor requires a lot of work and research. It might help if you were to have a look at the first in this series of posts as I don't want to repeat myself, but I will try to address your remarks.
The very nature of what this site offers will attract many who think that it is simply a matter of investing in the top 10 or 20% of Stockranks and it will be job done, it is to those that I address my posts. If we were in a raging bull market little harm would come from an investment approach such as that, but we are not and have not been, since 2008. QE was a brilliant concept which avoided a total melt down of the financial system, we were so close. The result is massive debt and a delicate balancing act to avoid deflation. When interest rates rise, as they must, domestic debt repayment will spiral out of control and corporate borrowings will become even more painful. The natural way for governments to reduce debt is to allow inflation to rise, which increases wages, reduces the real value of debt and inflates asset values, but also causes corporate bankruptcy. Which is fine providing you don’t have a fixed income or none asset linked capital. So in essence we have kicked the tin down the road but we haven’t yet found a real solution to the 2008 problems. I am not an economist and don’t profess to understand all this stuff but we must appreciate that the markets are walking a tightrope.
No one can time the markets but they can as you say hedge or avoid investing in rubbish stocks in the hope of making a fortune. When Japan was riding high in the late eighties only to collapse big time in the early nineties the consensus of investment analyst’s was the high valuations were the new world get used to it. The same applied to the Dot Com Bubble. We are still a long way from the top of the Japanese 1990 market and many of the shares in the Dot Com bubble have disappeared without trace. In 2013 the Editor of Money Week was telling the listening public on Radio 4 that Gold was a wealth protector, whilst at the same time vilifying Structured Products. Gold continued to decline by a further 20% and the fact that it had fallen seventy five percent between 1980 and 2003 was never mentioned. As for Structured Products I have invested in over 40 since 2000 and only once lost a small amount of money.
If you do the work then you may make good money out of being your own advisor because you are taking all the risk, but it simply is not true to say what goes down will come back up again. Tell me why the UK or the USA markets will not follow that of Japan—the Japanese had the second biggest economy in the world until it imploded—no one expected that and at the time investors were piling in all of their hard earned money. Surely that must ring a bell, as you say Carey interest rates are so low that investors are keeping this market higher than it should be.
It doesn’t necessarily follow that walking away and going back in five years will be the wrong thing to do. It is all about the cost of risk if you take big risks you might make big profits or lose it all. Take a look at Ed’s Nap Portfolio it is up about 1% plus dividends since inception and yet despite a spread and applying the rules that may have worked in the past, eleven shares are down and eight up, the biggest gain is 96% the biggest loss 46%, but the actual return is 1%.

All of the above is of little value or interest to the hardened investor who know the real risks of investing in a market such as this but hopefully someone will read this and be put off investing/swimming in crocodile infested waters
Thanks for the opportunity to respond
Ken

It's as easy to Lose Money etc Part 4

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Ken Lowes

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