The curse of the bearish case

Markets are at an all-time high. Everybody is making money and I just had my best month ever (see previous post). Now what?

A critic would say that this is not sustainable and the markets are in a bubble. They can’t possibly go any higher as the PE ratios are so high, earnings are too low, insane valuations, interest rates are about to increase, inflation is coming, governments will raise taxes to pay for their Covid-19 expenditure etc.

Bears strike downwards with their claws which is why it’s said that markets are bearish when they go down.

Yes, there’s lots to be concerned about.

A bull strikes upwards with his horns which is why it’s said that the market is bullish when it goes up.

The positive spin would be something like this: the world is re-opening, the pandemic will be over or we will all learn to live with Covid-19, mRNA and CRISPR will be used to treat countless other infections and diseases, a cancer cure will be found this decade, we will all transition to sustainable energy production and battery storage technology will make many breakthroughs, automation and AI will significantly improve our quality of life, the 4-day work week will be the norm, anybody anywhere on the planet will have access to 5G internet speeds (Starlink), the future will be spectacular and the stock market can only go up.

You are probably thinking that the bearish case sounds more reasonable than the bullish case. And that, my friend, is the curse of the bearish case – it always sounds smarter.

The bullish case sounds a bit like pie in the sky and is just too rosy. It doesn’t sound that smart and is harder to believe.

If you listened to the media and got out of the market whenever someone said a crash is coming, you’d most likely be broke. Or, at the very least, you’d be significantly worse off.

I remember reading an academic study into the profitability of the clients of a brokerage company. Collectively speaking the best performers were accounts of deceased people or people who forgot their logins and weren’t able to make any investment decisions. Most people don’t know what they’re doing and they are shooting themselves in the foot when they trade. Investing is like any other skill – you need somebody to teach you, otherwise you can make very expensive mistakes.

I’m a believer in passive investing (buying index-trackers) but know that there’s a place for active investing and hedge funds etc as well. You do you. There’s millions of ways to make a profit – find out what works for you and do that.

Bitcoin – may be legal tender in El Salvador soon

Firstly, the term “legal tender” is only ever used when a Scotsman tries to use their funny money to pay in a shop in England. “It’s legal tender!” they would shout at the shopkeeper in a Scottish accent… That’s probably one of the few examples of “legal tender” used in a sentence.

Second, where the hell is El Salvador? I’m glad you asked. I googled it and can tell you with confidence that it lives in Central America next to Guatemala and Honduras. I’m sure the weather there is nice all year round…

I admit I know virtually nothing about El Salvador but I love the fact that they might make Bitcoin legal tender. This is huge! I hope many other countries will follow suit.

I’ve always liked crypto and all the possibilities of blockchain. That’s the way forward. I imagine central bankers are all scheming right now to maintain the status quo and how best to avoid innovation at the pretence of protecting the consumer. Let’s see what they come up with this time… maybe some economic sanctions on El Salvador because Bitcoin will totes be used for money-laundering (and conveniently forget that cash is also used for money-laundering).

Crypto is the future! I’m very excited to see it spread its wings and fly.

I also did a quick backtest of how well Bitcoin and Ethereum have done compared to the S&P 500. I looked at what it was like for somebody who missed the crypto boat in 2017 and started to contribute £100 each month from January 2018. Spoiler alert, they’d be pretty happy even though it’s been a very choppy ride in crypto.

Bitcoin VS Ethereum VS S&P 500, 2018 Jan to 2021 May.

The above isn’t investment advice but clearly shows the potential of crypto.

Enjoy the ride!

Do you have a Child Trust Fund you’ve never known about?

A new long-term investment account was announced in 2005 (in the UK). This was for children born on or after 1st September 2002. It was called a Child Trust Fund (CTF) into which the government paid £250 in the beginning and then another £250 at age 7. Parents were able to add more into the account (subject to an annual limit). Families on lower incomes could get an additional £250 both at the start and age 7.

The account was the predecessor of today’s Junior ISA.

After age 18 the account can be accessed or re-invested in an ISA etc. However, there is a high incidence of ‘Addressee Gone Away’ accounts – this means that many people have a CTF account with their name on it but simply never knew about it.

I realise this article should live on TikTok, because that’s where all the kids are on. However, it’s also relevant to parents of kids born between 2002 and 2011.

Child Trust Funds were discontinued in 2011 due to politics and probably the cost involved as well. Existing accounts could continue though.

If you were born after 1 Sept 2002 (about 18.5 years ago) then there’s a good chance you have a child trust fund with at least a few hundred or few thousand pounds in it. This is accessible for people who are 18 years old today… and gradually more and more CTF accounts will “mature”.

It’s possible to track down your own or your child’s account and the process is explained on the government’s website.

I hope some of you find the above useful and are able to track down your child trust funds. 🙂

Missing the best and the worst days

You may have come across some articles, which go along the lines of “if you missed out on only 10 of the best days in the market then your returns would drop from 8% p.a. to 2% p.a.”. This is usually followed by the conclusion that timing markets doesn’t work and you simply have to be in the markets through thick and thin. That way you are guaranteed to benefit from those best days in the market and make good returns.

What pisses me off is that this analysis is completely one-sided. It is a half-truth. What do you think the market returns would be if you missed out on just 10 of the worst days? Yeah, I just flipped that. Obviously, missing out on the worst 10 days but still benefiting from the best days, will massively increase your portfolio’s annual returns. I have proof!

You can watch a youtube video (by Financial Choices Matter) about this – the analysis was done over an investment period of 107 years (Jan 1900 to Dec 2006) and the results are below:

As you can see, it holds true that missing out on the best days will reduce your returns. But it’s also true that avoiding the worst days massively increases the investment returns. (For clarity, the buy and hold approach turned $100 into $25,746.)

There’s also a good paper by Mebin Faber about this. I found it very interesting.
Excerpt from Meb Faber’s analysis:

He makes very interesting conclusions such as:

  1. the best and worst days tend to cluster together (volatility clustering) – the majority of both the best and worst days happen when the markets are in a down trend (below a 200 day simple moving average) -> therefore, the ride is much calmer when you’re invested during times of the market being above the 200 day simple moving average.
  2. if you miss both the best and worst days, then your annual returns are better than buy and hold.

The above analysis would suggest that market timing can indeed work and that there is HUGE value in eliminating the bad days. Investing during times when the market is above its simple 200 day moving average could eliminate 60-80% of the volatile days (both best and worst days) and then allow you to benefit from the uptrend. It would be a smooth and relatively boring ride, but the data suggests it would work better than buy and hold.

Bi den! 🙂

Is gold a buy right now?

Gold is going up like there’s no tomorrow. All-time highs and all. Silver has exploded recently as well. Is this a buying opportunity?

I………………… really have no idea. Anybody who tells you otherwise is a liar and probably trying to sell you something.

Gold is seen as a store of value and as a safe-haven during times of economic difficulty. Things aren’t looking that great out there with rising unemployment and closure of businesses. Naturally, people flock to the shiny metal.

Gold itself doesn’t produce an income (no dividends) and doesn’t have many industrial uses. I know Warren Buffet isn’t that fond of the stuff either.

Have a look at longtermtrends.net where they compare US stocks and gold and silver over many decades. The charts will show that over the long term stocks have been a significantly better investment than gold.

I’m sure you have noticed there’s been plenty of positive news about a Covid-19 vaccine, which could improve the economic outlook. Stocks are doing really well and many tech stocks are at all-time highs (check out the Nasdaq 100). Or is it inflation that’s pushing stock prices up? Inflation doesn’t only increase your grocery bill… it can manifest in mysterious ways. 🙂

These days we have more alternatives to gold as well. Crypto looks very promising to me.

Gold is having a good run this year. However, nothing in the world of finance stays the same for long. It’s important to have an investment strategy and even more important to follow it. Don’t marry your positions!

Good luck!