Self Invested Pension Plan

I have a small pension scheme that was started some time ago, the payments were stopped after 10 years or so and I can’t recall why, or if it was even my decision to cancel them (I can’t recall ever stopping the direct debit). The projected returns from that scheme are not great, and the charges were high and not transparent. So I decided that the best solution was to run my own Self Invested Pension Plan (SIPP) account. So I will be in charge of my own money.

I already had a share trading account which cost £90 per year, to add a SIPP was about another £100 per year, and the trading credits from the £90 fee can also be used for trades in the SIPP. So that means the charges amount to a fraction of the charges I would be paying in a pension plan. It also means that I’m in control of the investment decisions rather than some faceless partially accountable team.

I’ve found that saving into a pension is very tax efficient because tax isn’t paid on money that goes into your pension. If money is paid in directly from my employment, it gets paid in before it is subjected to Income tax and National Insurance. Money paid in out-of-pocket by me gets the income tax credited back into the pension account but not the National Insurance. So its best wherever possible to have pension contributions paid from your employer directly from your gross pay, rather than making the payments yourself.

Pensions are a tax efficient way to save. The upside of the SIPP is the relatively low cost. The potential downside is that the investment decisions sit with me, so if I screw that up, I compromise the amount the pension will eventually pay when I retire. I’ll post some more about how I address that potential downside another day.

Intentional Trading

You read a good thesis for a stock or hear a good story about a company’s prospects on a podcast. This enthuses you to do a little more research. This looks like there’s a good prospect for a short term gain. Great let’s buy some of this, it’s a risk but a small punt could be good. You follow the price for a few weeks, looks like the hypothesis might pan out.

I been through this a couple of times in the last year and have learned a hard lesson.

I bought a few shares in Cairn due to good sentiment in the market about a potential positive outcome from a legal case with the Indian government. I thought there was a good probability of a 20% gain within the next few months. Within 3 months it was 36% up on the buy price. Did I sell? No, I took my eye off the original goal which was to trade this stock for a quick profit, and hung on in there, missing the opportunity to take a profit. Over the following month or so it dipped down to a 12% gain then later bounced back up to 22%. Did I sell? No. once again I missed the opportunity.

I invested in a super high risk single drug biotech called Geron on the prospect of a positive outcome of 2nd stage drug trials. 40 days later it was up 105%. Did I sell? No once again, I held on when I should have sold.  Since then Geron’s partner and major funder has pulled out of their contract and the gains are all wiped out and I’m sitting on a loss.

My investing to date has been long term buy and hold, so my habit is generally not to sell. These two shares were Trades not Investments so I should have set myself hard rules about when and why to sell at the outset. Then stuck to them.

Set downside rules such as:

  • Sell if the price drops by x%
    • this is to protect the capital (live to trade again)
    • set the percentage to something that is reasonable for the volatility of the share, not too small as that might cause you to sell too soon just eroding the capital
  • Sell if there is some drastic change to the thesis that will mean there will be no upside

Set a target:

  • Have a target % gain that you are aiming for, note this as a target price to sell at or trigger your exit strategy
  • Decide the exit strategy having hit that target
    • Take a profit by selling a proportion or
    • Set a trailing stop price so that any drop by x% less than the peak price triggers a sale

With rules such as those above, I would have been sitting on a decent profit. Instead I’m now looking at whether to hang on to Cairn as a medium to long term investment (although generally I’d prefer to be invested in renewables rather than oil). With Geron I think I’m going to have to hang in for a few weeks in case there is a dead cat bounce, then cut my losses and sell.

The lesson learned is not to trade shares without a clear intent at the outset, then rigorously apply those rules ignoring greed or fear of missing out.

Rebase you prices before deciding whether to sell

OK, say you have a share that has done fairly badly since you bought into the company. The first thought that comes to mind is that you should sell it and get it out of your portfolio. That is one approach but may not be be the best.

Any money that you have lost on this ‘bad’ share is already gone, basically you should at this point write off that money. Now make the current price the marker and review the share as if it were a new purchase and do the research that you would do in that case. Given the current price and the analysis you have done, is this a share that you would purchase? If it is then re-base it and leave it in your portfolio. If its future does not look as good as other prospects for your portfolio then by all means sell it and put the money to better use.

Bitcoin, is it here to stay?

As everyone is having a say on Bitcoin, I thought I’d write up my thoughts here. It looks like December 2017 may have been a notable month in the story of Bitcoin.

Mining for fun and profit: Can it be profitable? The idea is that bitcoins get awarded to miners according to the amount of work done to create a new block in the blockchain (the blocks being the ledger where transactions are recorded). The original premise of was that an increasing amount of work would be required to earn a bitcoin as more coins were minted. So while in the early days one could luck in on a few bitcoins by just downloading and running some software on your PC, this is no longer the case; now specialist hardware is required in order to have any chance of earning Bitcoin from mining.  According to this video  by TechCashHouse https://www.youtube.com/watch?v=UHQqWCreCBw (dated Nov 30 2017) there is only marginal profit to be made from readily available mining hardware. Money can only be made where there is a low electricity cost. Also mining machines noisy and hot, so not something that will be welcome in the lounge or bedroom alongside the games console.

Using it as a currency: Once the technicalities of holding Bitcoins (on exchanges, in wallets or safely on paper) and using them to make transactions is understood, it is possible to buy stuff with bitcoin. At one point it was apparently possible to buy a cup of coffee with Bitcoin. Recently however Bitcoin transactions appear to have become more of a practical challenge, for instance its no longer possible to use Bitcoin for Steam games https://www.theverge.com/2017/12/6/16743220/valve-steam-bitcoin-game-store-payment-method-crypto-volatility. There are a number of factors contributing to this: primarily volatility and transaction costs. Volatility making pricing a product difficult and transaction costs ballooning to $20 a go. Additionally the Bitcoin system is starting to struggle with transaction times during Nov-Dec 2017 it was very rarely less than 100 minutes but has regularly peaked at over 1000 minutes https://blockchain.info/charts/avg-confirmation-time.

Avoiding the man: As a distributed system the Bitcoin network is not in the control of any government or major business entity. Due to the cryptographic nature of the blockchain implementation at its heart, Bitcoin is considered by many to be able to anonymise any transaction. This had made it the currency of the dark web, but with the higher transaction costs this apparent secrecy now has a higher price premium. One use of Bitcoin has been to provide a means of currency exchange avoiding high exchange costs when moving funds between countries. Current volatility may make timing such a transaction more challenging than before, but the increased transaction charge would still compare well to bank charges for all but the smallest amounts. Monies filtered through bitcoin transactions however are increasingly being considered by governments, and there are questions about the degree of anonymity of transactions via the coin exchanges.

Ah but its a commodity: Bitcoin has been in the news this year as the finance industry and popular finance press have started to become energised about Bitcoin as a speculative commodity. Some brave souls have even spoken of it as an alternative store of value to gold. On the other hand there is also much comparison of the likely Bitcoin bubble to the Tulip bubble of the 17th century. On the downside Bitcoin has been bedevilled by scams and massive breaches of security at coin exchanges. Aside from the speculation in the day to day value and the potential bubble there are other ways to lose a good quantity of money/value in some of the side schemes that have arisen, such as Coinbase which appears to be a pyramid selling scheme for Bitcoin investments. On the less shady side there are now two institutions trading bitcoin futures as of this month (Dec 2017), these are:  Cboe Futures Exchange ( as XBT) and CME Group (as BTC). There has been some talk that a futures market will reduce the volatility in the Bitcoin price; that is yet to be seen.

Conclusions

My conclusion from my investigations into bitcoin is that this cryptocurrency is not going to become ‘the’ universal digital currency, but will be sustained as a store of value and probably remain traded as a commodity.  The blockchain technology that underlies the Bitcoin network is perhaps more important than Bitcoin itself, it may yet become a major influence on the future of both contractual and financial transactions. The serious finance community are more interested in other blockchain currencies. One that particularly caught my attention is Ripple, which can be used as a means of settlement between the major financial institutions.

It is likely that we are experiencing a bit of a bitcoin bubble, I think there will be a downside but have (like anyone else) no idea how big a drop or when. Ultimately I think on the other side of the bubble there will be a stable value (well as stable as any other commodity) since if treated right Bitcoin can remain a useful store of value albeit not at the current overblown price.

For a really clear explanation about the basics of blockchain I highly recommend a quick look at https://anders.com/blockchain/ where there is a demo video and a web application that lets you play with the blockchain implementation featured in the video.