Listening on the commute

I have a commute of over one and a half hours each way.This gives lots of time to listen to podcasts. Normally I would listen to the news on Radio 4 whilst getting breakfast, but this morning I’ve had about as much Brexit and Prince Phillip nonsense as I can take, So the podcast listening started early.

Whilst preparing and eating breakfast and getting ready to leave for work I listened to ‘We Study Billionaires”, which is also called “The Investors Podcast“, there seems to be a bit of a branding issue. After that I needed a little light relief so I listened to the BBC Comedy of the Week podcast. This week was “Mark Steel’s in Town” where Hastings was the town, and Mark Steel has the townspeople eating out of his hands.

For the journey home more light relief with the Sowerby and Luff show, of which more another time.

Zero fee investing 2

Well I was wrong yesterday, it appears that Freetrade is not the only UK contender for Zero Fee investment. There is also Trading212, who have been at this since 2016 or earlier. They appear to have a more mature capability than Freetrade offering shares (which they call equities), CFDs and foreign exchange on their platform. They have both Apple IOS and Android apps available.

Online reviews make interesting reading though. There is a recurring theme about difficulties with withdrawals in comments on reviews. But these comments are featured along side reviews praising the trading platform and the educational materials.

My impression is that since Trading212 are offering CFDs (Contracts for Difference), currency and commodity trading, they are a very different kind of organisation than Freetrade.  They appear to be set up for short term trading rather than investing, the nature of that game is very different. If you were to trade on the platform, from the reviews I’ve read, it appears likely that you would be running into fees that are not highlighted in their Zero Commission headlines in their up front marketing.

From just the two organisations web sites and online reviews I’m more inclined to prefer Freetrade over Trading212. The Freetrade service is designed for long term investing, whereas Trading212 appears to major on short term trading. Trading212 appears very slick and corporate, whereas Freetrade’s site has an open vibe with a comprehensive blog and customer forum.

For the moment I’m going to be sticking with my current trading platform as I need the SIPP account, which neither of these platforms currently offer. I will be watching Freetrade though as it could become a viable option when its more mature.

Zero fee investing

One of the biggest barriers to starting investing is the cost of the trading platforms. Most of the online trading platforms have an annual or quarterly fee amounting to around £100 p.a. Then on top of that they charge a fee of around £10 for each trade. Additionally there may be other fees if you wish to move off the platform or take money out.

The hard maths around platform charges mean that it is not cost effective to invest small amounts, as any gains on the investments are likely to be eaten up by the platform fees.

IFreetrade IOS appn the US in recent years they have had a service called Robinhood which offers free trading via your mobile phone. Now there is a similar service called Freetrade launching in the UK. It is early days for the service and you have to request an invite from their web site. Currently only an iPhone app is available.However they are also developing an Android app to follow.

So how can Freetrade offer share trading for free? Their business model funds itself by taking a small margin on each trade. Their trading costs appear to be minimised by making pooling free ‘basic’ trades from multiple investors to execute at the end of the trading day. They also offer instant trades at a cost of £1. It is also possible to invest in a limited range of US stocks on the platform.

There has been talk of Revolut or N26 addiing Robinhood style trading services to their smartphone baking offer, but there is nothing apparent on their websites that can be signed up to. So for now it looks like for now Freetrade is the only option for truly low cost small scale share investment in the UK.

The Betting Analogy Delusion

There is a common view that “Investing in shares is like betting on the horses”.

This is wrong. When you buy shares to invest you are buying a part ownership in the horse, not betting on just one race.

To push this analogy to the limit: If you choose to buy part ownership of a good horse it will win more than the average horse and therefor be worth more. So the value of your share appreciates.

Trading rather than investing in shares is closer to gambling than investing, as you will be betting on the short term performance of the share. That is the equivalent of betting on a horse in just one race. Like with betting on horses if you study the form of the share and pick your race (the point in time) you can improve the odds. But to do this you need the time to become an expert on studying form and develop a deep insight into the particular horses (shares) you follow. And even after all this you will be subject to the whims of market volatility.

The outcome on a short term trade on a share is subject to the volatility of the market, understanding and predicting ‘that’ is not possible for most of the people most of the time. The odds of wining on a long term investment however are significantly better, because over the longer term the market price for shares has always increased and a rising tide ,on average, raises all boats.

To win at investment you need to get part ownership in more than one horse as you don’t want to end up with all your money invested in a bad horse. You need to put your money on many (15 or more seems to be the general recommendation). If you were to pick shares randomly such that some would do well and some badly, if the overall market rises over 5 to 10 years, so will your investment. If you manage through studying the form (financial performance) of your potential picks to avoid the bad bets, you should be able to do somewhat better. You can win at investing (beat the market) if 55% of your picks do well.

So investing is not like gambling because if you invest for the long term you will more likely than not profit. Whereas if you gamble in the longer term the house always wins and you alway loose.

(Photo from www.goodfreephotos.com)

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.