Managing investments in trying times

Things have changed, we are living in a different reality to January this year. There is much media blurb about markets bottoming out and V shaped recoveries. I personally think that the repercussions of the current lockdown are going to reverberate in the market for some time.

So what to do now with the investments? I, like all the media pundits, really don’t have a clue what’s likely to happen next. There is an unprecedented amount of speculation about the macro economic impacts of the crisis. If the CEOs don’t have a clue about the future of their businesses, what hope do the analysts, pundits or I have.

I’ve been wondering how to approach this. So far I’ve done very little that differs from previously. I perhaps need to be a little more dynamic in my thinking. Persisting with buy and hold may not be enough.

I had just under 20% of the portfolio in cash so potentially I’m in a position to buy bargains. But as I’m fortunately working I’ve had no time to study the opportunities. To manage the investment better there are things I need to do:

  • Assess the current state of the portfolio
  • What will be the new normal? things are unlikely to return to the earlier status quo
    • Which shares are at risk (some businesses will not survive)
    • What sectors will benefit
    • What sectors to avoid
  • Are my trading rules still fit for purpose?
  • Re-consider the regular trading (free trades) investments
  • Make a new watchlist, the original watchlist is no longer fit for purpose

There’s much work to do to address this list. There are some decisions that I’ve already made.

I’ve upgraded my account to a frequent trader account. Previously for UK trades I’ve relied on the once a month ‘free to trade’ regular investments and paid for non-UK trades from the investing credit or cash in the account. To accommodate the current volatility I want the flexibility to average into positions via more frequent smaller trades, whether UK or International. I also might need to get shot of some shares with a broken thesis.

I’ve decided that I need to have a more geographically diverse portfolio. I had already started to add some US stocks, but I need to add to that and also look at other markets.

I’ve started new watchlists – one for Simon Thompson ‘Bargain Shares’ – one for US stocks – one for the high conviction stocks in my current holding – and one to gather new ideas or ‘dip’ opportunities.

This long weekend is an opportunity to do an assessment on the risk level for the current holdings, and start a plan for how to approach investing in the coming months.

Dividend Investing

I got dividend investing all wrong. I looked at different styles of investing. I put aside dividend investing as something to look at later when I’ve retired and need to take income from the dividends.

There appears to be two types of dividend share (at the extremes of the spectrum): steady companies with low dividends of mostly less than 4% or distressed companies offering good dividends. For the former it looked like the non-dividend shares would give a better return. For high dividend stocks may appeared to be a ‘falling knife’.

What I had missed was this. If you find a sound steadily growing business paying a reasonable dividend the later dividends are paying out a much higher percentage if the amount is considered against your original cost basis. This means that if you invest in a good dividend company, one that has a record of dividend and share price growth the dividend percentage actually received in later years will be considerably higher than the headline figure for the year.

As an example I modelled a share held for 10 years with an annual growth of 5% in share price and a dividend of 3%. With no dividend reinvestment a £1,000 investment would become £1,551, so the dividend would be equivalent to 4.5% of the original investment. With the dividend at 3% reinvested every year the Investment becomes worth £1,990, so at that point the annual dividend payout is almost 6% of the original investment. If that is continued for a further 10 years the numbers double again giving an investment worth £3,996 and an annual dividend payment at 12% of the original sum.

Through playing with the model I discovered that a reinvested dividend share when you add the dividend of 3% to an anticipated growth of 5%, it is the equivalent to a ‘growth’ stock anticipated to grow at a 8% per annum.

So in assessing a share to investing, if you assume a reinvestment of the dividend it can be considered as the equivalent of a guaranteed addition growth at that percentage.

So I will no longer discount an investment, because its a dividend stock, I will asses it along side other opportunities on the basis of the likely total return.

Is Trading Bitcoin Possible using the Mayer Multiple

bitcoin logo

The MayerMultiple is the current Bitcoin price divided by the 200 day moving average. Based upon statistical analysis of the multiple over the life of Bitcoin, Travis Mayer determined that the optimal time to buy Bitcoin would be when the multiple is below 2.4.

There is an article on The Investors Podcast website explaining how this number has been derived and showing both the historic Bitcoin value and Mayer Multiple graphically:

As this Mayer Multiple analysis is based upon historical information it will only work going forwards if the future dynamics of Bitcoin prices are consistent with the past. So as for all back-tested trading formulae there are no guarantees here that this will work going forward.

If I understand the article correctly, if regularly buying Bitcoin waiting until the Mayer Multiple is much lower than 2.4 would not be as profitable as piling in when its at 2.4. The theory being that over time there will be an underlying increase in value due to the network effect of increasing numbers of investors generating an increasing value.

I’m still not really convinced in Bitcoin as a store of value worthy of investment (see Bitcoin, is it here to stay?). However there has been profit made that has been missed by not being in Bitcoin, so if you are to trade (or god forbid invest) in bitcoin this might be a better indicator of when to buy than gut feel of guess work.

@TIPMayerMultiple twitter account tweets out the current Mayer Multiple value provides charts of the Mayer Multiple TIP interview with Travis Meyer

I Dropped the DRIP

This is the week that I turned off all the DRIP (Dividend Reinvestment Plan) settings on my SIPP (Self Invested Personal Pension) account.

All the investing primers will talk about compounding interest over the years being a key factor in maximising your returns. To increase the returns add dividend re-investment into that equation and it looks even better. However the automatic dividend reinvestment offered on your trading platform may not be the best option to do that. If like me you do not have large holdings of any particular share.

The way the DRIP feature works is it will take the dividend received for a share then attempt to buy shares with the amount, then charge a £1 fee. None of my dividend paying holdings return a dividend of more than £50, so whilst £1 seems a small amount to pay to trade, I am mostly breaking my trading rule to not spend more than 2% on a trade.

This doesn’t mean that I am not going to reinvest the dividend. I will allow dividend payments to accumulate, then add that to the regular pension contributions. The dividends will then be invested alongside the normal regular investments. This is going to reduce the costs of running the SIPP by about £35 a year (it all helps). This is also going to reduce the amount of effort involved in tracking the trades.

Why I invested in Alibaba

Until recently I have invested mainly in UK shares. I want to diversify my portfolio to be less UK centric so last year I started considering more international opportunities. Since then I’ve bought about 10 different international shares. Economic growth in China is an opportunity that is not being addressed in my current holdings, so I was looking for opportunities to invest in that region.

During 2018 I tracked the news on a number of companies including Alibaba. Alibaba has many online businesses (see the logos above), somewhat analogous to Amazon, eBay and Google. This company has a massive market and steady growth. Despite current concerns of the impact of the Trump trade wars impacting growth in China potentially reducing the near term growth, the long term prospects still look very good.

Alibaba are listed on the US market so can be bought through the trading platform I use. I finally took the plunge to buy, during the recent dip in price, I bought two tranches one this May, then another recently in June. I buy in tranches to attempt to even out the volatility and avoid buying in at an inopportune price. The second tranche has enabled me to reduce the average cost per share. I will look to buy again in 6 weeks. Currently I’m down just over 4%, but I’m only two months in and I’m looking for an investment that will be in place for 5 to 10 years. I don’t intend to buy more than 2% of my total portfolio in this share though.

What I could have done better is to spend more time looking into the detail of the accounts and gain a better understanding of the business, but I have limited time and have been swayed by the coverage in financial media. Time will tell if this was wise.

Tesla – buy on this dip?

Tesla’s share price is down, why should anyone invest in Tesla?

Red Tesla Model 3

Elon Musk’s strategy has been to vertically integrate wherever possible. This gives Tesla closer control of their value chain and an ability to have their own proprietary technology. For instance the recent custom processor development that reduces dependence upon Nvidia for autonomous driving compute resource.

The perceived risk of the shared patents is not as significant as some state. The ability to execute on these patents is dependent upon engineering experience which Tesla has an 8 year lead on all legacy manufacturers (compare the specifications of the original 2012 Model S with the newly released Audi eTron you’ll find that oldest Tesla model wins across the board). An additional key advantage for Tesla is the millions of miles of real world telemetry from their cars, this is more valuable than the patents in enabling their product lead, particularly in safety and innovation in autonomous driving.

Graph of efficiency, showing the Telsa lead over Mercedes, Jaguar and Audi
The most efficient cars in the world – Slide from the June 2019 Tesla Shareholders meeting

Battery supply is the Achilles heal for all electric car manufacturers, and looks likely to remain so, neither Kia or Hyundai can meet demand for their new electric cars. VW the most likely European challenger, with plans to ship 200,000 electric cars. But they have significant battery supply chain issues; firstly a proposed 20GB supply agreement with Samsung was downgraded to 5GB, and then patent litigation between a chosen partner SK Innovation and LG Chem bringing supply into doubt. The legacy automotive manufacturers who are committing to electric vehicle production are having to scramble to lock in supply chain deals for batteries, with the current lack of supply that implies increased battery prices in the short term and massive investment costs in the medium term. Simultaneously they are having to invest heavily in an attempt to catch up with Tesla. Meanwhile the Model 3 rips a hole in one of their more profitable segments outselling all the competing models in the US market.

Tesla is currently better positioned than their competitors with its own battery plants and partnership with Panasonic. Tesla has been steadily improving their own battery technology both incrementally, and more recently through the recent acquisition of Maxwell. The Maxwell technology has the potential to both increase power density and perhaps more importantly to reduce the factory space required to manufacture cells. Additionally Tesla now own the Maxwell supercapacitor IP, which appears to be at the heart of the recently released active suspension system in the Model S and Model X updates.

The Tesla cars are more advanced than any mass market competitor can hope to be in the next few years. They are currently more efficient (the important how far can it go on a charge). They are more capable, the performance version of a Model 3 will out perform a BMW M3 on a track for a lower price (not particularly useful for the average driver but a commercially important flagship variant).

On the downside, I’d have to agree that Tesla finance can seem precarious and Elon Musk likes to fly at the limit of risk. Tesla at this point is highly dependant upon his ruthless drive. Elon seems to exhibit a confluence of being both a shrewd operator along with occasional naivety, for instance announcing the closure of all showrooms, bating the SEC etc.. Like Steve Jobs with Apple, there is an undeniable dependence on a singular personality, which is definitely a risk to any investment. However Apple has continued, so I think would Tesla, although not with the same ruthless pace.

The dip in share price last quarter was due to the confluence of a number of factors over the three months; the reduction in US electric car tax credits, the China import papers debacle, impact of European industrial action on imports, the logistics of export to Europe (built cars sitting on ships), the Shanghai battery fire, the showroom go/no-go decisions. Although I expected that to be a temporary blip the share price continued down to around 35% from its peak price. This drop was due to a combination of Trump trade war related tech stock price hits and the fact that Q2 is not likely to deliver a profit, delighting the Tesla bears and short sellers. What they are missing is that the lack of profit is due to ongoing capital investment in new plant (a gIgafactory in China) new model development (the Model Y, the pickup truck and the truck). Value here in the medium term will not be from dividends it will be from growth.

On balance I’m seeing more good than bad in the overall picture, this low point is buying opportunity if you have the risk appetite. I’ve topped up last week to reduce my average buy-in price. Although the volatility of Tesla shares is appealing to traders I’m holding my handful of Tesla shares as a long term investment.

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