From: Tim Short
Sent: 17 November 2018 10:45
To: FIELD, Mark
Subject: Brexit Is Economically Catastrophic
To The Rt Hon Mark Field MP
Dear Mr Field,
I would like to know as a constituent of yours and an investment banker what actions you are taking to prevent the severe adverse economic consequences of Brexit, which were extremely clear at the time of the referendum, and yet are becoming more apparent daily.
As you will be aware, we cannot replace the many FTAs we currently enjoy in virtue of our EU membership quickly or easily. It is a chimera to believe that trade with the Commonwealth can replace trade with the EU since it is an empirical law that trade volumes anti-correlate with distance.
There are three components of GDP growth, of which an increased workforce — meaning migration — is one. Increasing the other two — productivity and capital intensity — is difficult. We therefore require greatly increased levels of skilled migration, especially in the light of likely future demographic developments. Migration is harmed by Brexit since it creates a strong and accurate perception abroad of UK hostility to migration.
There is as you will know a composite sector model of the UK economy on the day before the referendum composed of the appropriate weightings of sectors in other OECD economies. Naturally, those other OECD economies have been exposed to the same global economic environment as has the UK economy. Nevertheless, UK GDP is currently underperforming the composite model by £500m per week.
I have never understood what it was that the Brexit voters wanted, but whatever it is, we simply cannot afford it.
I look forward to hearing what actions you intend to take to stop Brexit.
Why women are better traders and investors than men — a psychological explanation
Warwick University Business School (“WUBS”) have conducted a fascinating study on the investment performance of men and women. They show that women perform significantly better with a good sample size and temporal range. They make some interesting remarks on why this might be. I think I can add some extra psychological depth to this — so we can see that female traders appear to have some quite deep natural advantages and they should feel encouraged about managing their own investments.
What WUBS did was collaborate with the share dealing service offered by Barclays Bank. They looked at 2800 investors over three years. There are various ways of measuring stock market performance, but one of the most common is to compare the performance of a portfolio with a relevant stock market index. (I explain what a stock market index is here: What Is A #Bear #Market?)
It is quite hard to outperform an index consistently. This fact is what lies behind the recent strong growth of tracker funds. You may as well buy the index if you can’t beat it. The results from the WUBS study showed that women consistently outperformed the FTSE-100 index and men did not. The male investors returned 0.14% above the index which is basically statistically consistent with having performed equivalently to it. However, I suspect that these investors would have been better off just buying the index rather than paying a lot of trading fees to obtain the same performance.
The female investors outperformed the FTSE-100 by a massive 1.80%. This may not sound much, but it is actually huge. Done over a lengthy period, it would lead to significantly improved results. Let us assume that the FTSE-100 returns 5% a year. If you started with £10,000 and performed as the male investors do, you would end up with £45,000 after 30 years. (It is always important to think long term in the stock market; to prefigure part of the answers I will discuss below, the women seem to understand this.) The female investors would turn £10,000 into £72,000 over the same 30 year period. That is a huge improvement over £45,000 and bear in mind that the female investors have taken the same risk, making it even more impressive. (One caveat is in order here: no one performs this consistently over the long-term–if they say they do, it is a huge red flag. Remember Madoff? But the point stands.)
How are female investors outperforming?
WUBS and Barclays set out a few reasons which could explain the outperformance. One of them is the one we already know about. Women are less over-confident than men. I explain how that works here: Women Are Better Traders Than Men. In summary, women tend less often to think that their new idea is brilliant and then abandon their previous idea before it has had time to work. Men on the other hand just get extremely convinced about their new sure-fire idea and go with it. Interestingly, women’s lack of over-confidence is not manifested in what they say about their beliefs. They just don’t act on them as often. We could discuss philosophically what that means about our account of belief — but the key point is that women are less likely to trade in deleterious ways!
But there are new reasons suggested. There are three that I think are especially interesting.
Women stay away from terrible ideas like #Bitcoin (this explanation is proposed by a Guardian commentary from Patrick Collinson; see links below)
I have not seen any data on how many women bought into Bitcoin, but is is certainly consistent with my claim in the second post above that female investors have stayed away — we know that women did not vote for Trump very often and much less so if they had college degrees. In addition all of the online hysteria (!) from Bitcoin boosters appeared to be from deluded male market participants.
Women avoid “lottery style” trading
It has always struck me as insanity to own a lot of penny stocks which are supposed to return ten times the amount you invest in a year because this almost never happens. As I discuss in my book, The Psychology of Successful Trading, traders can get seduced by vivid stories, incorrectly over-estimating massively their likelihood of coming about. A far better approach is just to sit still in major stocks for a long time, with maybe some spicy options for fun in a minor section of the portfolio. The problem with picking the next Amazon (or Bitcoin, for that matter) is that you can’t. You would have to own a million penny stocks for each Amazon or Apple. So this strategy is exciting but completely unsuccessful.
Men hold on to their losers
It seems that women are better at getting out of something which hasn’t worked. This came very close to home for me. Infamously, I am still holding Deutsche Bank stock, partly because I recommended it in my book as a contrarian trade. Banks are supposed to trade at at least book value (in fact, 2.0x before the crisis). So if you buy a bank at 0.25x book value, you can’t lose right? Because it is buying something for a quarter of its value. That hasn’t worked for me yet — maybe a female trader would have got out of this position a long time ago.
In conclusion, we have seen some deep-seated psychological advantages which female traders will have over male ones. This should encourage women in their investing.
Understandingbasic psychology is one of the most important but alsomost neglected tasks for investors.Of course, everyone realises that they need to analyse the investments they are considering buying.But many traders do not realise that winning in investment is also about successfully predicting what other market players will do.And that is a psychological task.
Most of the advice on the internet is not really psychology.It is quasi-psychology.You might get famous traders telling you things like “I always played tennis in the morning before my best trades to make sure I felt good.”This is useless.By all means, study what these guys do to get insights into how they analyse opportunities and maybe any tricks they have for bouncing back from a loss.But famous traders don’t have any specific training in psychology so if you are specifically wanting to improve your own trading psychology, adopting their tips (such as the tennis one above)won’t really help you in achieving that goal.
Alternatively, there are some actual psychologists who write on the topic and are experts in the field of psychology.But be careful about their specialisms.Someone who is a clinical psychologist may be an expertin schizophrenia but not necessarily other aspects of human psychology. And of course the main thing is that these expertsdo not have any serious trading experience, so they also can’t help you improve your trading psychology.
To identify the right sort of person, you need to ask two questions: does this person have significant trading experience and are they qualified in a related field?I am one of these people.
To try to convince you of this, I will outline my ideas on how to optimise your trading psychology.The first thing to know about is that we have a lot of cognitive biases —mental shortcuts that are often useful when we want a quick and dirty answer and often very unhelpful when we are trying to get something right.One example is Confirmation Bias, where people look only for evidence that supports what they already believe.There have been manyrobust psychology experiments published,that show time and time again that we do this often and consistently.
The first thing to note here is that if you use this bias when making your own trading decisions, you will make bad decisions.Every time!So you will definitely not be optimising your trading psychology.But here’s the key point: everyone else in the markets will be doing it too.
So what does that mean?It means you need to know about Confirmation Bias and think about it in a market context.Look out for it in yourself and be careful.Expect it in other market players and trade accordingly.
That’s how you stand the best chance of optimising your trading psychology.
People often ask what the common stock market terminology of bullish or bearish means.While these have standard meanings in normal speech — bullish being positive or optimistic, and bearish being the opposite — at least the term “bear market” has a precise technical definition in the arena of stocks.I will explain this here.
The formal definition of a bear market is a market that has declined 20%.
The first item to clear up on the way to understanding the definition is “what do we mean by a market?”Normally people will be talking about a particular stock market index, such as for example the Dow Jones Industrial Average (“DJIA”), the S&P 500 or the Nikkei-225 (“N-225”).So now we want to know what a stock market index is.
Individual shares go up and down all the time.One cannot say what is happening in more broad terms to “the market” by looking at single shares because of this volatility.So instead, one looks at a basket of shares.That is what an index is: a basket of shares listed in a specific location.There are thousand of these, and they can be selected in many different ways.
To illustrate this, the DJIA is a basket of 30 major US shares that are selected so that they represent a good spread of major US stocks in different sectors such as computers, aircraft manufacture and banking.The S&P 500 is a broader basket of shares issued by the 500 largest public companies listed in the US.The N-225 is somewhat different as it is made up of the 225 largest stocks listed in Tokyo.It is price weighted, meaning that more expensive stocks will be more heavily influential in the movement of the index.
So, put simply, if all of the component stocks in the DJIA go down 20% in a period, the whole index will also go down 20% over that time.Since this index and the others are a broader measure of market sentiment than any single stock, if the DJIA goes down 20% in a period, we can say that it was a bearish episode for the market.Since that is an approximate measure of the health of blue chip US equities, one would also be justified in saying that that period was a bearish period more generally for major US companies.
The DJIA has been published since 1896.The graph looks like a long uptrend punctuated by occasional bear markets.You can see this below.
People tend to talk less about the technical definition of a bull market — they will often use it more colloquially to just mean “stocks are going up.”But if one wanted to be precise, it would just be the opposite of a bear market.It would mean that a particular index had increased by 20% from a trough.
I recently discussed (in Investment Styles) the two major different styles of investing: value and momentum. One difficulty with following a value approach is the difficulty in measuring value, since much of it these days is tied up in intangible assets. I will suggest here that, counter-intuitively, buying bank stocks is the solution to this problem.
The value approach to investing is simple to understand, though perhaps a little harder to implement. The basic idea is that you buy things when they are cheap. Finding cheap assets would classically rely on looking at concepts like “book value,” which is just the accounting value of everything owned by the firm in which you are thinking of investing.
In previous decades, book value would have been simple to calculate: you could just look at the published accounts and examine how much the accountants said each asset was worth. A company making cars, say, would own a lot of items like factories, car parts, machinery and land. You could look at all of those items that you could walk up to and touch, and add up all the values, and that’s it: you have calculated book value. If you can buy the stock for less than book value per stock, you have made a good investment. If the company sold all of its assets, and turned that book value into actual cash, each shareholder would get more than book value. That’s why value investing is a good idea, and why you should try to buy stocks at less than book value.
This simple approach is more difficult in modern times, because IP — Intellectual Property — is much more important than it used to be. IP is anything the company owns which is valuable but that you can’t touch. It could be a suite of software, the value of a brand, or
simply the know-how involved in producing the products or services that the company produces. To illustrate the scale of this IP problem for value investors, consider the following estimate. Ocean Tomo, an investment bank, reckoned that the proportion of the value of S&P500 companies which was tied up in IP increased from 17% in 1975 to a huge 84% in 2015. So it is clear that there is a very serious problem in adopting a value investment approach these days, and that’s unfortunate because in my opinion, it is the only approach that works.
So what should investors do about this? I think they should look at bank stocks. This will seem dramatically strange at first sight, because banks own hardly anything at all that is tangible. However, we already saw above that this is true for all companies now, so it can’t be avoided. The key point though is this: there is a well-determined market value for everything owned by a bank.
If you look at the balance sheet for Deutsche Bank, for example, you will see a very large number of items. They will all have market values though. That will be true of shares, bonds, interest rate swaps, credit default swaps, loans to corporates, futures and options, office buildings, warrants, cash in various currencies and any of the other myriad financial assets. There will also be a certain amount of brand value but I think that will be fairly low in the mix. So basically everything owned by Deutsche Bank could be turned into cash, and a known amount of cash, quite quickly.
Banks typically traded at 2.0x book value before the crisis. The rule of thumb for value investors in the sector was “buy at 1.0x book value, sell at 2.0.” Something like this is still true: you can buy Deutsche Bank at 0.3x book value and I think you should. That’s the right approach for value investors today.
There are two major investment styles which take completely different approaches.They are value investing and momentum investing.The former, also known as contrarianism, seeks to find cheap assets to buy.It is called contrarianism because often it involves looking for assets which are cheap because no one likes them.Momentum investing is simpler.This simply observes that often, assets that have been performing well continue to do so.So investors adopting this style just look for assets which have gone up and hope that they will continue to do so.
I favour value investing.One reason for this is because the problem with momentum investing is that assets which have done well continue to so until they don’t.There is no way to tell when something which has gone up will stop doing so.And we definitely know that nothing will appreciate forever!
The difficulty with value investing is knowing when an asset is cheap.In the early days of investing, the concept of book value was very useful.This is simply the accounting value.If a company owns a factory and some machinery, the book value will be close to the value for which the factory and the machines could be sold. If you can buy a share, or a slice of the company, for less than the book value per share, you should.
Book value is still very useful on many occasions.But modern companies are very complicated, and often much of what they do cannot be valued simply.A lot of their worth might be tied up in software, for example, which is harder to value than a building.Or they might own a lot of IPR — intellectual property which again, is intangible and hard to value.But the effort is worth it.Finding a cheap company to buy is one of the best ways to trade successfully.
I have written a lot about the importance of psychological factors in investing.It is absolutely crucial that you understand these, for two reasons.Knowing about your own psychology will help you understand and improve your decision-making processes. It will be especially valuable to know when cognitive biases are likely to cause you to make errors in evaluating investments.But just as important is knowing how other investors will think — after all, they have the same psychology as you do!And knowing what other investors are likely to think of an asset is the key.Because you want to find an asset which is not just cheap — but unjustifiably so.Then you can expect it to go up sustainably.
Yesterday, the Shadow Chancellor gave a speech outside the Bank Of England on the tenth anniversary of the Lehman collapse. I will argue that his remarks do not display a good understanding of how The City works. All quotations below are from his speech.
“The key lesson is this: never let the finance sector become the masters of the economy when they should be the servants of the economy” *
This is a misconception. Finance is never either the master or the servant of the economy so it would be impossible to change it’s status in this regard. The way corporate finance works is not that different to getting a mortgage to buy a house. This is true in several ways. Firstly, if you never buy a house, you never need the finance and you never talk to a bank. That’s up to you. So that doesn’t look like a master or servant relationship.
The second element of the analogy is that if you get a mortgage, there will be conditions attached. The most important ones will be around debt service and security. Debt service means that if you borrow money, you will have to pay it back and you will have to pay interest on it until you have paid it back. Security means that no one will lend you £1,000,000 to buy a house unless that debt is secured on the house. So if you default on the loan, the bank takes your house. Again, this is just contractual and reasonable and does not mean that the bank is either your servant or your master. It is a contractual counterparty.
Corporate finance is the same. If companies want to borrow, there are conditions they have to satisfy. No one forces them to borrow. If they don’t like the terms, they can just walk away. Or they can access alternative sources of funds, such as bond markets. There are conditions there as well of course. It still doesn’t seem to make much sense to say that companies are “servants” of the bond markets.
Similarly, countries are not required to borrow money in the international bond markets. Norway has a net surplus because it has wisely saved much of its oil income. The UK is currently not running a deficit — amazingly enough, although progress needs to be measure correctly, as I have observed previously https://timlshort.com/2015/01/04/uk-deficit-no-longer-a-problem — but in the past, it has borrowed heavily. The total debt will be £1,840bn as of March 2019. All of that debt also comes with conditions though in that case not very many. You have to pay interest and principal. Again, the choice is yours and, as said, currently the UK is not borrowing any further. No master/servant relationship there.
Reuters also report** that McDonnell said that “ordinary people were still paying the price for the crisis through falling living standards and cuts to public services, and a Labour government would redress the balance.”
There have definitely been falling living standard and cuts to public services. There was definitely also a global financial crisis. But there needs to be some link between the two for McDonnell’s point to stand. The collapse of Lehman cost the UK taxpayer nothing. McDonnell can only mean the bailout of RBS. This definitely cost the UK taxpayer. Arguably, a bank needing to be bailed out is the only reason to care about what they get up to. If they lose a lot of shareholders money, that is no one else’s problem. The only thing worse than bailing out RBS was not bailing it out.
The bailout of RBS amounted to £45bn. The Government spent that amount on buying shares. It still holds a lot. It has made a loss of £4bn on what it has sold so far. It will doubtless make further losses on future sales. However, these amounts are simply trifling when compared to government expenditure. Welfare spending will be £115bn in 2019 alone. So it is not the case that the RBS bailout contributed in any meaningful way to public sector spending cuts.
What did cause that was the government’s income — which is entirely sourced from taxation of the private sector — declining. And what caused that was a global recession. That was quite plausibly caused by the events of 2008 including the subsequent credit crunch.
But how will Labour “redress this balance?” Will it force banks to lend? They are private sector firms. Will it replace them with public sector banks? The record there is not good. Spain had a network of Caixas: local banks run by local worthies such as trade unionists and priests. They were massively corrupt and had to be bailed out having funded a large number of white elephant projects.
Meeting with bankers and asset managers, McDonnell said:
“You’ll get a decent rate of return but we’re not being ripped off anymore. Ripped off by speculation, privatisation, job cuts, exploitation of workers.”***
This is a claim that the government received a bad deal as a result of several activities.
Speculation is betting that an asset’s price will move in a particular way. It is not obvious what the government’s involvement would be in that or why it should care. If you suggest that RBS needed to be bailed out because it had “speculated” on subprime mortgage bonds, you need to explain why it is speculation to invest in Aaa securities.
Privatisation is a source of funds for the government. There no obvious way for it to be ripped off by doing that, unless it sells an asset for a low price. Which again, no one forces it to do. Perhaps McDonnell means PFI. That is also excellent value for money if the contracts are drafted correctly.
Job cuts: I have no idea what McDonnell means here. Obviously I understand what a job cut is, bit what is McDonnell proposing? That the government will regulate firing? That is bizarre and generally results in a lack of hiring because you don’t take people on if you have to keep them forever even if they are incompetent, corrupt or don’t turn up.
Exploitation of workers: so what is that exactly? And why is it not adequately addressed by the current regulations such as employment tribunals?
It does not appear as though any useful answers to the crisis are to be found in McDonnell’s remarks.