Stuart Kirk: Put my money where my mouth is

For more than 25 years I have managed money, advised portfolio managers or written investment research. So why don’t you back off? I hear someone yell from behind. It’s a good question for all financial “experts.” My answer, for what it’s worth, is: four kids, divorce, and always being the first to the bar.

Throughout my career I have learned that giving advice suffers from two problems. First of all, it is often wrong. Trump as president? It will never happen. Buy Emerging Market Stocks – Go. And second, the giver rarely suffers when he is wrong.

This new weekly column will do everything possible to minimize the number of bad calls. Better yet, why don’t we agree that sometimes we’ll be too late for a good idea, or so early that we won’t be around to celebrate our achievements? I will never say the word “wrong” if you don’t.

As for not having a skin in the game, there will be no recommendations that you do not participate in, whether it is buying, selling or removing tools for the summer. We’re in this together. And by leaving single-name stocks to the Reddit brigade, sticking to just sectors, indices, and large asset classes, we can’t be accused of market manipulation.

To make sure my money is where my pen is, you’ll be able to see how my portfolio is performing each week. Except for a small investment in a friend’s data business (Essentia Analytics), I have no other savings. Just as playing poker with no money is for children, investing without the joy and fear that comes with putting your own assets on the line is pure fantasy.

This is why so many model portfolios shoot the lights. They are not real. What it is, as I experienced in 1999, is to be five percentage points below the weight of News Corp as it went up and up during the dotcom bubble. I was sure it would explode, but my doubts grew. What was I missing? Colleagues stop looking you in the eye. You do not sleep. He hardly eats. Ultimately, my relative returns were so bad that I was forced to buy. Then it collapsed.

It wasn’t even my money. The customers were the losers. That’s why I consider writing a personal finance column such a big responsibility. Some readers will be coined, others will endure unimaginable financial pressures. In no way would I consider offering recommendations if I didn’t follow them myself.

Let’s start with a goal. I want to double the size of my pension within a decade, in real terms. That’s an inflation-adjusted return of just over 7 percent per year. Long-term stock returns are a bit below this, so it may not sound ambitious. But we are emerging from a multi-decade bull market, valuations remain rich, and the world is facing many crises. I think this is a sensible aspiration: not too greedy, realistic and upside.

Now to open the book. My only investments are in two defined contribution pension plans of roughly the same size, totaling £438,000. The biggest bet is a 27 per cent exposure to UK equities, then cash a smidgen less, followed by a global equities fund outside of the UK. It then drops to an 11 percent stake in Pacific ex-Japan stock, and the same weighting in Japanese stocks. That is all. No fixed income. Without alternatives. no gold

In the coming months we will analyze these positions and any news that affects them. What made me buy? Does the investment case still make sense? What’s better out there? But come Autumn Statement week, how about we start with that huge exposure to UK equities?

I had gotten out of risk assets before the pandemic (a fluke) and when the equity markets crashed in the first quarter of 2020, I wanted to rebuild my equity exposure. But what to buy first? I didn’t necessarily care where, just that the market had to be cheap enough to offset the still extreme uncertainty around Covid.

The US S&P 500 forward price/earnings ratio had dropped from 20 to 14 times. But UK indices, whose prices had fallen by a quarter, were up nine times. One day I will write about PE ratios and why they are dumb. But bullshit in the single digits is often a buy signal.

That’s how it turned out. My FTSE All Share ETF is up a third since then. Now what? Unusually, the index is cheaper in terms of earnings today than it was when I bought it, despite the rally. One reason is that oil company share prices have simply doubled since 2020, while their profits have skyrocketed. Similarly, the share prices of banks and pharmaceutical companies have followed some spectacular earnings rallies.

The low multiple also reflects concerns that profitability will collapse next year, by as much as a third according to consensus estimates. That seems harsh. Also, earnings fell much more than that in 2020 and stocks rebounded. Also remember that the UK has a bunch of amazing companies that no one has ever heard of. These tend to be asset light businesses in pharmaceuticals and technology with valuable patents and impressive research and development projects. The average cash flow return on invested capital for UK indices is world class.

Because most of the income from UK stocks is derived from abroad, a weak pound is good for translating gains. If the Autumn Statement fails to convince markets, equities should be a good hedge. In fact, there is a 60 percent inverse correlation between the quarterly returns of the FTSE All-Share Index since 1969 and the pound sterling against the dollar. Be careful, however, in the last five years the correlation is reversed.

I will maintain my weighting in UK stocks. Experience tells me that the best time to own something is when it makes me terribly uncomfortable. I have that feeling now for sure. No?

The author is an investment columnist and former banker. Email: [email protected]; Twitter: @stuartkirk__


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