Rants

Here are a couple of real scenarios for you to compare and use in your assessment of the way the world economy works. You need to be sceptical!

The Story from East of the old Iron Curtain

A private bank is set, takes money from depositors with aggressive marketing, sports sponsorship and by issuing debt securities (bonds). It opens lots of modern looking offices and carries on normal retail banking.

It also lends large sums without much real due diligence to businesses closely associated with the founder and his (it has ways been male in the cases I know of) friends. The owners of these businesses get large salaries and perks or even more brazenly loans that they will never repay and they quickly join the oligarch class.

Then the bank regulator discovers that the bank has billions in bad debts and is insolvent. It is now so large a supplier of services to the ordinary public that the only option is to nationalise it.

Result: People who pay tax as decent citizens have been robbed by a few crooks who now live elsewhere, ideally where there is no extradition treaty.

…and from the West

A flamboyant character and a few nerdy mates set up a company with a novel idea that attracts customers because it is priced so that it seems free, or very cheap. It may exploit others to actually supply the service that the founders ‘piggy back’ on, for example in the ‘gig’ economy, which keeps the price low, but even then it still makes no profits.

It pays other companies owned by the founders and their associates large fees for doing things that appear to be of very little value, or which would have been cheaper elsewhere. It also gives giving the founders bucket loads of share options at virtually no cost.

Offering a service at an unprofitable price will usually suck in customers because established businesses that need to make money to live can’t compete. So the user base grows and the company is able to borrow vast amounts from venture capitalists who are often investing other people’s money, but who expect to get paid back handsomely when the company is floated on the stock exchange.

The company floats publishing a prospectus that predicts losses for years ahead but a pot of gold at the end of the rainbow. The shares are bought at patently silly prices by institutional investors with the pension funds and savings of ordinary people and by small investors who like to play the stock market. The venture capitalists unload their stakes, as do the founders who now have huge shareholdings to sell – and go away with billions. This is sometimes called a Unicorn.

Over time the share price falls dramatically and in some cases the firm goes bankrupt or is taken over at a bargain basement price (possibly even by the same people that filled their boots when the stock market floatation happened).

Result: Millions of people who have been saving a bit of their hard earned incomes over years lose a chunk of their savings and a few youngish billionaires set up trusts in the Cayman Islands and other exotic places to avoid giving back anything to society by way of taxes.

You tell me which model you prefer. I think the Western model has the advantage of being more discrete – people actually keep feeding the scam willingly!

Readers know about my interest in gardening and may have noticed the odd reference to classic literature in my posts once in a while, but I can’t recall referencing my huge enthusiasm for music, especially from the 60s-80s (my extended ‘yoof’).

Here then is first – more making a point than a real rant!

Recent discussions I have been having with a couple people who have noticed their IFA doing less work and then wanting to shove their money into portfolios managed by someone else made me think people might be amused, even disturbed to listen to the song “The Last DJ’ by Tom Petty and the Heartbreakers (2002).

Google or YouTube it and listen to the lyrics.

A song about radio – and about public service everywhere.

I frequently read the word ‘nimble’ being used as an adjective to describe apparently desirable investment products. I just read it in a quote from a Portugese investment adviser, so this is not a UK specific trend, even if it is the English language.

The implication is that such funds will do better because they swap assets around quickly as a reaction to global events, financial or otherwise.

I am sorry to say that the idea of an investment fund being nimble is about as sensible as the idea of an oil tanker being nimble and being steered like a speedboat. It is nonsense.

What does ‘nimble’ mean? Well as implied by the heading I think of the word in the context of the children’s rhyme – ‘Jack be nimble, Jack, be quick, Jack jumped over the candle stick’ (referenced obscurely in that all time classic song, American Pie). So I take that to be pretty athletic!

Agile, quick moving, lively and so on come up in the dictionary.

Investment is a long term process. Investment funds are run to stated objectives and mostly against benchmarks which must be published. So they are typically only ever going to make small changes to their holdings in the very short term. Even if a multi asset fund reacts to say an interest rate change that was unexpected, the most it is likely to do is shave a few percentage points off an asset allocation and add the same somewhere else.

So if you get told that XYZ investment is selected because the manager is nimble, assume that the adviser has seen him or her on the dance floor! A fund that is flexible and relatively unconstrained in its asset allocation may be a good idea but calling it nimble is implying alacrity followed by bold, speedy changes of direction, when you are more likely to get a bit of ‘left hand down a bit’. Nimble it will never be!

As an aside, advisers often talk of ‘nimble’ funds at the same time as they are shoe horning clients into multi asset funds with very specific asset mixes that won’t change and yet are simultaneously selling out of a custom built portfolio where with some effort, reasonably prompt changes of asset mix could be made – not nimble, but at least purposeful. Smoke and mirrors.