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A: What's all this about the Facebook IPO then?

The Financial Services Industry in the UK is in a sorry state. Retail investors are sold stuff which is in the vast majority of cases unsuitable. A solid diversified portfolio of stocks and bonds would suit the vast majority of investors, but of course none of them ever are recommended this kind of investment. Instead they are steered into managed funds of various sorts that have large fees part of which go to pay the salesman.

This is how it is, how it has been and, as far as I can see, how it always will be. As long as people are told that investing is a dangerous business and they can do it only through the agency of a qualified and approved 'advisor' they will simply never make good decisions.

The one thing the industry loves is more regulation. This justifies high fees and, most importantly, creates large barriers to entry. It makes spivvy insurance salesmen like doctors or lawyers. So, it's not surprising that the government is proposing more regulation. They have consulted extensively with interested parties, overwhelmingly the banks and existing industry, and they have concluded that, although regulation has given terrible outcomes in the past (think of just about anyone you know who has been sold any financial product over the last decade), the solution to the problem is ... drum roll ... more regulation!

Of course you need a highly experienced professional, expensive regulator to manage this, so let's welcome Martin Wheatley who has arrived from HK to run the newly-created Financial Conduct Authority. Apparantly the problem is that we didn't understand enough about behavioural economics, not that greedy salesmen routed savers into rip-off products because that was what maximised their commissions.

Of course, as usual real estate, carbon credits, bamboo plantations, land banks, wine, diamonds, precious metals, art and the rest remain outside the scope of this regulation. So valuable do ordinary savers feel the regulation is that they put much more of their money into unregulated buy-to-let properties than equities, even though for the large majority a few REITs, directly held, would offer a far better exposure to UK property than even a quite large portfolio.


References

http://www.ft.com/cms/s/0/7a681cc2-4674-11e1-85e2-00144feabdc0.html

Related articles

• Julian Knight: New watchdog must rebuild consumers' trust (independent.co.uk)
• Failing Finance Companies - does it impact life insurers? (pinnaclelife.co.nz)
• The Market's Hottest Dividend Sector Is Still the Place to Be (dailyfinance.com)

1. inflation will stay low,
2. the euro will remain weak,
3. eurozone government bonds will not default, at least technically,
4. the USA will be the best performing stock and bond markets
5. european banks will continue to underperform relative to other sectors in their national markets,
6. Japan will continue to have low GDP growth, and stock and market performance, but the Yen will strengthen and the Japanes will continue to be pretty happy.

Keep a look out for my comments on the Herts Investment Club, on Facebook.

I have posted something in TMF (as a reply to swemson's original post).  I have contributed a few posts to the Herts Investment Club . I am about to create a group in Linked In.

I have not yet managed to organise an actual meeting. I do intend to do this, but we're still a bit too spread out. Ideally we'd have North, East, South subdivisions with separate meetings.

My original post doesn't seem to have attracted any comments. I really would like someone to show some interest otherwise I feel as though I'm talking to myself.

I have now created the Linked In page. You can see it here. It is possible that you need to be a member of LinkedIn to see it. Linked In is like Facebook but for boring people.

Like most people of my age, I don't really get Facebook. I can see that it's an interesting exercise to get nearly everyone with an internet connection to post their contact details in one place, and to add a bit of photo sharing and messaging to go with it. But can this be worth fifty billion US dollars of anybodies money? Most of us will have never handed over a bean to Mark Zuckerberg, who must by now be employing a lot of bodies and hardware not to mention bandwidth.

I however did get a tiny insight into why it could be valuable. In my last post I talked about setting up an investment club. I decided, just as an experiment, to advertise this fact to anyone within 40km of where I live, via Facebook. I thought to myself 'What would Larry Page do?' and googled for 'advertise on Facebook', and landed here. I logged into my regular FB account (none of the complexity of setting up an advertising account as required by Microsoft or Yahoo). I filled in a few basic questions, mainly just the page I wanted the ad to go to. FB did the rest, practically writing the copy by scanning the destination page.

I then was able to target. This is what, in my view, makes FB a killer app. I could specify location (easy enough: 40km around Stevenage, my nearest town), age (no minors), and people who had specified in their profiles that they were already interested in investing. This market is a few hundred people.

I then specified how much I was willing to spend: no more than 50p a click, and a couple of quid a day, and I was done, bar selecting a random (free) image to adorn the ad. Start to finish ten minutes, max. My ad was approved with a half an hour - it is remotely possible that a human was involved in this part of the process, but I doubt it.

Now I will simply sit back and wait for the emails. I need to attract one or two percent of the market to have a viable number to form a club. The advertising will cost me a few pounds. I will report here if it works. It may be that 50p is too low a bid to get my ad displayed: unfortunately well-heeled brokers and IFAs are completing with me for the target market, which is the downside.

I will report back. The proof of the pudding is in the eating, but my initial reaction is: don't short FB yet (not that you could anyway, because it's still a privately-held company!).

I decided as a sort of new-year resolution that I'd join an investment club. I know a few people who trade shares and other securities but I do not belong to any organisation dedicated to securities investing. I am a member of a few groups that discuss (real) property investment, but usually the propery people do not have an interest in or experience of stock (or bond, futures, options, FX, contract for difference etc. etc.) market investments.

I know a bit about this topic, but I'm always interested in hearing other's opinions on this, not least because the a pure rational approach to investing is not a sure-fire way to riches, as I know to my own cost.

Investing in the UK is very frustrating. The whole industry is regulation-driven model, with investors directed into collective investments with high fees and poor performance. Individual investors are terrified of investing directly in the stockmarket even though all the evidence suggests that they are likely to do just as well as highly-paid fund managers, even if they choose stocks at random.

Proshares used to offer some support for investment clubs but, as you will see from their own bulletin board, their service is practically moribund. Time To Trade has a better-looking website, but as you will see from their Herts Directory they don't exactly have a lot of clubs listed.

I have been contacted by someone in Herts who is interested in setting up a club. I'll probably post a few things on Facebook, but if you are interested in joining a club to discuss investing then get in touch. I'm not convinced about setting up an actual legal entity which will do investing, as it seems to me that unless we get a lot of interest (and a lot of capital to invest) the hassles with accounting and tax statements will exceed the benefit of simply discussing market trends, etc. and investing in our own portfolios.

There are some wonderful sites out there for tracking investments. I just signed up to Wikinvest. I'm not sure how well this copes with UK-listed stocks but it does a brilliant job with US listed equities.

If you live within easy reach of the Stevenage area, and would be interested in joining a club to meet, say, once a month, please drop me a line to steve.hemingway@gmail.com.

The investment banks, hedge funds, private equity funds and sophisticated investors have delivered nothing to savers over the last decade. Returns on pension funds over the last ten years have averaged 1.5% before fees, which means that most savers have seen their assets shrink relentlessly to keep fund managers in Bollinger and Bentleys. Not much has changed since Where Are the Customer's Yachts? was written a couple of lifetimes ago.

A big part of the problem is that sensible risk-minimisation techniques are taken to the limit and beyond in the pursuit of fees. Lots of stuff has been written on this. Rick Bookstaber has been writing about it, as far as I can tell very well, recently. The general point is that geeks understand the weakness of their models, and the heroic assumptions that they have needed to make the mathematics tractable, but the suits aren't listening and don't want to hear.

I always believed that the solution for ordinary investors was to find a passive fund with minimum fees and stick with it. Jack Bogle has spent a lifetime explaining why this is a good idea. It also has excellent academic support. Increasingly however I have come to believe that, because there is so much momentum in stock price behaviour, it's not a good idea to invest passively.

Passive investors believe that everything knowable about a stock is already in the price and that it's a waste of time trying to second guess the market. Value investors believe that looking at the underlying business of the issuer of a share and investing only in companies with good cash flow, strong balance sheet, and a high long-sustained (ten or twenty years long!) gives superior returns. Warren Buffett is the king of value investors, but Charlie Munger and a whole crowd of others are no slouches either.

The funny thing is that it's terribly easy to do at least well as Warren Buffett himself: his company, Berkshire Hathaway, is traded on the NYSE and can be bought with anyone. It is tax efficient in that all dividends are re-invested and managed with minimal overheads and no fees: there's one thing you can be 100% certain of - your financial advisor will never advise you to buy it, even though you'd have made 76% over the period 2000-2010, compared to -11% on the S&P500.

There are lots of websites that advise you how to construct a Buffett-like portfolio, and indeed, many of Buffett's holdings are big blue chip stocks, so you pays you money and you takes your choice. But I would argue that you'd be a lot better off doing that than picking a 'top performing' fund out of the tables in MoneyWeek.

I regularly get called up by mysterious salesmen offering wealth beyond the dreams of avarice if only I will sign up to their brokerage and start trading on the wonderful research they will give me.

I just spoke to Matthew Taylor of Finsoul.com. He was offering tax-free investment, offshore trading, between my repeated attempts to bat him away. I think I am just too polite even to cold-calling reptiles like him.

Anyway, it's interesting to see that this operation has jumped on the Big Green Bus of companies that are working to save the planet. I suspect that a lot of fraud will be conducted under the auspices of environmental responsibility. Not that I would suggest that Finsoul are remotely fraudulent, although I may change my mind if they call me back on Tuesday as they have promised.

Goldman Sachs is "Doing God's work" according to this interview in The Times*. By this he means that GS is allocating capital in society, to the most productive uses, presumably.

I don't know exactly what is meant by this. Nature, and its wonders, is often thought to be God's work, by those religiously inclined. It is arguable that in fact evolution is God's work, or at least design, to save him too much work in designing lots of individual organs and organisms.

The problem, though, is that, actually, GS doesn't allocate much capital as such. Most of its revenue comes from trading, exploiting the bid-ask spread without taking significant positions, together with fees from traditional investment bank operations: mergers and acquisitions, together with IPO's.

Whether or not asset allocation is God's work, it should not be done by GS itself. The most it can do is produce good analysis and advice for the 'buy side': the principal investors. In fact that is not the way investment banks work. They are all income-driven, i.e. seeking to maximise the product of the average percentage fee (or bid-offer spread, expressed the same way) and total value of transactions.

To my mind, this explains why so much trading activity destroys value. The parable of the Gotrocks clan explains a lot. Buffett is always careful to avoid being too nasty to GS as they do act for him in some transactions, but it is clear to me that he regards them as fairly parasitic, if not exactly a giant vampire squid wrapped around the face of humanity.

The problem is that we, the population at large, are the Gotrocks, and we are losing out a lot to GS and their ilk. Unfortunately we rarely manage our savings directly (our pensions are almost always managed 'professionally') and we cannot choose to follow Buffett's example and avoid almost anything to do with trading.

*

I don't know how long the link to The Times article will work, as Rupert Murdoch has stated that he plans to charge for all content. A quick search should throw up the essential facts of the interview.

Benjamin Graham, as well as his disciple, Warren Buffett, both strenuously warn against speculating, as opposed to investing, and generally define speculating as any kind of purchase of securities involving leverage. I have always wondered how to square this with the modern portfolio theory view that using leverage is simply a way of moving along the risk-reward frontier. On a fundamental level, if you really know that a stock is going up then you are going to get a bigger return on equity if you gear up. Obviously, on average, you do not, but there doesn't seem anything fundamentally malign about using some borrowed capital to spice up your return. Proprietary traders typically have a performance which is measured on an equity-free position: they have to stand a carry cost of their complete position value.

It was not until I started doing some modest trading myself that I gained a slender insight into the problem of gearing. In my view, it's not the gearing that's bad, but the margin calls. Benjamin Graham talked about a bipolar 'Mr Market' who has extreme mood swings but however crazy is feeling is always willing to trade with you, the investor. In Graham's recipe for trading success the key is to wait for Mr Market to get nearly suicidal and then take some shares off his shaking hands. When Mr Market flips and enters his manic phase, and will pay silly money for any old rubbish, sell the shares he sold you earlier back to him at a handsome profit. Sounds as easy as falling off a log, doesn't it?

Of course, it's hard to judge Mr Market's mood exactly in relation to his mood tomorrow or a year or ten from now. What may seem like a deep depression might prove to be a relatively sunny period compared to later. However, one this is certain. If you are forced to sell when the market has tanked there is no way you are going to do anything but lose money. This happens when you get that unpleasant email called a margin call. This means that the equity you've posted with your broker has evaporated and that further falls (or rises) in the value of your positions will result in him being fully exposed to the risk of you going broke. If you can't post further margin he will sell your position. I can absolutely guarantee that if you let him do this he will chose the exact moment when the market bounces right back and you will have lost everything.

So leverage is very dangerous, and there is no way of entirely avoiding the risk, but at the very least some kind protection should be put in place, whether buying options, overcollateralising, getting to a market neutral position or whatever. None of these strategies is perfect, but doing none of them is probably going to end in tears.