Let's Be Unreasonable

"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man."
George Bernard Shaw.

Bad Data In...

The IMF seems to be having a bad year. First it was accused of 'groupthink'. Then it was rumoured (again) to be considering Gordon Brown as its leader.

Now it's The Economist's turn to sink the slipper. It points out that the IMF's forecast of China's current-account surplus assumes a steadily depreciating yuan, and a widening surplus. That provides ammunition for protectionists to impose tariffs on Chinese goods. Yet China's current-account surplus has actually declined since 2006.

But let's not just pick on the IMF. In "Botox and Beancounting", The Economist also points out the cosmetic effect of US official measures of government debt, productivity and economic growth compared to European measures. "The snag comes if investors fail to grasp that official national figures can show the American economy in an overly flattering light."

Of course, none of these is an isolated incident. There are also fundamental problems in comparing corporate financial data, for instance, given differing accounting standards.

And we live in a world where auditors are still trying to figure out what "scepticism" means...

But we don't have a problem detecting bad data. Plenty of people warned others about what Madoff's fraud, for example, and investment analysts routinely uncover issues such as The Economist has reported. Short-sellers make this their business. No, as David Einhorn elucidated in "Fooling Some of the People All of the Time", the problem is how to give the same weight of publicity to the prudent interpretation of the data as is given to the release of the data itself.

The media and social media clearly play a significant role. But even if we create an Office of the Devil's Advocate, ultimately each of us must accept responsibility for thinking critically about the data we're given if we're to avoid making some big mistakes.

Image from TraceyNolte.

Hanging Ten With The Momentum Surfers

I've not read "The Big Mo" yet, but I've put it on my list following a review I read in the FT. It's said to preach the evils of “herd behaviour whereby people blindly and irrationally follow those around them and work themselves up to a frenzied panic” or "momentum surfing".

I hope I have to eat my words, but I'm not expecting much more than some insight into exactly why it is that the leaders of our institutions don't get this, rather than how they might be induced to think critically and take a contrarian view when the evidence suggests that's appropriate.

The author, Mark Roeder, may have some direct experience of the former problems, having been "head of global advertising" at ill-fated UBS between 2004 and 2009. But for a real guide to the value of critical thought and adopting a contrarian stance "The Big Short" and "Fooling Some of the People All of the Time" will take some beating.

Diversify More

Great to see a broader debate about where social lending sits in the banking and investment world (most recently summarised on Bankwatch).

It would indeed be very helpful if people could deduct their social lending fees/losses against their income tax, and lend money to each other via their ISAs. Some day common sense will prevail.

Of course, you can already lend money to people (who aren't related to you) via your Self-invested Personal Pension plan with the trustee's consent. I explored that in some detail in 2007 while General Counsel of Zopa, and even obtained FSA authorisation for Zopa to introduce people to a dedicated 'mini-SIPP' that was to be issued by a SIPP-provider exclusively for lending money via Zopa.

On that basis, there's no reason you shouldn't be able to lend money to others through a 'DIY' ISA or stocks/shares component of your normal ISA, especially where the administration and audit-trail is outsourced to a social lending platform such as Zopa (currently the only one in the UK).

But let's go further.

The artificial distinctions between the various investment 'channels' merely confuse the issue of how diversified you really are, and create a needless multiplicity of intermediaries who all have to take their cut from our money. We know what it means not to put “all your eggs in one basket”, but struggle to see or understand the “eggs” and the “basket”, and unwittingly hemorrhage returns in fees and commission.

Consider that you can invest your money in exactly the same managed investment funds directly, as well as via a tax-free 'wrapper' such as an ISA, pension and/or child trust fund. And if your corporate pension is managed as opaquely as mine are, then you have no idea whether your corporate pension trustee has your pension money invested in the same funds you hold via other 'channels'.

As I've pointed out previously, figuring out whether your 10, 20 or 30 different funds actually represent a diversified portfolio, or ultimately all track each other, is no easy task. The existing product providers and IFAs can't really be expected to take a huge interest in your mish-mash of pension and non-pension, taxable and non-taxable investments (and let's not forget the mortgage albatross or any other liabilities you thought were assets). They tend to earn fees simply based on how much of your money they have 'under management'. So if your investments are scattered to the four winds, the revenue they earn from you is disproportionate to the work required to pull all the information together. In fact, it may not even be cost effective to pay the fees for an adviser to do a proper job.

While the FSA has reviewed retail distribution to try to resolve this issue, that review ignored any asset offered by a provider that the FSA doesn't regulate, including all consumer credit (and hence social lending via Zopa). The limited nature of the FSA's remit and resources prevent it from seeing the financial world holistically. Consider, too, that the FSA's own "MoneyMadeClear" website has different tabs for pensions, as opposed to savings and investments - when in both cases you're simply 'investing', and your money could end up in the same place through either channel.

As I've said before, we need a one-stop, low-cost service that allows you to track all your savings and investments, whether in or outside pensions, taxable or non-taxable; understand whether they're up, down or sideways; benchmark them against competing options; assess whether you are really diversified; avoid the pitfalls of transfer fees, dealing charges and other potentially hidden expenses; and cost-effectively trade your way out of any problems.

Remember, you are on your own: pay less, diversify more and be contrarian.

Personal Investing Made Easy?

My anxiety as a personal investor is rising at the same pace as world stock markets, unemployment, public sector debt and house repossessions. And the scale of the pension fund black hole actually seems to have induced one pension trustee to write to me for a second time in one financial year(!) - to remind me I can "change my investment choices". My gut tells me it's all going to get a lot worse and for a long time, before it gets better - and so does Bob Prechter, to name but one of many pundits:

I do my best to keep track of various small investments in numerous pots that have accumulated over the years - several ISAs, pensions (corporate, SIPP and stakeholder friendly) and child trust funds. I even move them around over the flames from time to time, in the hope that at least one or two will ignite. But none has yet paved the way to retirement, let alone a comfortable one.

So what changes should I be making to my investment choices?

The first step in any such undertaking is to figure out exactly what each investment is worth... and whether I'm ahead...... Or not.

And right there the whole personal investment management process comes to a juddering halt.

Because not all of the relevant information is in the one place, and some of it is downright difficult to obtain (when one confronts the different ticker symbols that pension providers use, for example). So there are always a few funds kind of drifting 'out there' that you learn about every 18 months from some forlorn pension trustee somewhere.

And figuring out whether your 10, 20 or 30 different funds actually represent a diversified portfolio, or ultimately all track each other, is no easy task for an amateur. In fact, the pension trustee who wrote to me recently didn't even suggest I try.

The product providers and IFAs can't really be expected to take a huge interest in your mish-mash of pension and non-pension, taxable and non-taxable investments (and let's not forget the mortgage albatross or any other liabilities you thought were assets). They tend to earn fees simply based on how much of your money they have 'under management'. So if your investments are scattered to the four winds, the revenue they earn from you is disproportionate to the work required to pull all the information together. In fact, it may not even be cost effective to pay the fees for an adviser to do a proper job.

The FSA has just spent oodles of time and money reviewing retail distribution to try to resolve this issue, and they've made some progress, but ultimately it seems an impossible task. Consider that the FSA's own "MoneyMadeClear" website has different tabs for pensions, as opposed to savings and investments - when in both cases you're simply 'investing', and your money could end up in the same place through either channel. And the FSA's review basically ignored any asset offered by a provider that it doesn't regulate, including all consumer credit - its remit and resources prevent it from seeing the financial world holistically. It's a fool's paradise, as I've pointed out before.

So let's face it: you are on your own. Pay less, diversify more and be contrarian.

Now I don't think I'm unrepresentative of a good many people over 40 who have a bunch of stray investments that are only going to grow in number, but not necessarily in size, and who know they really ought to be doing something to keep it all under control. I'm aware of services that go part of the way, but no one-stop, low-cost service that would allow you to track all your savings and investments, whether in or outside pensions, taxable or non-taxable; understand whether they're up, down or sideways; benchmark them against competing options; assess whether you are really diversified; avoid the pitfalls of transfer fees, and dealing charges that hammer nails into some apparently cheap options (e.g. I'm told not to trickle money into ETFs); and cost-effectively trade your way out of any holes.

All in a single afternoon.

But here are some examples of the elements that would be worth combining, even if initially that's in something like a Netvibes or iGoogle screen - other suggestions welcome - :

• FT.com - spend days finding the right fund names, ticker symbols and recording all your holdings using data from product provider web sites - remembering to record the trickle of reinvested dividends - and, hey presto, you can track the performance of your portfolio.


• Money Gym - hit the FT's gym to learn the basics of (some) asset classes.


• Yahoo's ETF Glossary - actually a useful repository of most investment jargon.


• Lower cost dealing - the devil's in the pricing detail, and you get no advice so have to know exactly what you're buying and why, but compare Motley Fool, The Share Centre, with those listed here.


• Comment and opinion from some top notch experts too numerous to mention here - not seductive stock tips (because I don't believe anyone should be relying on those unless they're sitting for 12 hours a day in front of 4 trading screens full of data to check them), but broader suggestions on how to view what 'the market' is doing, pitfalls, scams and so on.


• Books from said columnists and others who are aligned with helping you meet the real personal investment challenge.

It's a tough job, but surely one day someone will make personal investing easy.

The Bull Market in Australian Cattle Stations

Yep, amidst all the bloodletting and mayhem of the credit crunch, there's a bull market in Australian cattle stations - over 30 have been rounded up in the past 6 months. It seems they've been under-capitalised, relative to their potential capacity and projected global beef requirements, and stand to benefit from the decline in available land elsewhere.

Amongst the buyers are The Macquarie Pastoral Fund, Terra Firma (which just bought out the Packer's rural holdings) and Primary Holdings (management pictured on location), which is in the process of tying up with ex-Murdoch man Ken Cowley's iconic RM Williams vehicle.

It's such a significant opportunity that old mate and CEO, Bob Tucker (pictured, seated left), former COO at Man Global Strategies, recently moved from London to Sydney, after securing seed funding from the RAB Special Situations Fund.

I have a little empathy, as Irish ancestors on my mother's side helped open up the area of the Kimberley region in Western Australia that is now the Ord River irrigation area. The history is covered in Mary Durack's book, "Kings in Grass Castles". I see there's even an upcoming tour of the trek the various families took to get out there in the 1880's.

It's still a hard life out there, by all accounts. Nice to see that the humble whiteboard remains an essential tool.