If you have been around the investment business as long as I have, it is impossible not to develop some strong opinions about the way that the industry has developed and is regarded in the wider world. In this chapter I offer some thoughts on the things that bug me, together with some further reflections on aspects of investing that I have only touched on earlier in the book. Feel free to disagree with me if you wish! As I have learnt over the course of the last 30 plus years, nobody can claim to be right about every aspect of investment. Experience is certainly the best instructor I have had.
There have been some dramatic stock market crashes in my time as a professional investor. The 1987 crash was a huge shock at the time. The internet bubble and subsequent bust was simply one of the craziest episodes in the whole of market history. The scale of the 2007–09 financial crisis, when stock markets fell by 50% for the second time in less than ten years, was also dramatic.
I would make an exception of the internet bubble, but it is fair to say that most stock market falls, including the biggest crashes, were not forecast by anybody. The 1987 crash was a seismic shock to the industry. Nobody had seen the markets fall so fast so quickly. You couldn’t deal in some unit trusts for three or four days. They simply wouldn’t answer the phone. That had never happened before and wouldn’t be allowed today.
In the aftermath of that crash, they wheeled out market historians such as J.K. Galbraith and all sorts of others who could remember the 1929 stock market crash on Wall Street, saying it was the end of the world. When you’re young and only a few years into your investment career, as I was, you think, “Well, these people ought to know what they’re talking about.” But of course I was wrong, as were all those doomsters who said that the 1987 crash would usher in a new global depression.
What you realise as you get older is that a lot of people who work professionally in the investment business don’t actually have a clue what they’re talking about – and the more expert they are, the worse they usually are. You can make a great career out of sounding good, even if your forecasts are almost totally useless. Most economists fall into that category. They get very well paid for being wrong almost all the time. There has never yet been an economic recession that has been predicted by the majority of economists. I find it incredible that they get away with it, but they do.
Mind you the fund industry can lose its marbles as well. In the 1980s and 1990s, many investment trusts borrowed money at absurdly high fixed interest rates. That cost their shareholders a huge amount of money. Equitable Life, the pensions and life assurance company, notoriously went out of business after promising its clients guaranteed annuity rates that it could not possibly afford to pay when interest rates began to fall dramatically.
If nothing else, these examples show that the idea that professional investors will always do better than private investors is complete rubbish. In my experience, the institutional and professional investor can be every bit as idiotic as any private investor, and sometimes even more stupid. I have seen too many examples in my time to think differently.
It also means that if you are in the business, it pays to be quite humble. You could always be wrong in the future. I am not clever enough to tell you where the stock market is going to go this year or next. It is easy to be a multi-billionaire with hindsight, but at the time things are never as obvious as they seem to be afterwards. The best you can do is take a long-term view and look out for prices or markets that have reached an extreme and bet that they won’t persist for long.
Something like that happened when interest rates reached 15% during the early 1990s. You just knew that could not be sustainable. Yet I remember having a hell of a lot of trouble trying to persuade a client to buy a guaranteed income bond that paid out 13% a year and would also give his capital back at the end of the policy’s life – just think what that would be worth today. He just thought interest rates would go on rising indefinitely, which is what people tend to do – they just extrapolate from recent experience.
A good recent example is the Japanese stock market, which from a long-term historical perspective has looked undervalued compared to most other leading country equity markets. But there are still hundreds of investors who find it impossible to invest in the country’s stock market. Why? Because there have been so many false dawns before in Japan, and many investors still bear the scars of trying to get back in too early. London house prices are another example. People who say that prices will never come down again have short memories. We have had big setbacks in house prices at least three times in my career and at some point we will have another one, though don’t ask me to tell you when.
Psychologically, as human beings we have a much greater aversion to losses than we have positive feelings about gains. That’s why I don’t gamble. Horse-racing is like investment in that the outcome is rarely very satisfying. If you bet and you win, you are disappointed because you should have put more money on the winner and if it loses you aren’t satisfied because you shouldn’t have put any money on it at all! Investing can sometimes be a bit like that too. When you get a winner, you think why didn’t I put more of my portfolio in that? And if it’s not doing well, you think why did I ever put any money in it in the first place?
Investments are basically driven by greed and fear. If you are going to be fearful all the time, I repeat what I said earlier. Investment is supposed to improve the quality of your life, but if you worry about it every second, then it’s not having that effect. It is certain that anyone investing will at some point have to deal with a crisis or a big market fall. There have been plenty of 5–10% corrections in the stock market over the last 20 years and quite a few scares which led to even worse outcomes.
Instant communications means market moves happen much more quickly, both up and down. I think it’s important for investors to appreciate that, whatever they invest in and however good the fund manager is, the likelihood is that at some stage your portfolio is going to take a hit. You’ve got to think, “How will I feel then? If I invest £100,000 and find it’s only worth £85,000 in a year’s time, how am I going to feel about that?”
There is a useful test you can take. Whenever you buy an investment, you should try and work out the worst-case scenario. When you get a mortgage I always ask clients, “What happens if interest rates go up and you have to pay 5% instead of 3%? Have you worked out how much money that is and can you pay it?” If you can’t, I question whether you should be having that size of mortgage, or even a house at all. It is surprising to me how many people don’t seem to think this way when it is really no more than common sense.
The same goes for investment. You need to have realistic expectations and be mentally prepared for the times when things are not going well. If your expectations are not fulfilled, you will naturally be disappointed. If that happens, don’t look at everybody else – think about yourself, about the investment itself and whether you are as genuinely long-term in your approach as you think. Rather than panic, I suggest you go fishing or take some time out rather than let your emotions get the better of you. It’s never fun to see your investments go down. Nobody enjoys it. But it is a fact of life and you have to know how to deal with it when it happens.
The speediest fall I have seen was October 1987. Then it was a huge shock because people had never seen a market fall so quickly. Wall Street on that Monday night fell 25%! London, on the Monday, had already fallen just over 10%, and the following day it fell 11.5%. Since 2000 we’ve had two falls of 50% in ten years, which is unusual, but it does underline the volatility of economic and financial cycles.
That tells you that you need to look longer term and you do have to make sure that you have sufficient cash around you to give you that buffer before you invest in the first place. Just because something goes down doesn’t mean that it’s a bad investment. An awful lot of the time, although people say, “You guys always say that,” we end up saying, “It’s a buying opportunity”. It might be trite, but 99% of the time it’s also bloody true!
This must be the only industry in the world, where, if prices go down, people don’t buy more, but less. If I said there was a 50% sale on at Harrods people would flock there. But in stock markets, people go the opposite way, become fearful and often don’t do anything at all! That’s the best time to be looking to buy, even if there is always a lot of luck involved. I get asked, especially when markets go down, “What should we do?” My answer is always the same. I just say, “Look, if you’ve already got a well-balanced portfolio, and if you’ve sorted out what you want to buy, then buy a chunk, say 10% or 20% on day one, leave it for a while, and if the market takes a fall, I’d definitely be putting some more money in.”
There’s psychological pressure for the DIY investor because, if your investment starts to go down, do you take a small loss or do you just ride it through? Back in 2008, funds like Old Mutual’s Small Cap fund and First State Asian Pacific all took a huge hit. They were down 40% or 50%. The DIY investor tends to say, “Well, if I had sold it at the top, that would have been great.” I say back at them, “Yes, but would you have bought the shares back at the bottom?” The news at the bottom is always worse than it is at the top. People too readily get into the doom and gloom and they don’t buy back what they have sold and so they lose it. If you’d held on to the Old Mutual fund in 2008, it has since risen by over 250%. The First State fund is up by a similar amount.
This all comes back to my point about decisions: the fewer you make, the better – the trouble is, if you are a seller one day and a buyer the next, both decisions have got to be right, and usually one at least is wrong. That’s enough to make you lose money. When markets are bad, I’m tempted to say the best thing is to turn off the news, don’t keep looking at your portfolio and focus instead on the long term.
Market squalls will come, and there could be two or three in a year, or there could be nothing for a year or so, but it is a racing certainty that over your lifetime you are going to experience some tough times. But as a general rule, markets and economies most of the time plough the middle course. It’s never as bad as you think, and it’s never as good as you think either.
If the market falls and a fund manager like Anthony Bolton, Neil Woodford or Nigel Thomas does poorly, it does not mean that they have become bad fund managers overnight. In fact, they’re the ones who thanks to experience will keep their nerve, which is what you need. What you don’t want is someone suddenly going off-base because something’s happened to the market and he’s doing something he wouldn’t normally do. That’s normally a recipe for disaster.
We always want a reason for something, but sometimes there’s just not a good reason. Back in the internet bubble, when the end came in early 2000, there was no single piece of news that suddenly said that this technology wasn’t going to work. In fact, everything that was said about technology in 2000 and what it was going to do we’re seeing happen now. We can see that clearly now, but tech stocks still fell like a stone back then. Like the railway and canal bubble they were wonderful for the economy in the long run because, although there was huge over-speculation and over-building, it’s exactly what the country needed. You would never have got all the railways being built if everyone had sat down and thought about it.
The final point I would put on the table is there are periods when markets do become overvalued or undervalued. There may be some indicators that tell you that your return over the long-term is likely to be higher or lower as a result. The famous buying point for the Hong Kong stock market is a PE of 8; when the market falls that low, it is almost invariably a good time to buy. It’s quite remarkable over the last 30 years that the market has bounced off that level so often. It is a good example of how, rather than trying to make macro market or economic judgements, it is better to hold on to your historical perspective on where markets are and take a line from that. An objective signal is always better than relying on a personal or emotional approach.
That is why many fund managers prefer to concentrate on valuations in their chosen sectors and stick to that method. A fund manager such as Mark Slater at Slater Investments uses a lot of ratios when screening stocks, but he doesn’t do a lot of macro. Anthony Bolton never did a lot of macro, at least until later in his career. Giles Hargreave is the same. Of course, they may always have an opinion, but the question I like to ask fund managers is not what they think about the general economic climate but: “Are you still finding opportunities in the stock market today?”
If they can answer that question in the affirmative, that can be very helpful when trying to decide whether market valuations are too high or not. If they say no, it pays to be cautious yourself. You might think that their answer would always be “Yes”, but my experience is that the best fund managers – the ones who have been around for a while and are honest with themselves – are also pretty honest about sharing their current opinions.
I would be much happier if the government stopped tinkering with the pensions regime in this country. Pensions are the second most important financial asset that most people have, after their homes, and the endless messing with the rules about what you can and cannot do does few of us any good. However the recent pensions freedom changes first announced by George Osborne in 2014, and taken further in the 2015 Budget, are potential game-changers which – if they are left alone by future governments – will have a profound impact on millions of people’s future financial wellbeing. The chances are that if you are reading this book you may well be one of them; and even if you are not you will find a lot of people talking about the issue.
That is certainly a change from the past, when the word pension tended to make people’s eyes glaze over and the subject was often seen as a quite distinct subject from investment. Yet, of course, as I have mentioned more than once already, in reality they are not. For this I blame the final-salary scheme so beloved of the public sector and until recently also popular in the private sector. In this type of scheme, the liability to pay you a pension rested entirely on your employer. As an employee, there was little need to know anything about investment. Your pension was just a function of your final salary and length of service with the company – typically around two thirds of your salary. That was enough to cover most of your daily needs, with any savings you had managed to build up as a bonus. There was no need to keep tabs on what was happening to the stock market. Someone else would take care of all that.
Today, the age of lifetime employment and the final-salary scheme are long gone, at least in the private sector, which is why nearly everyone now needs to understand the basics of pensions in a way that was unnecessary before. The old way lives on mainly in the public sector, where nearly all workers are still in final-salary schemes. The beneficiaries include politicians, so perhaps it is no coincidence that the constant meddling with pensions rarely affects them directly. If they had a private pension, I am confident that they would acquire much greater understanding of what impact the changes they approve are likely to have on you and me. I cannot think of a more important change than making them face the same practical problems that the rest of us now have to do.
What is fortunately also true is that private pensions are much better value than they were 30 years ago, in the days of sky-high charges and commissions. The big change is that the liability has passed from the employer to the employee and the self-employed. Given that your pension fund may well be worth more than your house, this has become a huge personal responsibility. How much pension you end up receiving will depend in no small measure on how you choose to invest it. It is no longer enough to rely on someone else to make decisions on your behalf. You either have to make them yourself or find someone qualified to help you make them. There has never been a more important time to educate yourself on the subject.
The issues can be quite complex, but the point I hope to impress on you is the need to start thinking about your pension fund as what it really is: just another investment fund. The better your fund is invested, the bigger the pension you will be able to draw from it when the time comes. On a day-to-day basis, a personal pension is merely a tax-efficient savings plan – no more, no less. So treat it as such, alongside your other investments. If your employer has a defined contribution scheme, and pays into it alongside you, don’t just automatically take the default fund choice the scheme offers. Have a look at how your money is being invested and whether there are better alternatives. If you decide that picking funds as I have described in this book is a realistic option for you, apply the results to your pension as well. If you take advice, the more interest you take in what your advisor is proposing, the more likely you are to end up with a satisfactory outcome. My argument would be: you really can’t afford not to get involved.
This is not the place to go into every aspect of the issues raised by the new pensions regime, not least because the new rules only came into effect in the course of writing this book (and there are more changes still to come). We will need to see how it settles down. In practice I view these changes, which you can find summarised on government and other websites, as a real mixed bag. On the one hand, the freedoms not to have to choose an annuity and to be able to pass on your pension savings tax-free to your spouse or dependants if you die before the age of 75 are genuinely positive and ground-breaking improvements. For those who have accumulated significant pension pots already, these changes could be particularly valuable.
On the other hand, the steady process by which successive budgets have reduced the lifetime allowance and annual limits on pension contribution tax relief are backward steps that limit how much value the other pension changes will have, especially for the younger generation.24 I also share the concerns of those who fear that people with limited experience or knowledge about pensions are at risk of making mistakes and falling prey to wrongful sales patter, bad advice or even fraud. (God knows the pensions industry has enough skeletons in its cupboard on the first two of those counts.) Whatever else you do, therefore, I urge you not to do anything in a hurry until you have really understood the changes that are being proposed.
One of the real problems with pensions which rarely gets mentioned is that, as it is with buying a house, there is a lot of luck involved. So much depends on when you happen to retire (and later also, for your heirs and dependants, when you happen to die). What is happening to interest rates at the time, and how the stock and bond markets are being valued at those moments, can make a huge difference to how well off you are in retirement. If you take your pension as an annuity, as people were forced to do until they introduced the drawdown system, the level of annuity rates can vary quite significantly from one year to the next.
My father-in-law was one of the lucky ones. He retired in 1994, just when there was a sudden sharp rise in annuity rates. It was a year when the Federal Reserve, the US central bank, raised rates unexpectedly, causing havoc in the bond market. Annuity rates are normally priced off the yields on government bonds, and gilts had their worst year for 36 years, yields soaring and prices falling. It was a shock to the market, but good news for my father-in-law. He retired just as annuity rates peaked. For his £300,000 accumulated pension pot, he got almost 10% a year for the rest of his life – a real bargain as interest rates and inflation both went down from there. Today he would be lucky to get 5% from an annuity. He would need £700,000 to have the same annual income.
If you have opted for drawdown instead, taking what you think you need and leaving the rest invested, the same lottery applies, depending on where the markets are when you start drawing down. If you started to draw down your pension at the end of 2007, it would have been horrendous, as the stock market promptly fell by 50% over the next 18 months. If you had started in March 2009, you would have been in clover, as the stock market is up more than 100% since then! As nobody can confidently predict exactly how the markets are going to behave over such a short period, there is no way round the problem of luck that I can see. You have no choice but to accept “the slings and arrows of outrageous fortune”, as Hamlet says.
The problem of timing certainly complicates two of the most difficult issues posed in pensions planning: (1) deciding how much you need to guarantee an enjoyable and stress-free retirement and (2) the problem of whether to choose the annuity route or drawdown. The pension freedom legislation frees everyone from the need to take an annuity if they don’t want to, which is intuitively very attractive. What people don’t like about an annuity is the idea that the insurance company goes off with all your money when you die. You give the insurance company all your savings and if you die the next day, the company cops the lot and no one else gets any of your money. Of course, if you live longer than the actuaries expect, you benefit at somebody else’s expense, but the unfairness of it still rankles with many people. It has got worse as annuity rates have continued to fall.
The trouble is that drawdown is much more appealing to people as an idea, but devilishly difficult to get right in practice. Having managed drawdown for one or two clients, I have hated every moment of it, if I am honest. It is very stressful, knowing that you are always having to take a view about the markets despite knowing that it is impossible to foretell what they are going to do from one year to the next! If the markets are about to fall by 50% over the next two years, as happened twice in the last 15 years, what are you meant to do? It is easy to decide with 100% hindsight, but something of a nightmare at the time.
This is therefore one of my biggest worries about the pensions legislation changes. If professionals like me cannot be sure what the best drawdown strategy to adopt is, is it reasonable to think that most ordinary investors can do any better? There has to be a fair chance that if they do choose to go down the drawdown route they will eventually run out of money, forcing them back onto reliance on the state. In practice, given that the majority of people have less than £30,000 in their pension pot, many will simply take the cash and spend it.
As it is, something like 80% of all people with pensions fail to take any professional advice before deciding what to do when they retire. When they opt for an annuity, the great majority simply take the deal offered by their insurance company, instead of shopping around, as they should. That must also cost them thousands of pounds. It does not suggest to me that they are crying out for the opportunity to make any more decisions! I don’t know if anyone has ever studied this in any depth, but my gut feeling is that most of the time most people who have chosen drawdown in the last ten years will probably look back now and wish that they hadn’t given up the annuity option. The only way most people will have benefited from going for drawdown is if they happen to die early – and that is not the kind of thing that you want to wish for – at least I don’t!
To my mind, therefore drawdown only works for quite sophisticated people with a lot of money. Government claims that five-million existing annuity holders will benefit from the freedom to exchange their annuity for a cash sum needs to be put into context. It is not yet clear that such a scheme can be built and even if it is, it might only benefit a small minority. For most people, I venture to suggest that it will probably make sense to retain their existing secure annuity income. Anyone who does opt for drawdown should keep the equivalent of at least two years of pension income as a reserve, so that if the markets do tumble, you can stop the drawdown payments rather than see your capital diminish any further.
With pensions still in mind, I cannot reiterate enough times (a) how important it is to start saving early, and (b) why it is worth taking the trouble to read more about investment and – as more and more are doing – become something of a DIY investor yourself. I worry that most people are too put off or frightened about how complex it all seems to do that. If they need advice, they don’t where or how to get it. There is a genuine problem in this country that most advisors won’t touch you unless you have a minimum of £250,000 or so in assets.
If you haven’t got that sort of money, or are only just starting out down that road, you really have no option but to try and fend a bit more for yourself. After all, if you never start investing, you may never get to the stage where you can afford good financial advice. Even then you may well want to go on taking an active interest. Why? Because what most financial advisors offer is actually not investment expertise itself, but financial planning.
Financial planning involves looking at your overall circumstances – whether you have a property, the age and needs of your children, life assurance, pensions and so on – as much as it does doing the actual investment of any money that you have. Of course, many financial planners would love you to hire them to look after their money on a discretionary basis, and earn another fee that way. Sadly many of them simply aren’t that good at the investment part of the equation. You know the old saying: “If you want to make a small fortune, start with a big one”. I am afraid that it is often true.
I like to contrast what happens in investment with the way people go about buying a car. You don’t need to know how an internal combustion engine works to buy a car, yet when people do go and buy a new car they won’t normally just go into a garage and say, “I’ll buy that red one,” and then two weeks later complain that what they’ve bought is a two-seater and they’ve got a family of six!
But that’s what seems to happen in finance so often. Whether or not you have got an advisor, or are doing it yourself, people just don’t forearm themselves with things to ask or any basic understanding of what they are trying to achieve. I don’t think the financial industry helps itself in this respect. Like all industries, it has its own jargon and needlessly complicates things.
Attitudes to money have changed over the years. Once upon a time unit trusts were very much the poor man’s way into equity. If you were at the golf club, you couldn’t really talk about unit trusts as you could about how well or how badly your Shell shares had done in the previous week. There was an incredible snob value in having a stockbroker. It was also bizarrely thought that having your own stockbroker was the way to get the best professional advice. Unit trusts didn’t fit that bill at all, although ironically, because of their favourable capital gains tax position, they suited higher net worth people far better than they realised.
A big change to people’s attitudes came in 1966 when Barclaycard came out and brilliantly called their card a credit card rather than an HP card. Hire purchase was seen as very working class and my parents, for example, would never have borrowed money. Of course, this was before inflation started to take off and the cost of money got much higher, but my father thought that HP was a shocking working class habit (as well as an expensive one).
Barclaycard brilliantly broke that by calling it a credit card. I take the consumer society to have started pretty much from there. If you remember, in those days Barclays just mailed out their credit cards. You didn’t apply for them – they actually mailed them out to you, and you got a card more or less automatically. The biggest change is that it’s still very easy to get credit, but thanks to regulation, it’s much harder to get anything on savings and advice into the public arena.
It has always struck me that it is remarkably easy to go into John Lewis and get five grand’s worth of credit within two or three minutes, but if you came into Hargreaves Lansdown with £5,000 and said “help me”, you’d be here half the day! That is because of all the forms that have to be filled in and the background research into your circumstances and attitude to risk which we are required to undertake before we can give you advice on anything.
If we are ever to develop a proper savings culture in this country, which we need if we are to invest in the future of our economy, we have got to make saving and investing easier and simpler. Education is obviously a big part of the answer, but there must be a better way to incentivise people to spend less time gambling and more time trying to put their money to work in more productive ways. The rules governing TV advertising would be a good place to start.
My first piece of advice to any would-be DIY investor would be: don’t go near a bank for almost anything on the savings or investment side. Obviously you need a current account and banks may be able to offer you a decent mortgage deal, though these days it really pays to shop around before you commit. Yet their bank is the first place that many people go. I suppose that is because it seems the obvious place to start.
The trouble is that banking is not what it used to be. We all learnt that with the most recent financial crisis. Over the last 20 years banks have gradually changed from being guardians of people’s money and financial interests to giant sales and gambling machines that see their customers only as the source of more product and trading profits, not as people they can – and should – be trying to help.
Anyone who has dealt with a bank on the retail side will have seen for themselves what a rip-off they can be. Partly that is because virtually all branch employees are now salesmen in disguise. I can still remember walking into the Lloyds Bank in Teddington years ago and being struck by the fact that the first thing I saw was a graph showing how many endowments they had managed to sell in the past week.
My grandfather was a bank manager at National Provincial before it was merged with the Westminster Bank to become NatWest. He was what you would call an old-fashioned bank manager. He knew a lot about South African gold shares and would buy them for his customers when he thought they were cheap. Can you imagine a bank manager doing that today? He’d be thrown out. Bank managers today no longer owe their careers to how well they treat the customers of their branch, but to how well they meet sales targets set by some manager at regional or head office.
The real rot with the banks set in when they allowed the retail banks – the ones that take your money as deposits on the high street and lend them out to businesses and individuals – to be taken over by profit-chasing investment banks. Nearly all the scandals we have seen in the last few years –mis-selling of pensions and insurance, interest rate and foreign exchange rigging and so on – have stemmed from that calamitous change in culture and behaviour.
Although there have been some tentative steps at reform in the last few years, it will take many more years to stamp out the bad habits and poor decision-making that has been allowed to creep into the way our banks do business. I wish I could say that we are through the worst, but in all honesty I find that hard to do. Don’t trust them with your money!
For years the regulators have introduced ever tougher rules to clamp down on misleading sales and marketing practices by financial services companies. I have no problem with that. God knows there have been enough scandals over the years. When I started out one of the big talking points was the advertising done by a firm called Barlow Clowes. This was run by a man who filled the newspapers advertising a fund that invested in government bonds, yet magically promised investors a higher income return than government bonds themselves were generating.
Everyone in the business was left scratching their heads wondering how on earth that could be possible. My boss Kean Seagar, to his credit, was absolutely adamant that we should not let any clients anywhere near the Barlow Clowes fund. And that was very sensible; it turned out that Barlow Clowes was a simple fraud that enabled its founder to live a champagne lifestyle with money that flowed in from gullible investors. It was a classic example of the old adage that if something appears to be too good to be true, then it almost certainly is.
At that time there were no regulators around to stop the advertisements appearing and the newspapers, although they did do some simple checks, were happy to print the advertisements and take the revenue. A few years later the regulators had to step in again to introduce rules spelling out exactly how fund companies should present figures showing the performance of their funds. That was amply justified: we all know that there are “lies, damned lies and statistics” and some of the fund firms took the black art of misleading adverts to new heights.
What puzzles me today is the growing mismatch between standards applied to different industries. You cannot launch a fund or write a prospectus for a share that is being listed on the stock market for the first time without having to add pages and pages of small print detailing the risks. It is one reason why you will rarely see a TV advertisement for a fund, however reputable the fund management company offering it.
Yet switch on the television and what do you see instead? Adverts for ambulance-chasing lawyers and loan companies that charge you unbelievable interest rates and endless advertisements that beg you to start gambling on sporting events! The latter even offer you money to get started on the gambling habit. You could easily lose all your money, but that is given nothing like the same prominence as it would be if you were being offered a perfectly dull and sensible investment product that could make you money over the next few years.
The last thing I want is to see us go back to a world where financial products are sold by misleading promotions. Print and social media still carry plenty of ads. But in a TV-dominated age it is not a great surprise that the country’s savings rate has been so weak in recent years. Credit was far too readily available before the financial crisis and now we have a problem where it is often next to impossible to sell perfectly sound savings products to those who need them most.
The lack of savings is not just a young person’s problem. Those in their 40s and early 50s were traditionally people with money, but today many in that age group have not really saved anything. They might have a house, but a house is not a bank account, and it may or may not be useful later on – that’s a different argument. Suffice it to say that I wouldn’t want to be relying on selling a property for a pension.
Those of us who have been in the funds business for many years know how important the personal finance press is to the industry. Both my first boss, Kean Seagar, and later Peter Hargreaves, were quick to realise how helpful getting coverage in the newspapers could be to their businesses. They made a point of getting to know personal finance journalists well and being ready to offer a quote on any topical issue.
They also placed adverts in the financial pages offering information and advice on funds and produced free brochures on things like capital transfer tax, which the papers were happy to promote to their readers. In his autobiography, Peter says that the first time he realised he was going to be a millionaire was when he went to his front door and found a huge pile of letters from readers responding to his first unit trust advert in the newspaper. At that point he knew he was onto a winner with his new business.
Since then the symbiotic relationship between the financial press and the funds industry has continued to grow in both scale and scope. Every week you will see a lot of advertisements for funds in the financial pages of the national newspapers and in the main weekly magazines such as Money Observer, Investors Chronicle and MoneyWeek. The pace tends to become especially frenetic towards the end of the tax year, when the press is busy advising readers to make sure they take advantage of their annual ISA allowance and pension contribution tax relief. The amount of advertising has mushroomed since I started.
Every week you will also read scores of quotes from leading broking and advisory firms in articles about funds, pensions, mortgages and so on. Needless to say, Hargreaves Lansdown is always prominent amongst those being quoted, and I plead guilty to being a regular commentator on such issues as the funds we like as a firm and the latest developments in the markets. Fortunately I greatly enjoy that part of the job and I like to count a number of personal finance journalists among my friends.
Nevertheless, as they would be the first to confirm, I also have some regular beefs about the way the financial press seems to operate. Actually I think it is very important to distinguish between the business and City pages of the newspapers and the personal finance pages, which are typically separate. The personal finance pages are often included as a supplement or distinct section of the main newspaper, reflecting their very different agenda and readership.
In practice it is usually the editor of the City and business pages who has ultimate responsibility for the money pages. I have often thought that it should be the other way round, as what the personal finance pages are writing about is usually far more directly relevant to readers than the general business and City pages. It is all very well taking about Vodafone’s profits, but that is not what most affects most people. These days the personal finance pages cover a lot more topics than they used to do. It is not just about investment. It is also your energy bill, car insurance, bank accounts and so on.
Ian Cowie, formerly at the Telegraph, now a columnist at the Sunday Times, is one of the longest-serving personal finance journalists. He tells a great story about how when the problems at Equitable Life first started to appear, he tried in vain to get his City page colleagues to take an interest in the story. At first they just weren’t interested. It was only when he mentioned that some of the paper’s employee pensions were invested with Equitable Life that they suddenly sat up and took notice. It made the top of the front page the next day.
My feeling is that in the last few years, and particularly since the financial crisis, personal finance journalism has developed much more of an edge to it. There is more of an agenda than I would have said was the case before. Partly that must be because of the failings of the banks. What remains the case is that the media play an important part in shaping what people think and unfortunately not everything they go after is right. It is clearly a lot to ask the DIY investor to read as many of the financial pages as I do every week, but if you want to take investing seriously, I think you do need to read a lot to stay up to date. I would suggest starting with the Daily Mail on Wednesday and either the Financial Times, Times or Telegraph on Saturday. The Saturday issue of the Independent is obviously a must read.25 So too is the Sunday Times. You might also want to look at one of the magazines regularly as well. After six months or so you should have a pretty good idea of what is going on.
What worries me is that newspapers are clearly now failing business models. The internet is chewing them up, and they are struggling to respond. News today is a straight commodity. You don’t need a newspaper to see the news. In fact, it’s out of date by the time you’ve got it. What newspapers should be good at is analysis, and I think that is what they should be spending more time on. I still don’t think they do enough of that. The trouble is that with so much online content to provide, journalists write too much, which leaves them less time to do the heavy-duty analysis that you would hope to see.
And what they do write about, particularly in the City sections, is too much about general economics, and not enough financial specifics. They think that the macroeconomic situation is important, but I suspect it just turns a lot of readers off. Too many economic and financial commentators work on a diet of doom and gloom, which can sometimes be right, but more often than not fails to be justified by later events. One of the biggest problems is that much of the economic data that they have to analyse is unreliable and regularly revised later – as good a case of ‘garbage in, garbage out’ as you can find. More to the point, commentators are often good at identifying problems but not so good at coming up with practical solutions about what investors should do.
That is particularly true when it comes to thinking about the stock market, which operates on a completely different cycle to the economy. For the last six years, there have been pages and pages of negative comment about the state of the world, its over-indebtedness and the folly of quantitative easing and other monetary policy measures. Yet at the same time stock markets have been booming. Small and mid-cap shares rose by more than 200% in the six years after the low point in 2009. Shares have been the place to be, but few commentators have consistently said so.
With hindsight what most of the commentators should have been saying is, “Pile into the markets because you’re being underwritten by the central banks!” But I can’t remember many who said that. On the contrary, most of them four or five years ago were talking about the risk that we would be seeing hyper-inflation by now, which of course we haven’t seen at all – in fact, quite the reverse. Everyone is now worrying about the risk of deflation. It shows again that using the macro picture to make sense of the markets is much harder than you might think.
QE may well cause a problem in the end, but as far as I can see, there is no inflation problem, mainly because the banks, certainly in Europe, and I would say in the UK too, are still struggling. That is what has really crimped the economy. The government wants them to lend money but (a) people don’t want the money and (b) because of tougher capital ratios and so on, banks can’t lend the money – in fact, they’re calling loans in. In Japan it took them 20 years to sort out their bank problem because there were so many bad debts on the books. You have to get that sorted as quickly as possible and in Europe, unlike the US, they haven’t done that at all, which is why I think the economy is working far better over there. Unravelling the consequences of the global financial crisis is going to take time. It may be that we are in what I call ‘the long middle’ of the current cycle. The media, rather like politicians, are not too good at being patient.
Obviously, there is some really good stuff online and in the media, and there are plenty of column inches about funds in particular. But I am not sure much of what is in the financial media is helpful to investors. I once complained about a certain columnist in one of the national papers who writes about his portfolio once a month. I analysed what he had been saying and found that his performance was really poor. Yet when I told the editor of the section that his columnist was talking rubbish and his performance was dismal, the answer was that it didn’t matter because he was well-known and his column was entertaining. It is easy to forget that newspapers are in the business of selling too.
One problem is that young personal finance journalists are generally badly paid and lacking in experience. Many don’t have enough money to have direct experience of the subject they are writing about. Until you have lost a quarter of your money in a stock market downturn, it makes it difficult to appreciate what that involves! I do think there is more of a negative edge to what they write now. Some of the criticism is clearly deserved, as the financial services industry has hardly covered itself in glory. What shows through to me a lot of the time, however, is the lack of in-depth research.
The numbers of journalists are falling all the time because of cost-cutting and they still have to produce something very quickly. I often hear them say, “I haven’t got any time to research!” So instead they rely heavily on research done by third parties, much of it by people with a vested interest in a certain outcome. I wish journalists would check the data in ‘research findings’ a bit more thoroughly. I think investors need to be quite careful when reading this kind of story not to take it at face value.
There is also another problem that needs to be mentioned, which is that some newspapers themselves are slowly but steadily moving into the financial advice business themselves. By that I mean that they are increasingly producing supplements and online services whose content is effectively provided by financial services companies as partners of the newspapers. This is in addition to the revenue they generate from readers clicking through from online adverts. If you see something like, “The Daily X annuity service”, for example, you can be certain that the information will come from a chosen business partner and have bypassed the editorial department. At least one newspaper hired as its partner a firm of advisors that was later fined by the Financial Services Authority for recommending dodgy funds and selling payment protection insurance!
The danger is that readers think that the newspapers have done a huge amount of research to discover the best people to work alongside, when you and I know that their commercial departments have simply gone out to find the best deal! I have also heard from freelancers that it is well-known that certain organisations can’t be criticised because of their commercial relationship with the newspaper.
When it comes to the stock market, I have to admit that we have all played along over the years with the newspapers’ stock picks and market-forecasting game. I don’t want to sound whiter than white, but a few years ago I stopped us giving predictions on where the FTSE index would end the following year, or picking shares of the year. I admit that I had done this for 12 or 13 years. For my FTSE forecast I simply used to add 10% to the current level, on the basis that some years I would get it right, and other years I would look a complete prat. But I never took it very seriously. Then about five years ago I happened to be almost bang on right, and I got all these emails from clients congratulating me! I suddenly realised that they really thought this was a serious bit of analysis, and they might start to believe it was useful information, not just a bit of end-of-year entertainment. So we’ve stopped doing it.
I would also say that I don’t think TV does finance very well. The markets are not a very visual subject, especially now that we have abandoned live trading on the stock exchange floor and TV has never really got to grips with personal finance at all. It ought to be a good subject for radio, however. Some of the programmes, like Wake Up to Money and the Today programme, can be very good. The trouble is they’re on at a ridiculously early hour in the morning, which limits the size of their audience. It is true that Money Box on Radio 4 has been running for years but my impression is that it devotes less time to investment than it once did.
I don’t want to end my feelings about the financial media on a negative note. There are some excellent personal finance journalists and freelancers out there who do an absolute cracking job and are very conscientious. The reader problem pages in the daily newspapers do a great service in getting redress for hard-done-by savers. It is amazing – though also slightly shocking – how quickly the threat of media coverage can fix a problem with government and industry bureaucracy. That is a very useful role, although to the extent that it highlights the incompetence of many companies in the business, it doesn’t help to get people saving, as I wish they would.
What do I read? The short answer is a lot, but then it’s part of my job. I read all the major newspapers and magazines such as Money Observer. My personal favourite is MoneyWeek, despite it having what I consider to be too much of a diet of doom and gloom. It is always challenging and gives an excellent rundown of the week’s financial news. It also has an excellent iPad version.
If you are new to investment, you should try and read as much as possible, but I would avoid most of the macroeconomic stuff, as much of it is scary and not very helpful (not least because the figures that grab the headlines are often revised as time passes, making the original figures redundant). The problem with media is that sensation sells papers. Headlines which say that everything is OK do not tend to get read!
The articles I would suggest you concentrate on are those written by investment fund managers themselves. They can help you build a picture of what is going on in the fund universe. Some fund managers provide regular video clips in which they talk about their views, something unheard of years ago. Seeing fund managers being interviewed is a good way to help you understand their overall philosophy and objectives.
The internet is now a huge source of everything you might need. It only takes a few seconds to get definitions of any jargon you might not understand. But there are also plenty of other sites to help you, among which I would highlight boringmoney.co.uk,trustnet.co.uk, citywire.co.uk, cashquestions.com and fairerfinance.com. You will discover your own favourites in due course. Whatever you might think of social media, I also think that Twitter is becoming a useful source of information, as many market commentators and writers can be followed there. Among my favourites are @woodfordfunds, @merrynsw, @georgemagnus1, @nfergus (that’s historian Niall Ferguson), @jdsview and @paullewismoney.