Don’t ask directions from somebody who hasn`t been where you are going.

I do not know about the rest of you, but I feel that we are entering totally unknown territory in regard to politics, religious unrest, and the world`s economic stability. It all seems to be unravelling at the same time and where is the steadying organisation which can put its hand on the tiller and steer us through the oncoming turmoil? I just cannot see the likes of Trump/Clinton aligned with Putin and the European Union improving the situation in the Developed World. I can maybe envisage China, India and the Emerging Far Eastern countries forming a “go it alone” economic block, but who knows what will happen? Today we are just spectators who will eventually become participants in the possible forthcoming accident.

I have to say I feel ashamed for feeling so pessimistic about the future. After all, science and technology is about to gift us with free clean solar energy and sufficient supplies of potable water. Medicine is about to extend our life span and eradicate many of the nastier illnesses. Agricultural developments will mean we can feed ourselves and limit the number of people who go hungry. Robotics and Artificial Intelligence should allow the world`s population to decline rather than increase, as dangerous and repetitive mundane work is handed over to machines. Good as all of this might sound; the unanswered question is still, how will we get to this Promised Land? Where is Moses?

The above is all relevant to the view that we take on our personal finances. Recently a subscriber, who has had a remarkably good run in the last six months, making in excess of 27% on his ISA portfolio, asked me what he should do as he was alarmed for the near future and could no longer see any rising sector opportunities. I suggested that he could not do worse than examine two of Jesse Livermore sayings;

  • The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even amongst the professionals.
  • It is enough for the experienced trader to perceive that something is wrong. He must not expect the tape to become a lecturer. His job is to listen for it to say “Get out!” and not wait for it to submit a legal brief for approval.

I believe that if Jesse Livermore was alive today he would be out of the market and in cash. He would be relaxed and sleeping at night whilst waiting for the market correction to take place. As a matter of interest if the subscriber that I referred to above took his portfolio into cash for the next twelve months he would still be making an 18% annualised return. I would not mind some of that! In these circumstances cash can be regarded as a genuine sector.

On a lighter note, you may be aware that the Bank of England has released £430 billion of Quantative Easing into the U.K. economy. These numbers are just mind blowing and I find them difficult to envisage so I have turned them into something that I can imagine. A £1 coin is 2.5mm thick and the distance to the moon is 384,400 kilometres. By my calculation that means Mr Carney`s £430 billion represents 1,075,000 kilometres and is 2.8 times the distance to the moon. It might have been nicer if he had taken the £430 billion and used it as “helicopter money” and given every man, woman and child in the country £6615! These are numbers and thoughts with which to conjure.  Please point out any errors in these calculations and I will issue a correction.

A lesson learnt the hard way

Commercial Property funds such as M&G, Threadneedle, Kames, Aberdeen, and Standard Life have for the last few years been the stabilising feature of both of the Saltydog portfolios. They have been producing a very nice small regular monthly uplift and we have used these funds as an alternative to cash, with the safer Tugboat carrying a greater percentage than the more adventurous Ocean Liner. Up until the Brexit referendum all appeared to be smooth sailing, but then upon the announcement of a vote to leave all hell was let loose. We have witnessed a mass exodus of money as professional investors overseeing large holdings have reduced the money held in these funds. To defend themselves, the fund managers have been forced to make dramatic reductions in the fund price to discourage these sales (the largest for the moment being 17% made by Aberdeen) with most of the others dramatically closing the door on any further encashment.

This turmoil is the evidence justifying those analysts who have long said that open-ended funds and unit trusts are badly designed to deal with property investments since they provide daily liquidity for an asset that isn`t liquid on a daily basis. Normally unit trusts invest in shares. There is no problem then if investors want to sell units; the fund manager simply sells some shares and the investor gets his money back within a couple of days. However where the fund is invested in property such as office blocks, shopping malls, government buildings, banks and the like, it can take months to achieve a sale and hurrying up this process results in fire-sale prices. This is the reason that the funds carry large sums of cash to cover the normal daily transactions. This time it would seem that Brexit has conjured up in the minds of some investors a vision of the country`s city centres being reduced to ghost towns as the UKs economy exits to the Continent! Under these circumstances it is not surprising that these property funds have had to use extreme measures to protect themselves while commonsense and sanity returns to the market.

What is to be done now with these investments when the sale restriction is eventually removed? We can expect the prices to be lower as the result of property surveys and valuations carried out in the light of Brexit. On the other hand the property tenancy agreements are still in place and rent will still have to be paid. There is therefore no reason for a major reduction in the historical 3% to 4% these funds yield which is still very attractive when compared with the present “soon to be negative” interest rates. Maybe having taken the knock, it will pay to stay invested but with a smaller percentage of your portfolio.

On the other hand perhaps this money could be better invested elsewhere. It is worth looking at what this actually means. Let us say that you had 25% of your portfolio in these property funds and they have taken a 20% hit. This means you have suffered a reduction of 5% on your total portfolio. Not a great outcome, but not one that merits reaching for the poison tablets. It means that you need the remainder of your portfolio to earn you an additional 5.3% to keep the status-quo.

The same Brexit fever that has produced this property “annus horribilis” has produced a 10% fall in the value of Sterling and also contributed to a significant rise in the value of gold. All funds which are earning their money overseas and especially in dollars, have therefore received a rise in value of 10%. If you were also to be invested into the gold mining funds you would be receiving a double whammy. It is however a question for each individual to decide as to whether these conditions will continue whilst the terms for the UK exiting the European Union are hammered out. Also if Mr Carney continues to talk the value of Sterling down and Mrs Yellen in America continues to talk the value of the dollar up, then the Ocean Liner graph below is demonstrating a portfolio that has the right sort of mix to make the most out of the situation.

This is the stuff that goose pimples are made of!

Ocean Liner 160713

M&G Property Portfolio Update

During the last few weeks we have seen the M&G Property Portfolio fall by over 6% and then recover.

The sudden drop took place on the 12th May 2016, when M&G announced that they had moved the pricing basis of the fund from an offer basis to a bid basis. There was a notice put on their website explaining that the decision was taken due to a trend of sustained outflows from the fund, expected to continue in the foreseeable future.

M&G June 2016

I, like many of our members, contacted M&G to ask for further clarification. Most of us got little more than a polite reply encouraging us to look at the announcement on their website. One of our members did get a much more comprehensive response, which he has kindly allowed me to share with you …

“As an asset class, property recovered strongly in the period following the 2008/2009 banking crisis. Indeed, the asset class has produced above-average returns in the last three or so years. The combination of slowing growth in property asset values and the impending referendum on EU membership later this month is the most likely reason why some investors have chosen to reduce exposure to property, resulting in the Fund’s move to a net outflow situation. The M&G Property Portfolio experienced a price swing in March 2013 and also May 2013, with these price swings lasting only a matter of days. Further back in the history of the M&G Property Portfolio, the Fund experienced a more prolonged period of net outflows in the period leading up to, and during, the banking crisis. At that time, the price was calculated on a bid basis between November 2007 and June 2009. Both the Property Portfolio and its Feeder Fund are currently being priced on a bid basis and I hope you will appreciate that it is not possible to say when the price basis for the two Funds will revert to an offer basis.

Looking to the future, Fiona Rowley, the Manager, holds the opinion that in the next three years, returns from the asset class will result from rental income rather than coming from further increases in commercial property values. I must emphasise that this is the Fund Manager’s opinion and should not be taken as advice or a recommendation. It is not possible to make any guarantees about future performance or the way in which commercial property prices will move in the future.

You can find an explanation concerning the move of price basis on our website as follows:

http://www.mandg.co.uk/investor/funds/prices/property-fund-prices/

To provide some more detailed information on the subject, as of 12 May 2016, the Fund’s price basis changed to reflect the fact that the Fund is currently experiencing a net outflow of cash. Being invested directly into buildings, the Fund needs to carry a large cash position, so there is no liquidity issue as such and the underlying value of the Fund’s assets remains unchanged. The price swing mechanism aims to ensure that the value of the Fund is not diluted for remaining investors when the Fund is cancelling shares, rather than creating new shares.

Perhaps I can expand further on the subject. Prior to the change in price basis, the Fund was receiving net inflows of cash. The amount of money going into the Fund, in terms of investor purchases, was much higher than the amount coming out as a result of investor redemptions. As the Fund is open-ended, further shares could be created to meet the demand.

In the scenario I mentioned, the Fund’s price was determined by the cost of creating new shares, which would involve buying more buildings. Property transactions are much more expensive, in percentage terms, than, say, share purchases. A figure of around 6%, representative of land taxes and legal fees, was therefore included in the price when the Fund was creating further shares to meet investor demand. Investors buying shares paid this cost, investors selling their holdings effectively benefited from a bid price which included the high costs of buying property. Since the shares being redeemed by the Manager could be re-used when the Fund was receiving net inflows of cash, withdrawals were priced to reflect the fact that the Fund needed to buy more underlying assets. In this manner, the value of Fund’s underlying assets is not diluted; an ‘offer/creation’ basis for pricing was used, because further shares were being ‘created’.

In the current scenario, the Manager has needed to move the price basis, as the Fund is experiencing a continual net outflow of cash. At present, the price is based on the value of the Fund’s assets, after deducting the cost of selling property (around 1.15%), as the Manager needs to cancel shares. This reflects the situation if the Fund were to actually need to sell some of the buildings it holds. I should like to reassure you that the Fund has sufficient liquidity to meet redemptions from cash. I hope you will appreciate that it would be unfair to offer a price based on creating shares to investors leaving the Fund, when shares are actually being cancelled. This could ultimately have the effect of diluting the value of remaining investors’ holdings.

With the Fund having a net outflow of cash on a daily basis, investors who sell receive the price as if the Fund is selling its assets. As the costs involved in buying and selling property are high, there is a difference of more than 6% when the price basis changes. We believe this to be a fair and equitable way of mitigating the risk that the value of remaining investors’ holdings is diluted by the net outflow of cash from the Fund. With the price being based on what the Fund would receive if it cancels shares and sells its assets, rather than the cost to the Fund of buying further underlying assets, investors who buy further shares will pay a more favourable price. Those investors selling their shares will receive a price based on the value of the Fund’s assets, less the cost of selling those assets.”

On the 3rd June 2016 M&G announced that the price had swung from cancellation pricing back to creation pricing.

Although we have covered the topic of bid / offer pricing in our newsletters and regular weekly emails, I thought that this response was particularly thorough, and I hope that it has given a useful insight into this aspect of investing in funds.

That was the month that was!

Over the last few years the Saltydog Tugboat portfolio has avoided the frequent stock market drops by having a large percentage of its money invested into the Slow Ahead Group in what we fondly refer to as the ‘Slow Property’ sector. During this time these commercial property funds have consistently made small monthly incremental gains allowing the remaining portfolio money to be invested into the more adventurous sectors of the market. This smaller amount has from time to time been trend-following in Japan, Emerging Markets, India and Gold funds. It has made reasonable gains whilst the larger amount has given the protection against the downside in the Stock Market. For three years this has worked out very well giving a total annualised gain in excess of eight percent whilst taking very little risk.

Recently there has been a fundamental change in the pricing of the ‘Slow Property’ funds.  Funds such as M&G Property Portfolio, Threadneedle UK Property Trust, Henderson Property, Standard Life Property and Aberdeen UK Property would appear to have moved their selling prices from an “offer” price to the lower “bid” price. This has reduced by around 5% the money received by sellers, and similarly reduced the value of stock held by investors in these funds by the same amount. The reason given for this action is that unprecedented large amounts of money have been withdrawn from these funds in the first quarter of 2016. The fund managers, by lowering the unit price, are saying that they are sharing the cost of any forced property disposal between the remainers and the leavers. I guess this is not an unreasonable argument. It does not help us however, and it does beg the question, if the money flows back into these funds, will they then reverse the price back to the offer price? It will also be interesting to see whether these funds return to those nice steady positive monthly increments of old!

The question we have to ask ourselves is why has there been this avalanche of money from these funds? Is it to do with BREXIT or perhaps it is that the “movers and shakers” – the “men upstairs”-  believe that the UK commercial property market has been operating in a bubble and is due a correction? Whatever the reason, we need to decide whether to stay invested or not? It requires a considered decision. Doing nothing is probably not the answer, as staying in the middle of the road, and not making a decision, usually gets you run over. Fortunately our exposure to these funds has been reduced by the foresight of Richard who has been gradually selling them over the last month. I guess if you believe that Britain is likely to stay in Europe and that a sensible price correction has taken place, then why not stay put and remain invested?  You have taken the knock, which has happened and is in the past. Normal service should be resumed. The alternative I guess is to sell up, perhaps take a further dilution charge and move into cash whilst the storm passes overhead and wait to see what tomorrow brings. It would be a great shame if these funds were not to resume their role in the Saltydog investment philosophy.

It is worth remembering that the pessimist complains about the wind. The optimist expects the wind to change. The realist adjusts the sails.

Patience is bitter, but its fruit is sweet. (Jean-Jacques Rousseau)

In these volatile times it is a good thing to remember this saying which might in particular apply to the subject of gold bullion and mining funds. Should, or should one not be presently invested in this arena? Certainly the financial press would suggest that it is the wise thing to do. They tell us that gold is an insurance against geopolitical unrest, financial distress, war between nations and infrastructure collapse. It also performs well both in times of inflation and deflation. Today, when negative interest rates prevail, gold becomes a high yield asset since zero yield (gold) is higher than negative yield (government bonds).

As a private individual, if one makes the decision to go down this road, then one also must make the decision whether to hold the actual bullion or to invest in the gold mining funds. I know it is irrational, but I feel uneasy about holding gold from the security point of view, even if using outside secure storage. So for me I have gone down the route of investing into mining funds, which I can buy and hold in my portfolio in the same way as any other fund of my choice. By doing this I have to accept that there is not an exact correlation between the movements of the bullion price to the mining fund prices, but they do trend in the same direction.

Looking at the graph of the price of gold over the last hundred or so years it would seem that in times of financial stress the gold price will rise and in the good times it falls in value. There are three distinct peaks:

  • The first is in the 1930’s. In 1900 the US adopted the gold standard, and the official US gold price was fixed at $20.67 (not much higher than it was at end of the 1700s). In 1934 the US Government devalued the dollar (in terms of gold) raising the official price of gold to over $35 per oz. It’s doesn’t look significant on the graph, because it is dwarfed by subsequent rises, but that was equivalent to a 70% increase.
  • Then in the 1980 it went up again, fuelled by concerns over the Soviet invasion of Afghanistan and the Islamic Revolution in Iran. It went up to $850 per oz., before falling below $260 in 1999.
  • Finally it peaked again in 2011, at just under $1900 per oz.

Gold 100 year graphSince the 1970s, after President Richard Nixon ended US dollar convertibility to gold, the price of gold has fluctuated more widely –  it also appears to rise much more rapidly than it falls. Approximately ten years on the rise and twenty to thirty years on the fall. Surprisingly it would also appear to ignore periods of conflict and has only moved for economic reasons.

Today one could certainly be forgiven for feeling that the financial situation in all the major world economies is far from secure, so perhaps now is the time to have some of your savings invested in this asset.

During most of history, a nation`s gold reserves were considered its key financial asset, intended as a store of value and as a guarantee to pay depositors or secure currency. It is calculated that all the gold that has ever been mined would approximate to 180,000 tonnes and at today`s value that would be in excess of $8 trillion. Apparently most of this gold is still in existence. A United States Geological survey allocated this gold as follows:

  • Jewellery 49%
  • Investment bars and coins 19%
  • Central Banks 17%
  • Industrial 12%
  • Lost 3%.

The top ten central banks control some 12% of all the gold ever mined with the United States being the largest holder with 8100 tonnes, Germany 3384 tonnes, I.M.F. 2800 tonnes, Italy 2450 tonnes, France2400 tonnes, China 1800 tonnes, Russia1400 tonnes, Switzerland 1040 tonnes, Japan 760 tonnes and Holland 600 tonnes. The United Kingdom is now eighteenth on the list with 300 tonnes. I knew about the United States fondness for holding gold as the dollar was until 1971 linked to the gold standard. I was surprised however at the amount held by Germany, Italy, France and Holland. For these countries these holdings represent over 60% of their Forex reserves whereas the U.K.`s holding only represents 8%. These countries are obviously putting more value in the future necessity for holding gold bullion. What do they know that we do not?

Perhaps these governments in the European Union are not confident of a world economic recovery.  Or maybe the recent hike upwards in price simply reflects the buying power of the millions of the “new middle classes” in India, China and the developing countries who want to own and display their new-found wealth in the form of jewellery, coins and gold bars. Gold gives people peace of mind and has for thousands of years been used as a medium of exchange. Possibly now for a number of reasons demand for this precious metal is going to outrun supply and the price may continue to rise.

I am aware that this is a simplistic approach to a complicated subject, but I do feel that now is the time to hold some gold bullion or in my case gold mining funds, then to have the patience to let this situation play out and see if it does bear fruit over the next few years.

 

 

2016 is going to be the year of “the dog”

The Chinese have got it wrong. Two thousand and sixteen is going to be the year of the dog……The Saltydog!

This New Year the press is full of gloom and doom with warnings of an approaching financial apocalypse. The pundits at the Royal Bank of Scotland seem to be advising anybody that will listen, that they should head for the hills and take up a life style akin to Barney Rubble in the Flintstones. I guess that some might consider this to be understandable with the FTSE100 moving from 7000 in April 2015, back down to 5800 in January 2016. A fall of 17% and the possibility of a further fall, bearing in mind the present absence of any good news. A common forecast would seem to be that the FTSE100 might bottom out later in the year closer to 4000 than to 5000. That would be a fall of around 40%. As the chart below shows, this would not be unprecedented when you consider how the FTSE100 has performed over the last 20 years.

Three-Peaks-2016

Anybody using the “buy and hold” (do or die) approach to their pensions and investments could see them virtually halve in value under these conditions. Now that will be a disaster. There are many reasons being put forward for the present financial catastrophe. To name four: the collapse of growth in China; the fall in oil and commodity prices; an uncontrollable growth in world debt; future rises in interest rates. Who is really to know which one of these is going to generate a further collapse?

So why have I said that this year is going to be the year of the Saltydog?  Well between April 2015 and January 2016 the Tugboat portfolio has gone up by 7% not down by 17%, which as you know is because it was actively managed using a momentum technique with up-to date performance numbers. At this moment 70% of our investment portfolio is sheltering in the Slow Property sector making small monthly gains with the 30% balance in cash and spread amongst the more risky sectors. If the disaster that I described above should happen then I would expect the Tugboat algorithm to advise a departure from the risky sectors back into cash, leaving the Slow Property to continue to make gradual gains. Of course if they were also to stop performing then we might end up for a period holding mostly cash?  This rather nice synopsis should leave us in a perfect position to take advantage of the pick-up in the markets whenever that occurs. We would be cash rich and poised on the starter blocks!

The question you might now be asking is would we have the time to complete this favourable manoeuvre or would the fall be too quick for us to complete a controlled withdrawal. Looking back at the 2008 financial collapse of 48% might surprise you. What is always referred to as falling off a precipice, was in fact not the situation. It actually took place in four distinct steps and the losses were entirely containable using a Saltydog approach. Apart from that we are already some way down the road heading for port and safety.

FTSE100-Credit-Crunch-LR

In this climate it is very important to think carefully about the message that the press and the financial institutions are putting out because they might have a hidden agenda. Therefore perhaps it is not always best to take their messages at face value. For instance, RBS has good reasons after their appalling performance over the last few years to now preach caution. If there is to be a further market collapse, then they will appear wise, and if there is not, then everybody will forget what they said anyway. So think carefully and question what you read and hear, then before acting, see whether it gets confirmed by the numbers.

This situation reminds me of a story about an acquaintance of mine. He was diagnosed with having prostate cancer. He told me that his consultant Mr Singh had said that he should have it removed with an operation, but he ought to be aware that the operation might leave him impudent. My friend found that strange, but did not give it to much thought, and he said to go ahead. The operation was successful and the cancer has gone, but unfortunately he has not been the same man since.  

 

 

Money is like seawater, the more we drink the thirstier we become!

Last month the Saltydog Investor completed its fifth year, and as I said in my last blog, they were not easy times.  Still to coin a phrase, we mustn`t grumble, it could have been worse, but how much worse, who is to know? Let us hope that we do not find that out in the months and years to come.

I know that we in the West live in a “democracy”, but somehow I feel helpless to influence the way my life and future is being organised. The political parties are all similar to each other, they trundle along and somehow do not seem to need or heed the wishes of the people who vote for them. They just want our money for their wars and pet projects. I liken our present democracy to three wolves and one sheep voting as to what to eat for dinner. It is all pre-ordained and the sheep is in for a rough time. The wolves are the major players in Politics, Industry and the Banking world, and we are the sheep!

Nevertheless, having said the above, our cautious Tugboat portfolio managed a gain of 52% over that five year period. If this performance was to continue for  twenty years, our original £40k would turn into £214K. Under these economic conditions  I would suggest this to be a satisfactory outcome. The question is can, and should we have done better?  Of course with the benefit of hindsight the answer is yes. We did make a couple of fairly fundamental mistakes from which we must learn from for the future.

As momentum investors we are reliant on the weekly numbers for our instructions as to which IA sector and fund to invest our money. In 2014 the numbers shouted out that we should be invested in UK Gilts and Index-linked Gilts, but we knew better. We had listened to the broadcasters and pen-pushers who said that Q.E. was coming to an end and that would be “bye-bye” to value in Gilts and Bonds. Today Q.E. has still not ended and in 2014 guess what was the best performing sector – UK Index-linked gilts, up 18% . A lesson learnt. Do not act and invest on the strength of media noise, it is usually short on facts and long on sugar.

Our second mistake was generally not to act early enough when entering or exiting a sector or fund. Perhaps we should have stepped in or out with smaller sums of money, whilst establishing with more certainty the direction of its movement. Like they say in the Army “take small steps quickly” and any mistake is likely to be less painful. This is not a big deal, it simply comes down to being more regimented in our approach.

What does this coming year hold for us? Probably more of the same, with the world`s markets remaining volatile and unpredictable. So at Saltydog we will stick firmly to our risk pie-chart whilst trying to make the improvements to our operating procedures and thus endeavour to claw back towards a 10% annual return. We will also spend less time listening to the financial press who, like show magicians, appear to be able to pour white and red wine from the same bottle!

sdi-dec-2015

When the facts change, I change my mind. What do you do Sir? (Attributed to John Maynard Keynes)

The Saltydog Investor is just coming up to its fifth year anniversary and what a tumultuous five years on the stock markets of the world this period has turned out to be.

Financial problems have continued to plague most countries throughout this time, and to date there has not been any certain evidence of a recovery within the Banking Industry.

The European Union is far from a settled and directed community.

China has risen as an economic power, and is now facing the problems of establishing a stable and balanced economy.

Recent lack of world demand for manufactured products and building materials has produced a slump in commodity prices, resulting in difficulties for those countries supplying these products.

Oil fracking in the USA has created a price battle with the established oil producing nations. This has resulted in prices more than halving to the benefit of the users, but not the suppliers.

Russia has been flexing its military might to impress and keep in line previous satellite Soviet countries. This has resulted in the Western World imposing trading sanctions which, coupled with the falling oil prices, are wrecking the Russian economy.

The above is the stressful environment that the Saltydog Tugboat portfolio has been operating with during its five years of existence. Some days it has seemed that the markets would fall faster than you could do up your shoe-laces, only to see them recover over the following few days. During this time the investment press has enjoyed a field day whilst piling on the pressure and concentrating in rotation from one terminal subject to the next as if it had been riding a financial merry-go-round.

Our original intention with the Tugboat portfolio was to try to achieve a relatively safe rolling return after costs of 10% p.a. It was to be a demonstration for ourselves and our subscribers that it was not necessary to have your money stagnating in cash ISAs and the Banks` coffers earning you nothing. This we have proved beyond any doubt, as the Tugboat portfolio has avoided all the major market drops during this five year period whilst enjoying a steady rolling return of around 9% p.a. Unfortunately not the 10% we were looking to achieve, so that is a disappointment. Still, we must not take life to seriously; as we all know, we will never get out alive!

It was Voltaire who said that “Doubt is an uncomfortable condition, but certainty is a ridiculous one”. This taken along with the opening title said by John Maynard Keynes is surely a true reflection on the difference between a momentum investor and a “one shot wins” all passive investor. At Saltydog we are optimistic momentum investors relying on our own supply of fund performance numbers that we produce in order to lead us from one rising sector trend to the next. Admittedly in these five years these favourable sector trends have not been particularly obvious or long lasting. Nevertheless we have enjoyed life riding the Slow Property Funds, UK Smaller Companies, India, Emerging Markets, Gold Funds, Gilts, Biotech’s and Targeted Absolute Funds as each sector has enjoyed it`s fifteen minutes in the limelight.

The most important thing when looking at your investments is to believe that with care and attention tomorrow can be better than today. The world needs both the optimist and the pessimist. The optimist invented the airplane and the pessimist the parachute.  They act as a counterbalance to each other forcing us to examine whether our glass is half empty or half full. At Saltydog it is half full and we fully intend to claw ourselves back to that target of a 10% p.a. rolling return.

Tugboat 151111

Keep it simple, keep it cheap and keep at it.

Momentum investors need to have a regulated approach to following sector trends in the stock market. It is not difficult when using hindsight to see what was a trend to follow, and what was not, but getting it right at the time, that is the difficult bit. Some would say the function of forecasting is to make astrology look respectable. However following the numbers is not forecasting, and catching and identifying a rising sector correctly can lead to riches. That is why at Saltydog Investor we make our decisions based on a weekly analysis of the unit trust fund performance numbers broken down into their asset sectors. These are then reviewed on a four, twelve and twenty six week basis. Not for us decision making based on twelve month performance numbers. Keep it simple, and build a portfolio of unit trusts using a fund supermarket platform to keep your trading cheap.

To be a successful active investor you must have access to continuous up-to-date accurate information. Your decisions should not be based on rumour, speculation and hearsay. An example of the importance of this goes back to the days of sail. Clipper ships returning from the Far East before proceeding up the English Channel to London, would call in at the port of Falmouth at the western end of England. From here they would send coded messages by horsemen to the ship`s owners in London, this being the fastest method of communication at the time. These messages not only gave details of the ship`s cargo of spices, teas and exotic goods, but also as important if not more so, international news. The traders with this information then had a head start on their competitors and would be making their decisions and fortunes based on facts.

One of the most important things when looking at your investment portfolio, is to believe that tomorrow will be better than today. Try not to get disheartened when as undoubtedly will happen, you make mistakes and have failures. You must keep at it and treat these occurrences as “opportunities” to learn. There is a way to minimise the effect of any setbacks and protect your portfolio. That is to create your own risk pie-chart. Only then will you avoid the temptation (or innocent default) of ending up with too large a percentage of your portfolio invested in funds which lie in the higher reaches of volatility and risk. The more volatile your selection, the greater the risk of losing your gains when the trend you are following reverses direction. Of course you would hope to be alert to this change and take the necessary action. Better however to conduct these investing acrobats with a small part of your portfolio whilst the bulk trundles along in a safer environment. Investing should be enjoyable and not a do or die situation. You will then feel more inclined to keep at it and enjoy the benefits of time and compound interest.

The Saltydog Tugboat portfolio maintains a cautious approach by ensuring that at least 70% of the portfolio is in what we call ‘Slow Ahead’ funds. This has meant that in less than 5 years our portfolio has not only gone up over 50%, but we have successfully avoided all the market corrections.

Risk Pie Chart

Tugboat 151017

Every day above ground and vertical is a good day.

The last month has given cause for a number of people to consider putting Isaac Newton`s “Theory of Gravitation” to the test. The media and the newspapers have been piling on the grief about peoples` failing pensions and investments caused by the collapsing markets in the recent “Black Monday” event. They are laying the blame for this mainly at the door of China`s falling GDP, this due to a reducing world demand for manufactured goods, which has then resulted in collapsing mining company valuations as commodity prices have tumbled. All of this and more is certainly true, but is the fall even across the UK stock market indices and when did it actually start to happen?

The FTSE100 and FTSE350 actually peaked at the end of April, and the FTSE250 a little later at the beginning of June.

I have looked at how they have performed from their highs earlier in the year, until the Friday before “Black Monday” the 24th August, and then how they looked at the end of the day

ftse100

Looking at these numbers it is obvious that the much quoted FTSE 100 had started its fall long before “Black Monday” and this fall was not evenly spread amongst the other two indices. There has been a silent crash taking place since the beginning of May with the smaller company markets being less affected. In fact the FTSE 250 has fared significantly better and we know from the Saltydog numbers that many small company funds were making reasonable returns during this time.

When this particular correction is completed, will we see these smaller market indices recover sooner and rise more sharply than the more heavily laden FTSE 100? Who today knows that, and only time and an examination of the numbers will reveal whether this takes place. Until then it is only a hypothesis. It is always worth making sure that you fully understand the situation in which you are operating. Do not just accept the media take on events.

I am reminded of the story about an aging couple who were considering marriage. They discussed various matters like finance and location. Eventually the old gent asked the lady how she felt about sex. She replied that she liked it infrequently. After a pause he enquired, was that one word or two.