Effective Investing

by Mark Dampier

  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.

  Dealing with the financial press

  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 someti
mes 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.

  Pressures on personal finance

  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?

  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 tha
t 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.

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  24 In 2015 the lifetime limit was reduced to £1m, although those who have already accumulated larger pension savings won’t be penalised retrospectively by losing their past tax relief.

  25 I write a regular column there on Saturdays.

  Chapter 10. Final Thoughts

  These are my nine key takeaways for DIY investors:

  If in doubt, save and invest a little bit more – the rewards will pay you back for years.