Saving Tax and Protecting Income from Inflation

To follow on from my comments on the Chancellor’s Statement and the changes to dividend and capital gains tax, it emphasises the importance of minimising tax liabilities.

It is important for both income and capital gains to hold your shares in ISAs or SIPPs which makes them both tax free. If you have maximised your holdings in ISAs and SIPPs then if you want tax free dividends one option to look at is Venture Capital Trusts where dividends are tax free and you also get tax relief on investment in new shares. Or you can simply buy them in the market where you won’t get the initial tax relief but will avoid the prompt decline in your investment value as they normally trade at a significant discount to NAV – currently between 5% and 12% for generalist VCTs.

The dividend yields on VCTs are also typically quite high mainly because they tend to only maintain capital values while converting capital profits into dividends. The AIC web site can provide a summary of all VCTs, their dividends and past price performance.

VCTs have not been performing well of late as their focus on unlisted and AIM shares in small companies which are out of market favour has damaged their share price performance after a period of excess exuberance particularly in technology company shares. But now valuations in small companies have become more reasonable so it might be time to consider more investment in VCTs.

Investing in ISA and SIPPs do not of course give you cash dividends to spend but you can put money into ISAs and then take out the cash accrued from dividends tax free, except for Lifetime ISAs.

From my past investment in VCTs I now have a substantial proportion of my income tax free. But VCTs and their taxation are complex subjects so make sure you understand them and/or take professional advice on them. My comments above are based on my understanding of the position but I do not guarantee that it is correct.

As regards minimising capital gains tax one solution is simply to not sell holdings that are showing a profit, or offset them with sales of holdings showing a loss.

Inflation protection

The other big issue raised by the Chancellor’s statement was how to protect a portfolio from the ravages of inflation. A half-year report from Value and Indexed Property Income Trust (VIP) this morning shows how they are providing that. For example they say: “VIP’s dividend per share has risen every year since 1986 when OLIM’s management began. It has risen by 932% over the 36 years, against the Retail Price Index rise of 232%. The medium term dividend policy is for increases at least in line with inflation, underpinned by VIP’s index-related property income.”

The net asset value per share fell during the half year but this is explained by these comments: “….rising bond yields and slower rental growth force property valuation yields up and capital values down. All sectors will be affected, with offices declining further, retail giving back its recent gains and the industrial sector suffering worst in the short term as it had become the most overheated. With consumer confidence at an historic low, and mortgage rates rising rapidly, stagflation may be here to stay, for at least as long as the war in Ukraine lasts.

Property transaction volumes have slowed down markedly since the summer, especially in the previously strongest sectors such as industrials and retail warehousing, with many sales only going through after agreed prices have been “chipped” by buyers and many more properties having to be withdrawn from the market unsold. Buyers now are few and far between as they wait to see how far yields move out. Property unit trusts have become forced sellers to meet withdrawals, proving yet again that open-ended vehicles are the wrong way to invest in property. Some pension funds will also need to sell after they were caught short of cash to meet margin calls on their dangerous LDI (Liability Driven Investing) schemes.

Land Securities has just sold a prime long-let London office at 9% below its March valuation, while the market for older or secondary offices has fallen off a cliff, with some now virtually unlettable and unsaleable where they do not meet environmental standards. The deep “brown discount” for properties in all sectors with non-compliant Energy Performance Certificates (EPCs) is the clearest evidence so far of the growing market impact of ESG. Two-thirds of car showrooms, for example, are currently estimated to have non-compliant EPCs.”

Property REITs are another sector out of favour at present for those reasons but longer term I would expect them to provide some protection against inflation.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Chancellor’s Autumn Statement

This morning Jeremy Hunt delivered his Autumn Statement. As expected taxes are up and Government spending is down, but exactly where the latter cuts, which are estimated to be £30 billion, will fall is not clear. That is particularly so as the NHS and Social Care are getting £8 billion more and schools £2.3 billion more.

Infrastructure spending remains also with Sizewell C nuclear power station going ahead and HS2 to Manchester plus other rail projects. Comment: a great pity that HS2 has not been canned which would save many billions of pounds.

As a retired taxpayer with significant dividend income and capital gains in some years (not this one I hasten to add), the tax increases are not as bad as they might have been. The pensioners “triple-lock” remains in place when my feeling is it should not have been retained, while with a lot of our assets in ISAs and SIPPs the damage won’t be too bad.

There is also continued support worth £26 billion for energy bills with £300 going to pensioners and the energy price guarantee will be extended past April 2023.

The big personal tax increases will come from a reduction in the threshold for the higher rate of 45p to £125,140 while income tax, inheritance tax and National Insurance thresholds will be frozen for a further two years until April 2028.

The tax-free dividend allowance will be reduced to £1,000 next year and to £500 from April 2024. The exempt amount of capital gains will be reduced to £6,000 next year and to £3,000 from April 2024, but capital gains tax rates are otherwise unchanged so there should be no rush to sell assets to realise gains. 

A rise in the Energy Profits Levy and a new tax on the extraordinary profits of electricity generators will raise £25 billion. The former will hit oil/gas producing companies unless they can offset it with investment allowances for developing UK oil and gas extraction. Comment: I hope Just Stop Oil take note of this poke in the eye and give up their campaign.

There will also be an impact on renewable energy generators with a 45% levy on “extraordinary profits” – defined as electricity sold above £75MWh.These changes seem to have been well anticipated and the prices of renewable energy trusts (wind farms etc) not significantly changed so far today at the time of writing while a UK gas producer I hold has risen.

It is always unfortunate though that the Government is making legislation that changes the likely future profits of these companies on which their long-term business plans, and my investment decisions were based.

There is also some jam for those living on means tested benefits to help with the cost of living. Benefits will rise by the rate of CPI meaning they will go up by 10.1%. There will also be £6.6 billion provided to improve the energy efficiency of houses and business premises which is a rational move when the UK compares very badly with similar European countries in insulation of buildings and construction quality.

The Chancellor has also announced that electric cars will no longer be exempt from vehicle excise duty from April 2025. This is a sensible move as the lack of tax on them was undermining the tax base and that incentive will no longer be necessary.  

In conclusion I suggest these tax/spend changes are a reasonable compromise and seemed to have had minimal impact on the stock market. I quote from the Chancellor: “The furlough scheme, the vaccine rollout, and the response of the NHS did our country proud – but they all have to be paid for. The lasting impact on supply chains has made goods more expensive and fuelled inflation. This has been worsened by a Made in Russia energy crisis.Putin’s war in Ukraine has caused wholesale gas and electricity prices to rise to eight times their historic average.”

Raising taxes won’t be liked by some Conservative MPs but I think they will accept the changes as necessary. The key is to ensure that spending cuts actually happen and that there is no back-sliding on that commitment.

Autumn Statement: https://www.gov.uk/government/news/chancellor-delivers-plan-for-stability-growth-and-public-services

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Abrdn UK Smaller Companies Trust and Property Companies

red apples on tree
Photo by Tom Swinnen on Pexels.com

I took the time to read the Annual Report of Abrdn UK Smaller Companies Trust (AUSC) today. It makes for interesting reading for those of us who invest in small companies. The performance last year (to the end of June 2022) was dire. NAV Total Return down 27% and the share price even worse. This wiped out all the gains in the previous year.

This is the main explanation given by the Manager: “The period was a challenging one for performance for the Company, particularly during the second half of the financial year, with our style being out of favour in the market as “top down” global macro factors have taken the lead over “bottom up” stock picking. Smaller companies markets have been difficult, seeing dramatic falls during 2022 after having been relatively stable in the second half of 2021”.

Their best performing holdings were Telecom Plus (TEP), Safestore (SAFE) and Alpha Financial Markets (AFM) and I hold the first two directly also. But they have both fallen back sharply recently.

This is what they say about those two which is a good exposition of their merits:

· Telecom Plus 118bps* (shares +72%): supportive end market conditions given the exit of low-priced competitors from the industry, and the strong position the nPower contract has in Utility Warehouse’s pricing offering. Sales force fully engaged again post Covid-19. Strong cash generation and dividends. An investment case study for Telecom Plus is included on page 42.

· Safestore 90bps* (+12%): solid demand in the selfstorage industry with the constant of the 3Ds (divorce, death, dislocation). Rate increases and strong utilisation have ensured consistent earnings and dividend growth”.

One of the biggest fallers in the year was GB Group – down 52% which has been the subject of a takeover bid subsequent to the year end. They exited a number of holdings and it’s worth reading the Annual Report for details of the portfolio changes.

The company has no plans to change its investment style and processes and I agree with that although the company is surely going to come under pressure if underperformance continues (the discount to NAV is currently 15.6%).

Safestore is of course a property company although it does not just rent out space so should ideally be valued in a somewhat different way. But it has participated in the rout of property company prices which continued today. Safestore is also held in some property trusts which has compounded the problem.

There is an interesting article in this weeks Investor’s Chronicle headline “The Sorry State of the London Office Market”. It explains how landlords are concealing a surplus of space and declining rents by offering rent-free periods and other incentives. However average lease lengths have been falling and are now less than 7 years which is far cry from when I was looking for office space 20 years ago. The additional flexibility is surely to be welcomed.

This perceived poor market for offices in London seems to be affecting all property companies when they frequently have a very different customer bases. It’s a typical bear market in essence – the good is sold off with the bad.

But the market seems to be reaching a point in my view when it will be worth picking up the big fallers in property and small cap companies soon. Those sectors are irrationally out of favour. For example some small cap companies have a large proportion of US$ earnings so will benefit from the falling pound in due course.

A falling pound should stop the lunacy of importing apples from New Zealand which Sainsburys just delivered to our house in the peak of the English apple season. Making imports more expensive does have some benefits!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The Financial Ombudsman Is Useless

I have posted here before about the exorbitant time it took to make a transfer of one of my SIPPs from one provider to another. It took over 5 months for what should have been a simple transfer (see links below).

I did submit a complaint to the Financial Ombudsman service in May last year. Their response so far has been to consider a derisory financial offer from the platforms to be adequate and as the transfer is now complete they consider no further action is necessary. This is despite the fact that the delay to the transfer cost me not just a lot of my time in chasing up the transfer (many hours in fact) but as my holdings were frozen and partly in cash when the market was rising, the loss was significant.

So after a year I have appealed and the case has now joined a queue for a decision by an Ombudsman. Apparently it may be several months before a decision is given.

I think the moral of this story is that the Financial Ombudsman cannot be relied on to provide justice in any reasonable timeframe. This case was a prima facie example of incompetence by platforms in handling transfers expeditiously as they should do. Meanwhile the FCA continues to allow platforms to get away with the anti-competitive practice of deterring platform transfers by introducing long delays.

Platform Transfer Finally Completed: https://roliscon.blog/2021/06/22/platform-transfer-finally-completed-and-pointless-trust-changes/

Platform Transfers – Progress Pitiful: https://roliscon.blog/2021/03/21/platform-transfers-progress-has-been-pitiful/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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EMIS Group – How Not to Organise an AGM

Today I had cause to send the following note to the Company Secretary of EMIS Group (EMIS):

_________________

Dear Ms Benson,

I today received the attached letter that refers to my shareholding in EMIS. Two points:

I have not opted in for web site publication. Please send me a hard copy of the Annual Report and Notice of Meeting, plus preferably a proxy voting form also although I can produce my own one of those if necessary. Please also note that I require hard copies in future.

I note that your letter refers me to the Notice of Meeting on your web site at https://otp.tools.investis.com/clients/uk/emis1/rns/regulatory-story.aspx?newsid=1571613&cid=192 . But that does not contain a full Notice of Meeting.

In addition I am very disappointed that you choose to set a date/time of 9.00 am in Leeds for the AGM which would be difficult to make for anyone living in the South of England.

In addition, as an IT company I would expect you would be capable of holding an on-line or hybrid AGM to avoid us travelling at all and risking catching Covid in a physical meeting.

I am most disappointed that you seem unable to get the basics of organizing an AGM right and hope you will organize matters better in future.

Your sincerely, Roger Lawson

_______________________

Is it not disgraceful that a company makes it so difficult for shareholders to obtain a full Notice of the Meeting and vote our shares, plus makes it difficult for shareholders to attend the meeting!

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Should BP Pay a Windfall Tax?

There have been calls for BP (BP.) to pay a “windfall” tax out of their record profits which were announced yesterday. For example Richard Tice, leader of the Reform Party, had this to say on Twitter: “BP highest profit for 8 years. Even bigger profits likely in 2022, not thanks to own efforts but to Putin’s warmongering. Shareholders likely above average wealth. So higher energy prices transfer wealth from poorer to richer. Windfall tax right in moment of crisis”. [I corrected a couple of grammatical errors]

The Labour Party has also put the Government under pressure to tackle the cost-of-living crisis by calling on MPs to support its bid for a windfall tax on gas and oil companies.

But is BP actually that profitable a company? Not being a shareholder in it I thought I would have a quick look at its numbers over the last few years. They are in fact quite abysmal. The company lost $20 billion in 2020 and in the previous 5 years never achieved a better return on capital employed of more than 7% in any one year and averaged only 1.4% over those 5 years.

Prior to that they tripped over the Deepwater Horizon Gulf oil disaster which meant not just profits disappeared but also dividends.

BP said “Generally, a windfall tax on UK oil and gas producers would not encourage investment in producing the UK’s gas resources”; and “”Very importantly, we also believe the UK should continue its [low carbon] energy transition as fast as possible. BP is committed to playing our part here.”

I think this is a “we need the money” kind of argument. But the simple fact is that BP’s profits, like those of oil companies, are very sensitive to the market prices of oil and gas. They have to invest billions of pounds on likely future profits in researching and developing new resources with no certainty that market prices will reward them. The level of profitability of BP over the last few years is not an encouragement to anyone to invest in this business. Taxing them with a windfall tax would discourage folks even more.

It’s unfair and unreasonable to penalise them when profits rise in a good year. They have to ride the peaks and troughs of market prices because nobody is going to protect them against market forces, unlike the Government’s unwise attempt to protect the public from them.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Electric Vehicles, Pod Point IPO and Bulb Rescue Cost

If the Government has its way, we’ll all be driving electric cars (EVs) soon. One of the concerns of drivers though is they might run out of battery power so the provision of chargers is of key importance in driving acceptance of electric cars.

There is clearly a big potential market for chargers, not just in homes but also in public places, at office car parks, supermarkets and other venues. One of the providers of chargers is Pod Point Group (PODP) who recently undertook a public stock market listing (IPO). The prospectus they issued (see link below) gives a very good overview of the market for electric vehicles and the charging infrastructure in the UK.

Pod Point was founded in 2009 and has installed over 100,000 charge points mainly in the UK. There are government grants available (OZEV) for home installations although those are likely to be withdrawn or altered from 2022. The government is also funding from 2022 large on-street charging schemes and rapid charging hubs across England. Meanwhile car manufacturers are focussing on production of new electric only (Battery Electric Vehicles – BEVs) and hybrid models. Some 6.6% of new vehicles sales were EVs in 2020 and by 2040 it is estimated that 70% of all vehicles on our roads will be EVs.

Chargers fall into two main categories – AC and DC with the latter providing more rapid charging. Home charging is typically via slow AC because UK homes do not have 3-phase electricity supplies. There are several different connector types. Pod Point estimate they have 50-60% of the UK home charge points and 29% share of public installations. But there are a number of competitors include BP Pulse. Petrol station forecourts are one location where chargers are being installed but it is unclear where the dominant charging location (home, office, etc) will be in future.

Those people with homes with no off-street parking will need to charge at public locations unless viable “pavement” chargers are developed. London-based Connected Kerb plans to install 190,000 on-street chargers by 2030.

Pod Point owns some installations under commercial arrangements with venue locations and that includes 396 Tesco sites where slow chargers are installed. Is that to encourage shoppers to spend more time in the store while their vehicle is recharging one wonders?

Pod Point doubled its revenue in 2020 and more than doubled its revenue in the first six months of 2021, but still made a large operating loss. The market cap of Pod Point at the time of writing is about £380 million.

How the market for the provision of EV chargers will develop is unclear and there are the usual numerous risk warnings in the prospectus. Government interference in the sector is clearly one risk and when a market is growing rapidly there are often folks willing to plunge in regardless of short-term profitability. The big oil companies are also moving into the sector and might provide significant competition.

An example of the problem caused by misguided Government interference in free markets is the collapse of Bulb which is apparently going to cost £1.7 billion to keep it afloat and ensure customers remain connected to gas supplies. It could be more if the market price of gas continues to rise. The cost to the Government will mean it is one of the largest bail-outs they have had to provide since the banking crisis in 2008, and they are unlikely to get their money back in this case.

As for most IPOs I will be avoiding investing in Pod Point until the company is clearly profitable and its market more established but the company has certainly come a long way in a short period of time. Trying to forecast the future profitability of Pod Point is exceedingly difficult – there are just too many variables.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Pod Point Group Prospectus: https://investors.pod-point.com/prospectus

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Utility Prices and the Cost of Net Zero

I commented previously on gas prices, price caps and reckless pricing. I thought it best to check how much my utility bills (gas plus electric prices) have gone up since I last changed supplier to Telecom Plus 8 years ago. My bill totals have gone up by 63% over that period whereas the Retail Price Index has only gone up by 23%. Extra roof insulation and cavity wall insulation was done before the start of that period and the number of residents has not changed. So that’s a substantial increase over RPI in total charges.

How much is that increase down to subsidies that we all pay to encourage low carbon electricity production (such as wind farms) and how much to the worldwide change in gas prices?

According to Lee Drummee, an analyst at Cornwall Insight, in 2020 over 30% of the typical electricity bill was accounted for by renewable subsidies and policies. In other words, much of the excess increase in utility bills over RPI has been caused by Government low carbon policies.

The price of natural gas on worldwide markets has gone up by 48% in the same period, but the market price for gas is extremely volatile. It was almost as high as it is now in February 2014 (see  https://tradingeconomics.com/commodity/natural-gas). On a longer term view, the market price of natural gas does not explain the increase in my utility bill over the last eight years.

Lord Matt Ridley has recently published a very good article on the energy crisis. It includes this comment: “It is almost tragi-comic that this crisis is happening while Boris Johnson is in New York, futilely trying to persuade an incredulous world to join us in committing eco self-harm by adopting a rigid policy of net zero by 2050 – a target that is almost certainly not achievable without deeply hurting the British economy and the lives of ordinary people, and which will only make the slightest difference to the climate anyway, given that the UK produces a meagre 1 per cent of global emissions”.

He also suggests the UK could have been self-sufficient in gas if we had not banned fracking with this comment: “We, meanwhile, decided to kowtow to organisations like Friends of the Earth, which despite being told by the Advertising Standards Authority to withdraw misleading claims about the extraction of shale gas, embarked on a campaign of misinformation, demanding ever more regulatory hurdles from an all-too-willing civil service”. I saw no reason to ban fracking so long as it was well regulated.

See Ridley’s blog here:  https://www.rationaloptimist.com/blog/the-root-of-the-energy-crisis/

Meanwhile the Global Warming Policy Foundation has explained how Parliament was misled over the cost of the net zero carbon emission target we are aiming for by 2050. It’s worth reading here:  https://www.thegwpf.com/climate-change-committee-misled-parliament-about-the-cost-of-net-zero/

It certainly appears to me that Government policies on these matters have been seriously misinformed. They have been driven by eco-fanaticism from those who think they can save the world from extinction by adopting extreme policies.

Meanwhile, and as I have said before, controlling the growth in population is the only sure way to reduce emissions and improve the environment. Our Government has done nothing about that issue at all, and few other Governments had done anything about it either.

Blog Readership survey.

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Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Grant Thornton Fined Trivial Amount over Patisserie Valerie Audits

The interesting news today, at least for a former shareholder in Patisserie Holdings (CAKE) as I am, was the announcement by the Financial Reporting Council (FRC) of fines on Grant Thornton and their Audit Partner over the defective audits of the company in financial years 2015, 2016 and 2017. The company subsequently collapsed in 2018 when it became apparent that the accounts were a work of fiction.

This is what the FRC had to say: “This Decision Notice sets out numerous breaches of Relevant Requirements across three separate audit years, evidencing a serious lack of competence in conducting the audit work. The audit of Patisserie Holdings Plc’s revenue and cash in particular involved missed red flags, a failure to obtain sufficient audit evidence and a failure to stand back and question information provided by management. As a result of this investigation, GT has taken remedial actions to improve its processes and to prevent a recurrence of these types of breaches. The package of financial and non-financial sanctions should also help to improve the quality of future audits.”

The sanctions imposed include fines of £2.3 million on Grant Thornton and £87,500 on audit partner David Newstead, after taking into account mitigating circumstances and the financial resources of GT.

But the detail of the case makes for interesting reading, which can be obtained in the link from here: https://www.frc.org.uk/news/september-2021/sanctions-against-grant-thornton-uk-llp-and-david where the Final Decision Notice can be read.

It shows that not only did the audit fall down in many ways but that accounting practices at Patisserie were amateurish in the extreme with apparently no proper oversight by the directors. It includes such problems as:

  • Large amounts of revenue recorded from voucher sales near the year end without being queried.
  • Cash growth that was significantly larger than growth in revenue or profit, with repeated inconsistencies in bank statements and dormant bank accounts being reactivated but the auditors not informed.
  • Reconciling items and journal entries being misused or without proper explanation. For example journal entries being used to record sales transactions, employee costs, etc. As a result there were many thousands of journal entries each year.
  • Additions to fixed assets being miscategorised and wrongly capitalised. For example, motor car purchases being treated as “plant, equipment, fixtures and fittings”.
  • Documents used as supporting evidence containing obvious errors or oddities such as lack of corporate logos, or invoices for vehicles with no vehicle identifications, remittance advices that looked like invoices, and alleged bank statements that appeared to be Excel spreadsheets.

The auditors failed to obtain sufficient evidence to support queried items or to challenge management’s explanations. Professional scepticism in the auditors was clearly lacking.

The liquidators of the company are pursuing a legal claim against Grant Thornton but according to a note in the FT they will continue to defend against that claim on the basis that it “ignores the board’s and management’s own failings in detecting the sustained and collusive fraud that took place”. GT claim that “our work did not cause the failure of the business”. At the end of the day that might have been so but if the defective accounts had been identified in 2015 or 2016 before the fraud became totally out of hand, perhaps the company could have been saved. It would certainly have saved me and many other investors from investing in the company’s shares after 2015.

The financial penalties for such incompetence are of course still trivial. Grant Thornton’s trading profit last year was £57 million.   

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Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Education, Education and Education

Education, education, education” were Tony Blair’s stated priorities for the country in 1997. Note for public speakers – the recital of words in groups of three always reinforces your message – for example, Veni, Vidi, Vici from Julius Caesar. In the current investment world, there is certainly a shortage of education so Blair’s phrase, which became very well known at the time, is worth remembering. Tony considered education was the key to future development in the country and the same applies to the investment world. The best investors never stop learning.

The recent growth in the number of retail stock market traders, particularly in the USA, is of major concern because many of them seem to lack education about the investment sphere. A recent article in the FT suggested that amateur “traders” were transforming markets and is certainly leading to higher volatility. Many such traders (it is doubtful that you should call them “investors”) were using fee-free platforms such as Robinhood and frequently buying on margin (i.e. increasing leverage by borrowing to finance a trade).

The FT article mentioned that in some weeks last year as much as half the trading in Apple was by retail investors, and many who have received cheques from the US Government as part of the economic stimulus in response to the Covid pandemic put the cash straight into the market. New retail investors are moving markets.

But they have a different mentality to traditional retail investors. They are more speculators than investors. As Charlie Munger of Berkshire Hatchaway has said  “The frenzy is fed by people getting commissions and other revenues out of this new bunch of gamblers, and, of course, when things get extreme, you have things like that short squeeze … and it’s really stupid to have a culture which encourages [so] much gambling in stocks by people who have the mindset of racetrack bettors and, of course, it will create trouble, as it did.”

Today I watched a couple of webinars which are relevant to this subject. Firstly I watched the ShareSoc AGM having missed attending the meeting when it took place. As the Chairman said, there is lots of supposed investment education on the web but it is mainly provided by people trying to sell you something. It is therefore good to hear that ShareSoc is putting a lot of effort into developing education materials. It was always the intention of ShareSoc from when it was founded exactly 10 years ago by me and others to provide education for retail investors. It has of course done that in many ways already but some more formalised material is probably needed. It does of course do a lot of good work in other areas such as on campaigns on particular issues. Please do join if you are not already a member – see:  https://www.sharesoc.org/membership/ . There is always more you can learn about the complex world of investment.

Another webinar I watched was the Fundsmith Annual Shareholder Meeting where manager Terry Smith answered questions – see https://www.youtube.com/watch?v=IojZCeUjhRg . His comments at these annual events are always very educational (I do hold the fund). He makes some interesting comments on the events of last year when it was impossible to predict at the start of year what would happen in financial markets. But he still managed to achieve a return of over 18% for the Fundsmith Equity Fund, well ahead of the MSCI world equities index. Two simple tips from him were: don’t take profits but run with your winners, and Return on Capital is a very important financial measure for any company. Of course he has said that before but they are worth repeating.

Terry has some interesting comments on inflation which everyone is worrying about of late. He says pricing power in the companies he owns is important. High return on capital and margins can help to offset inflation. But he gives some interesting data on debit/credit card expenditure and the savings ratio.

He takes another poke at value stocks versus growth stocks. He buys shares in a foggy environment but it’s better to look through the front window rather than the rear-view mirror.  So he does not intend to own any oil and gas companies. He dislikes commodity businesses, and his analysis of car companies suggests he considers them to be of the same nature.

As regards other education the Investors Chronicle often runs good articles of that nature. For example an item on “Finding Hidden Value” by Algy Hall a couple of weeks ago. He pointed out that antiquated account rules have eroded the usefulness of many classic ratios (such as P/Es or Return on Capital). The big problems are intangibles recorded on balance sheets and the fact that a lot of investment never gets recorded but gets written off as an expense. For example, if you launch a new product with a large marketing budget, or open a new office in an overseas territory, there is a lot of expenditure associated which tends to only generate sales and profits in future years. But you will have difficulty convincing your accountants and auditors to capitalise that expenditure.

For high growth companies there is typically a lag between such investments and a good return. So such businesses tend to look poor value on historic financial ratios. As I pointed out in my book Business Perspective Investing, it can be more important to look at other aspects of the business than the conventional financial ratios. Conventional accounts tend to underestimate the value of intangibles such as brands, business partnerships and customer relationships which are so much more important than physical assets in the modern world.

The key is to look at the future prospects of a business rather than just the historic or immediate future financial ratios.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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