Chinese Curse? Fake News!
But 'interesting' politics hits investment yet again...
ONE suddenly feels terribly old, says Tim Price at Price Value Partners.
A few weekends ago we met with a handful of friends from the City to discuss life, the universe and everything – but mostly matters financial.
During the course of our discussions, we discovered that what we understood to be an ancient Chinese curse – "May you live in interesting times" – turns out to be no such thing.
The idea of the curse is "fake news". As Wikipedia points out, it seems more likely that the quote was actually a comparatively recent accidental coinage from one or other British politician.
The people in attendance at this little symposium came from a variety of disciplines. Most were current or former traders, including my brother, who used to head up Italian bond trading for a major Italian bank. Several were trend-following traders. One worked for a data analysis and expert witness company. One was a 31-year-old German post-graduate specialising in artificial intelligence.
The plight of the (comparatively) young German was the one that gave us most food for thought.
Despite being absurdly well-educated and fluent in several languages, including English and Portuguese, our young PhD friend was a) having difficulty securing any kind of paid employment and b) finding that real world social interaction with young British females was, let's call it, "problematic" on account of what he implied was an extremely high level of "fussiness".
We can't realistically comment on the latter complaint, but he seemed perfectly charming to us. But we can certainly relate to the former. Perhaps the angriest this correspondent has ever been was as a graduate looking for work in the middle of 1991. We had just obtained a decent degree from a decent university having been a decent student throughout our scholastic career.
We had spent every college vacation in either paid employment or in unpaid internships to gain work experience. We had applied to over 30 firms across a wide variety of disciplines. Yet job offers came there none. Such was the situation in the recession year of 1991. Since we couldn't find work in our preferred areas (journalism; advertising), on the back of some well-meant fraternal advice we widened our search to include banks, and the rest is history.
From that time, frustratedly awaiting some offer – any offer – of employment, we recall practically a stand-up fight with our father. This correspondent's perspective: "I have done everything in my power and worked damned hard for years to be gainfully employed." The paternal perspective: "The world doesn't owe you a living."
We could certainly relate to the situation of this German gentleman.
There are simply lucky generations and unlucky ones. Our parents' generation was not necessarily so lucky – they were born just before World War II, and their earliest years were a mixture of ordeal and deprivation. But the post-war years, on the other hand, saw happier days.
The generations before them: not so lucky. Especially those who actually participated in the World Wars, and did not necessarily survive them.
This correspondent's generation: pretty lucky, all in all. Although finding a permanent job after university wasn't as easy as we'd expected, after a few years of hard graft and saving, we were able to put down a deposit on, and buy, a property – in central London to boot.
Generation "Today": not so lucky. As our German friend is finding, jobs are not that easy to come by. And even if you are able to secure one, it's unlikely that you'll be able to afford to take even the most basic steps towards securing a property anywhere remotely close to the south-east of England, let alone London. And there are very strange things happening to people's brains, and "courtship", let's say, as a result of technological change and ubiquitous access to smartphones.
We discussed a wide variety of topics that weekend, including those alluded to above, but also not limited to:
- Global debt and financial markets – is the current financial system sustainable given the monstrous amount of debt flooding the world?
- AI and machine learning – where will the jobs go?
- The dilemma for young people – are we living through the "last days of empire"?
- Is technology fuelling mental health problems and addictions – to pornography and much else besides – among the young?
- Has the "capitalism" versus "socialism" debate been conclusively answered – just not in a way that any of us anticipated?
- Opportunities for the future.
But that five-years-old 'Sunday Times' article highlighted above gets to the heart of the problem. There are pressing problems facing all of us as investors. Forget the day-to-day vagaries of the financial markets, which are ultimately timeless and inevitable – how do we protect what we already have?
Speaking of history repeating itself, we heard an anecdote from those far distant days of 2019 worthy of repetition. Since this was hearsay, we cannot attest to its reliability.
The story goes that Labour's shadow chancellor John McDonnell in 2019 met with the senior partners of a major accountancy firm and asked the following questions:
- If and when Labour is elected, on Day One can we raise income tax?
- If and when Labour is elected, on Day One can we raise the top rate of income tax to 70%?
- If and when Labour is elected, on Day One can we raise the threshold for inheritance tax?
- If and when Labour is elected, on Day One can we introduce a one-off "wealth tax" on assets over, say, £1 million?
We stress that this was hearsay. But the expression 'different circus; same clowns' springs to mind. Note, too, The Daily Telegraph's headline of 7th October 2024, 'Britain to suffer biggest exodus of millionaires in the world'.
The fundamental problem with socialism is that it never manages to grasp that basic economics and natural human self-interest and ambition will never be trumped by a naïve ideology in 'equality'. As we pointed out recently, not everyone possesses the entrepreneurial gene, least of all governments. Entrepreneurs, not politicians, are the true wealth creators. And entrepreneurial capital, like any other form of capital, will go where it is most respected. Treat it with contempt, or take it for granted, and national impoverishment will surely follow.
Irrespective of the absolute level of our wealth, how can we try to protect ourselves from what would now be a Starmer-Reeves wealth raid?
One caveat: there is only so far one can go in anticipating and mitigating the predations of a malignly wealth-destroying government. There are some basic steps, but for the sceptically inclined, you simply cannot go too far. Or as Lily Tomlin once said,
"No matter how cynical you become, it's never enough to keep up."
One obvious way to protect one's assets is to wrap them within some kind of legal and/or tax-advantaged structure, such as a trust, an offshore trust, an ISA or SIPP (Self Invested Personal Pension). The most vulnerable assets, we suspect, will be cash sitting inertly in bank accounts.
But moving your assets offshore won't necessarily be sufficient.
If you own Sterling denominated assets – here in the UK or in a Swiss or Singaporean bank, for example – those assets will still ultimately "clear" through the London banking system. Which will be vulnerable to any diktats issued by a UK government.
So if you want to attempt a "belt and braces" approach to your assets, not only will you need to consider where those assets are custodied, but what the currency composition of those assets is. Own Sterling assets, and you will be that much more at risk to the predations of a Labour wealth grab.
We are not necessarily recommending switching your portfolio to other currencies (though a degree of currency diversification, especially including gold, always makes sense), merely highlighting a technical vulnerability of sterling denominated "stuff".
Other "tactics"? As the former MoneyWeek editor Merryn Somerset Webb rightly observed at the time of the first Labour tax scare, you may wish to consider selling
"...any property that isn't your primary home – second homes, and buy-to-lets in particular, are the most obvious of wealth tax targets. Perhaps fix your mortgage on your main home while you are at it: unfunded spending promises will hit the pound, create inflation and push interest rates up. If you are a high earner (on £70,000-£80,000-plus a year) and have the capacity to bring income forward in order to avoid fast-rising additional rates of income tax (there is talk of 70%), now might be time to do that. Also make sure that you are using up all your allowances: capital gains is bound to rise under a Labour government, for example.
"I'd also top up pensions and individual savings accounts (Isas), with the caveat that a Corbyn [now Starmer] government could easily force redirection of the assets within pensions in particular. Can you imagine a scenario in which a fiscally bombed out government puts in place regulations requiring all pension assets over, say, £500,000-a-head, to be invested in, say, perpetual 'national regeneration bonds'?"
Which brings us to the second phase of the pre-emptive measures that could plausibly make sense, namely wealth preservation.
Longstanding readers will likely be familiar with the "wealth preservation" aspect of this debate, because it is the bedrock of our discretionary portfolio approach.
Structure first. Composition second.
One remark we made at that recent investment 'symposium' is a favourite old chestnut of ours: If you don't understand the rules of the game, perhaps it's better not to play. This describes our attitude toward the bond market, where we utterly fail to see how today's still insultingly low yields can possibly compensate bond investors for the credit, duration, inflation and interest rate risk they are now exposed to.
So that leaves a combination of absolute return investments, "value" oriented equities, and real assets – adjust according to personal taste, appetite for risk, requirement for income, and time horizon.
Better to be remotely right than 100% wrong. There are no precise answers or percentage allocations to these various asset classes, because investing is by definition an inexact, imprecise science. But if we are convinced of anything in these dangerous times, it is that true diversification makes more sense than ever.
Rob Gardner is a pensions specialist and also a fierce advocate of financial education for the young. One of the games that Rob teaches is a variation on Jenga – where you take blocks, one at a time, from a little tower, and add them to the top.
Rob's version, 'Built to Last', is effectively the opposite, and also a great way of teaching the merits of diversification in a way that even young children can relate to:
"The aim was to grow £50 as much as possible by building towers that had to reach a certain height to accumulate compound interest;
60 cm = 25%
80 cm = 50%
100 cm = 200%
120 cm = 500%
"You were given 3 attempts, each lasting 2 and a half minutes.
"The rules of the game were stacked to favour particular strategies. Specifically ones which, if applied to your real world savings, happen to help you grow your long term wealth."
So what were the lessons that meant you could excel and climb the leader board?
- The sooner you start, the more your savings can begin to compound. Don't spend too long thinking; Start building and keep banking! And come back!
- Properly spreading your risks is a good idea in the long run. Accept you will suffer occasional losses;
- Build more than one tower. Don't just build 60cm every time – occasionally going for higher risk reaps huge rewards;
- You may well make mistakes and lose money. Right sizing your risks will keep you in the game;
- Regardless of the rewards, don't even try making it to 120cm! You need a strategy that carries the appropriate amount of risk that allows you to reach your goal. A combination of 60cm, 80cm and 100cm will take you to the top;
- A strategy is only successful if it meets your objectives. How others perform is irrelevant. Easier said than done, but you're not actually competing against the person across the table.
"Those who combined a number of these strategies were always the most successful. 'Built to Last' showed the power of Gamification as an educational tool..
"And it is just one of the tools at our disposal in the fight for a more secure financial future."
These may or may not be interesting times. The curse may be imaginary, but the threat to investors and their capital is real. Having a plan, together with a genuinely diversified portfolio focused primarily on defensive value, will surely help, whatever governments and the vicissitudes of the markets throw at us.