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Kindle Notes & Highlights
by
Andrew Craig
Read between
December 21, 2019 - January 4, 2020
if you want to build wealth you must always be thinking about comparative value and purchasing power.
With inflation at 5 per cent, the £1,500 you receive in rent in January is worth £75 less at the end of the year. Your real return is, therefore, even lower than the 2.74 per cent stated above.
Rent also increases with inflation
‘Mean reversion’ is essentially the fact that anything measured will tend to go back to its average price over the medium to long term. It is worth knowing that the average ratio of UK house prices to salaries over the last several decades is actually between 3:1 and 4:1 depending on which data you look at.
outside of unique prestige markets such as London, New York, Sydney, Singapore and Vancouver, the ratio of house prices to salaries is a strong indicator of whether a market is expensive or not and certainly something you should consider when shopping for property.
When you are young, you want to be looking to grow your money. As you age, however, you will want to ensure that you are investing more and more safely to preserve the pot you have made and be able to earn a decent income from it. At the simplest level, this means that the older you are, the more of your wealth you should hold in bonds and cash – and the younger you are, the more in shares (equities).
real interest (return on cash) equals nominal interest (what your bank is paying you) minus inflation.
Lower bond prices mean higher interest rates and vice versa. They are two sides of the same coin.
To work out how much you are paying for a share in real terms, you must think about how much profit a given company is making now (and is likely to make in the future), and compare how much you might have to pay for your share of that profit to how much you might pay for the same share of another company’s profits. This is actually much simpler than it sounds.
This is a ratio that we call the ‘price to earnings ratio’ (‘P/E’ for short).
A lower P/E ratio means that you are paying less for the same entitlement to profit.
The book value is simply the value of all the assets a business owns,
The book value can be divided by the number of shares to give an idea of the value of existing assets that each share is entitled to. This ratio is called ‘price to book’.
When you look at a company, it is important to look at how much that company has traditionally paid out in dividends and what analysts think it might pay out in the future.
If we know that the P/E ratio or book value of a market is historically low, we have a much higher chance of making a great return on our money in the next few years than we would if those ratios were historically high.
we can conclude that the fundamental, structural (inherent) trend in commodities will be for their prices to increase.
Companies that offer a range of funds are known as fund managers, asset managers, investment managers or hedge funds.
Active funds are funds where an individual (known as a fund manager) tries to use his or her skill to pick the best shares (or other assets such as bonds or commodities) to make the best return possible for investors in that fund.
The mandate on any given fund describes the type of assets in which that fund manager can invest.
passive funds are where a fund management company copies the performance of an index
The FTSE 100 is an index and is simply an invention of the London stock market; it adds up the price and size of the biggest 100 companies in the UK in order to generate a number, which is known as the ‘level’ of the FTSE 100.
Despite being arbitrary, indices are very useful. If you want to make sure that you own the hundred biggest companies in the UK, 500 of the most important companies in the USA or the 40 largest companies in France, you need look no further than those indices to find out which companies you need to own.
Faster-growing companies will often have faster-growing share prices, which means you may have the opportunity to make higher returns with successful smaller companies than with very large companies.
Essentially, shorting is a bet that something will go down instead of up.
Funds are basically purchased in one of two ways: they are either traded on the stock market, like a share, or they are not.
ETFs are almost all passive funds.
Investment trusts, by contrast, tend to be active funds run by a fund manager with a particular focus such as smaller British companies or Japanese equities (Japanese shares).
There are also many thousands of other funds that do not trade like shares. These funds are usually what are called open-ended investment companies (OEICs) or unit trusts.
There are basically three types of fee or charge you will need to be aware of when considering whether or not to buy an unlisted fund (one that doesn’t trade like a share): the initial charge, the annual management charge (AMC), and the total expense ratio (TER) – now more frequently called the ongoing charges figure (OCF).
If you own a fund that generates income from dividends or coupons, you can choose to have that income paid out to you in cash (as would be the case in an income fund) or you can elect for that money to be ploughed back into units in the fund you own. This is called ‘accumulation’.
the ‘keeping it simple’ approach involves you setting up a direct debit to pay money each month into funds that will benefit from global growth and inflation.
To own a wide range of financial assets from all over the world, which is what you are aiming to do, you had to own a large number of funds.
In general, I would suggest that you allocate 60 to 70 per cent of whatever you are able to invest monthly into owning the world, 10 to 20 per cent into owning inflation, and keep the rest in cash.
I am suggesting that you do not begin to invest money into the financial assets we are looking at in this chapter (such as investment funds or precious metals) until you have first cleared any expensive (non-mortgage) debt and have saved at least a month’s salary to keep as cash, and possibly more.
TABLE 10.2 How you might split your money
The more suitable method, for the time being, is to look for one fund – or a small number of funds – which gives you as much exposure as possible.
I make about gold hold doubly true for silver. Silver tends to amplify whatever gold does. If the price of gold goes up by 10 per cent, silver will tend to go up by two or three times that amount. This is also true when the price goes down, which is why the prudent investor will usually own more gold than silver.
The point here is that the smart money will always be looking at relative value in the long run.
As you get older you should be thinking more about the return of your money than the return on your money.
The first ‘filter’ for finding these ideas can be described as ‘top-down analysis’. This is where you use your knowledge of current affairs, economics, technology and all things financial to identify themes or trends that help you decide where to put your money to work.
Working out the fundamental value of a company is essentially what accountants do.
The lower the PEG the better, as the number implies you are paying less to ‘own’ more potential profit growth.
For each company, you should find the current year’s P/E, PEG, dividend yield and price-to-book ratio (that is, book value per share). Where possible, you should also find out these numbers for next year.
Below 30 is what we call ‘oversold’ and above 70 is ‘overbought’. All other things being equal, the RSI tells us that an asset is cheap when it is oversold, so we should think about buying it, and expensive when it is overbought, so we should think about selling it.
