Millionaire Teacher

The voice of youth

A new book promises to reveal “The nine rules of wealth you should have learned at school”. This is what 15 year old Danny Beddard made of it: Continue reading »

New year, more resolution

Follow the script

Last year ended introspectively, with a failed trade in Armour that was both expensive and misguided, but before then I felt I was losing my grip on some of the constituents in the Thrifty 30 portfolio.

My resolution this year is a simple one to make and perhaps a more difficult one to achieve. It’s:

Only to add a company to the Thrifty 30, or hold a company, if I can articulate my reasons in less than two minutes in words a teenager can understand.

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Confessing to the original sin

Maybe simple statistics do trump judgement

Every time I read a review of ‘Thinking Fast and Slow’ by Daniel Kahnemann, a psychologist who won the Nobel prize for economics, I think I should read it. Especially in the light of a decision that is weighing heavily on me.

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The long view of retailing

Are retailers delusional?

I picked up a book at a jumble sale last week. It’s quite a novelty reading from paper.

I bought “The Art of the Long View”, by Peter Schwartz, an old edition published in 1991 because it promises insights into two interests that have hitherto proved incompatible, investing and the future.

Schwartz has written a number of books on futurism and runs a business consultancy. Its bulletin is a good read too.

Value investors have a vexed relationship with the future. We know it’s all that matters, but we don’t believe it’s predictable. A framework for thinking about the future that doesn’t involve predictions might help.

So, and I’m only ten fascinating pages into the book, I’m intrigued he endorses an Arab proverb:

He who predicts the future lies even if he is telling the truth

And I’m enthused by his explanation that scenario planning is not about extrapolating current trends into the future, one of the cardinal sins investors make, but presenting alternatives.

The end result, is not an accurate picture of tomorrow…

He says…

but better decisions about the future.

How, exactly, I have yet to discover, but his first example of where scenario planning might have helped reminded me strongly of the situation retailers face now.

He describes the crisis overtaking the advertising industry in the 1980’s. Anyone could see the growing popularity of new communication technologies, cable TV, videocassettes, fax machines and email that would drain audiences and revenues from network television. No-one could say how the future would play-out but it was obvious that advertising agencies were facing radical change or a serious diminution of their businesses.

By 1987 the shock had hit, profits were declining and staff were laid off. Yet most of the ad agencies Schwartz talked to wouldn’t join his study of the industry’s future:

To judge from our conversations with them, they are afraid of what they might learn, as if the cost of ignorance was smaller.

Recently I relocated operations to Cambridge’s remarkable public library (its new, three storeys high, and bigger than Tesco. Although I don’t like making predictions I doubt many more will be made like it).

The library is in Lion Yard, a new retail development in the centre of the City, and I’ve shifted temporarily so I can observe retailers and their customers. Already I’ve seen shoppers queuing around the block to buy the new iPhone from the Apple Store, while the shops opposite, Vodafone and 3, who’d also opened early and devoted their window-space to advertising the iPhone 4s, were populated only by bored-looking members of staff.

Lion Yard is populated almost exclusively by mobile phone shops, fashion stores, and John Lewis, which sells both. The apparent glut of shops, many of them empty when I walk past, makes me wonder whether John McElligott of the rather fearsomely named Value Stock Inquisition blog is right when he says.

I am of the opinion that the UK has way too much retail real estate.

He cannot understand Argos owner Home Retail’s strategy. Sales at Argos are falling, but within that internet and telephone orders for collection or home delivery are growing in significance (46% of sales). McElligott would like to see retailers like Argos shedding stores and the expensive leases that come with them, but Home Retail is opening and refurbishing more. It sounds as if the company thinks the falling numbers of customers visiting its showrooms is temporary.

I profiled Home Retail rather more favourably last December, but still didn’t add it to the Thrifty 30.

As well as the future, value investors have a vexed relationship with retailers at the moment. They look cheap, but keep getting cheaper. Some like Schroders’ Value Perspective team, think the sectors continuing decline is unjustified, and in particular those companies with strong balance sheets should profit investors in years to come. It’s a classic value case.

Home Retail is in an undervalued retailer with a strong balance sheet according to Schroders, although McElligott thinks its actions, a generous dividend and store openings (and share buybacks presumably) put the balance sheet at risk.

An alternative scenario is the Internet is draining customers and retailers are either going through fundamental change or a permanent diminution of their business.

We can’t predict how it will pan out, but would be very wary of companies that appear to be planning for business as usual, when business may never be the same again.

Making better decisions

Words of caution from psychologists, but the wisest of all are from a fellow blogger and value investor…

“Even the wisest people won’t make good choices when they’re not rested and their glucose is low,” says social psychologist Roy F Baumeister.

A new book describes willpower as a muscle that gets fatigued the more you exercise it. By making subjects hold their hands under cold water or suppress their laughter as they watch comedy routines, researchers are testing willpower and finding we are more likely to shirk a decision or make a rash one when we have already made lots of taxing decisions. The science sounds like fun, but some of the revelations are startling:

• Parole boards grant parole 70% of the time early in the morning but only 10% of the time late in the evening.
• The poor are continually struggling with trade-offs, which impair their decision-making and keep them trapped in poverty.
• To diet, we need to exercise will power, but for willpower we need glucose. See the Catch-22?

The main lesson seems to be avoid making decisions when you are tired or hungry. “The best decision makers,” Baumeister says, “are the ones who know when not to trust themselves.”

Dan Ariely says financial advisers ask two useless questions. The first they answer themselves, the the second can’t be answered

The first question is how much of your final salary will you need in retirement. People routinely answer 75%, which is the rule of thumb they’ve heard from financial advisers. “You can see the circularity and inanity”, says Ariely. If you ask people what they want to do in retirement, they actually need 135%. The second question  is how much risk you are prepared to take on a scale of, say 1 to 10. Experiments show that people always plump for slightly below or above the middle, even when the scales are themselves skewed towards high or low risk.

Ariely still sees a role for planners, though, as coaches helping us rationalise the costs and benefits of spending now, versus later.

Since the future is unpredictable, maybe master plans are inappropriate for investors. Geoff Gannon prefers principles over planning, and its opposite, trial and error.

The trouble with trial and error is it helps you adapt to your environment now. For investors, the errors, the feedback loop which guides you in the process of trial and error, are only apparent a long time in the future. Reckless investors responding to rising prices can profit for years before they get their comeuppance, and well-intentioned investors responding to falling prices capitulate during market-panics before they get their reward.

Plans rarely survive the future and trial and error breeds short-termism. Better to follow principles, like investing in good companies at cheap prices, and periodically check you’re still following them.