The Private Investor’s search for growth
The Private Investor’s search for growth
How to Avoiding Being Scammed in the Process
ATTENTION: Please take your time to read and watch the videos presented here. If there is one message for Private Investors I would like to communicate it is this one. it should take no more than 40 minutes of your time and yet save you thousands of pounds. Please SHARE.
Money for most of us is hard earned and hard to keep. Therefore like most things that we value we like to keep it in a safe place and take care of it.
As you know when it comes to money its different. First apart from it being a unit of account it should have a store value. Under the current system this store value is being eroded on two sides.
First through the extraordinary low interest rate environment that Central Banks have been implementing and secondly through the benign inflationary pressures. In short we are getting less “Bang for our Buck”.
These are additional pressures for these born in the tail end of the baby boom. On the one hand, due to recessions of the 1970’s, 1980’s and 1990’s the population has been in steady decline on the other hand life expectancy has increased.
This in turn means less tax revenues in Governments coffers, revenues that Governments desperately need to prop up the Welfare State.
The Globalization aggressively encouraged since the 1990’ has brought major problems, which the late and great Sir James Goldsmith’s articulated in his interview with the US TV Presenter Charlie Rose (1994). This Globalization has a drag on Tax revenue of national countries that find they have to compete for a share of the Multi National Companies profits.
At this point no doubt you already recognize the bigger picture described. Your probably wondering “How does all this affect me?”.
The Governments are looking at two major areas of cost cutting that directly affect “Generation X”.
The most obvious is Pension reforms. Final salary pensions are luxuries for those fortunate to have had them. Pension Liberation means that while people can have access to their pension pot earlier. , they have to work longer for their state pension.
The average pension pot stands at GBP 73,600 for men and GBP 24,900 for woman.
Now consider this;
Currently the ONS reports average income in the UK is GBP 27531. That means to live the same life style one is living today your pension pot needs to be GBP 550,000 that is a shortfall of GBP 477,020 for men and GBP 526,720 for Women. How does someone close that short fall in say the next 10 – 20 years?
Of course within our culture many of us can expect some sort of inheritance, but the Government has been looking at ways to get access through changes in care home fees and the disturbing proposal of paying up to GBP 20,000 on probate fees (suspended upon announcement of the general election).
Those of us in Generation X who were fortunate to of paid off our homes, after those heady days of interest rates around 7 – 9% have been the winners in this surreal economic landscape. In the old days it was “Cash is King” nowadays over the last two decades it has been “Property is King”. But for how long …
An undervalued pound and raising inflation is likely to see a nascent raise in interest rates. The Nationwide Building society is heralding the first fall in house sales since 2009. Add to the fact we non-longer need to be mindful of the E.U (Euro parity) post Britex. The property sector is starting to face some tailwinds in terms of Stamp duty. This country’s economy, since the late 1980’s has been about the housing market rather than manufacturing. Therefore, we are hooked on debt in terms of mortgages and remortgages to keep the party going.
So far I have outlined the Public “Scams” of modern Government:-
The Edifice to the commitment of the “From Cradle to Grave” Welfare State and the reality of it being slowly dismantled.
The lie behind “I promise to pay the bearer on demand” or in other words the gradual devaluation of money through inflation and fiat money eroded by quantitive easing.
So getting back to the issue of the short fall in one’s pension pot. In my humble opinion, the main high street savings Banks cannot assist an individual to bridge this gap. As an individual you can visit an IFA, after you have paid her fee’s , the best you’ll likely to get will be a packaged product. An IFA, will shay away from promoting, an average person of means, to any product that involves a high element of risk, unless they omit the word risk. Because, if it were to go wrong the FCA will place them under scrutiny.
IFA’s are good at a “One size fits all, with alterations for each individual”. ISA’s, Investments Trusts, School fees, Life Insurance even some Enterprise Initiative Schemes.
How many IFA’s suggested you invest in Bitcoin….
At this point many look to stockbrokers to achieve higher growth. Having worked in the stock broking environment it was shocking the level of ignorance fully qualified stockbrokers had, when it came to selecting stocks or placing trades.
First their main concern, is at odds with their own clients, is that of generation commissions. That requires coming up with good ideas to buy or sell a stocks or shares. Most of the stockbrokers get their research from City A.M, the FT or even the Daily Mail. The commission charged are usually an eye popping GBP 25.00 or GBP 50.00 a round trip (Entry and Exit).
Many stockbrokers, within the Square Mile, are run by young men and women, straight out of University. They get their professional exams then start giving you advice! (The Right Fit syndrome)
The results are usually catastrophic! They have often never brought shares themselves, let alone trade the financial markets. They get away with it as “Churning” the act of getting into and out of shares simply to generate commission applies to discretionary trading but not so much to advisory trading.
A typical scenario is that a CFD broker calls an investor about a good stock, he says “ the City” is buzzing about at the moment, that stock is Mc Donald’s his recommending to sell this stock because the market “Believes a decline in the share value”. The reality is that the Broker noticed while on his break that their breakfast menu, which he liked, has now changed.
After a week or two of side ways movements the Broker now faces a problem. In order to get his clients out of his stock and earn his commission his client will make a loss or “Scratch”. In his mind, that will not look good for his client. His solution is to show his client another stock. The scam here is “Sell the story” if his “Lucky “ his Client exits out of this firs stock and into the new stock. If he is fortunate the client remains in the Old stock and enters the new stock.
I think this treatment of clients abhorrent and have personally witnessed a broker run up GBP 30,000 of commissions, on funds under management of GBP 50,000, in an advisory capacity.
Many private investors believe that if a firm is regulated by the Financial Conduct Authority their capital is fully protected by the Financial Compensation Scheme. It is up to a point. However, provided the Stockbroker had a paper trail of “Treating Clients Fairly” there is little recourse when it comes to risk. The FSC does not protect bad trades, if you the client has agreed to them.
Many of the stock broker that trade CfD’s or Spread Betting are not skilled in areas such as traded options, futures nor even bonds. Rarely will they advise on these as they have no or very little experience in these financial instruments. That’s not to say they don’t know the theory behind them, they learnt that during their exams.
These instruments contain strong elements of risk but if used wisely provide substantial reward. Unfortunately the private investor doe’s not spend the time or have access to the knowledge to utilize the very instruments that would assist them in boosting their pension pots! The standard “City “ Stockbroker offering derivatives products do not even trade through a prime broker or the exchange. This means that they may be actively trading against their clients position in order to hedge them. Or worse still they are outsourcing the trading execution by using a larger “Broker”, normally a Spread betting company, that only provides Over the Counter products.
Obviously we cannot paint all IFA's or Stockbrokers with the same brush. The FCA has done a great job as far back as "Big Bang" 30 years ago, when the City resolved to clean up it's act. The vetting of companies and individuals have protected the public much better than before this time. But it's the need to hunt for stellar returns that constrict the individual in their choices in what to invest. Many of the packaged products do provide handsome returns, but not stellar ones.
Go for Growth!
In order to obtain stellar growth, reduce the liability on capital gains and inheritance tax many private investors invest in the Governments Enterprise Initiative Scheme. This scheme is in principle a very good idea indeed. It can be regarded as the rich mans ISA.
When I was working in private equity one of the investment directors pointed out to me.
“ You should never invest in these scheme for the tax benefits alone”.
He later told me the reason why:
“During my 20 odd years in this business I have yet to see investors make a good return on theses schemes”.
A bit of a harsh statement. The point being of course is that you have to kiss a lot of frogs before you find your prince in these types of investment. Liquidity and exit being key here.
Unfortunately not many private investors have the funds to invest on a trail and error basis into these types of schemes.
Another Investment Director of a well known private equity house advised me “ Avoid investing in Film Production companies as they are only as good as their last film.”
Alternative investments and the hunt for yield
As a private investor having to look for robust returns in a low interest environment if you have experienced any of the following:
Low savings account or Cash ISA returns
Packaged investments with pedestrian returns and high fee charges
Poor results from stock broking advice
You may venture either intentionally or inadvertently into the world of alternative investments. This is the arena of the unregulated and as such there is a lot of criminal activity. As a private investor you need to know that not only “All that glitters is not Gold” but also not all alternative investments are scams. Before we look into some of the Good, Bad and the Ugly you need to look into yourself.
Greed is the private investors No 1 enemy when it comes to investing. Criminals understand this implicitly. So called smart arses that deride a poor investor for having made bad investment forget the sophistication that criminals have in order to sneer decent investors hunting for yield. Criminals will have an answer to all your questions. The points to be wary of from any person that speaks to you about investments:
The Cold Call
Asking about family, children, hobbies, general irrelevant information and bank details. They are just looking for your soft spots! They should simply be discussing Investments not family.
The promise of “Guaranteed returns” any call that promises this you must terminate the call immediately.
The liquidity of the investment – how do you exit out if it to claim your returns….
The use of TPS and clamp down by the FCA regarding cold calling from authorized brokers means this approach to investors is nowadays being relegated as an old school sales approach. The FCA and serious fraud office has gone through great lengths to inform warn individuals about receiving cold calls. However, many companies FCA or unregulated still use this approach. This is because it’s effective if carried out professionally. Unfortunately, most companies use a 1990’s approach like a Boiler Room. Many of the brokers think Jordan Balfort rather than Chris Gardiner is a role model.
Still, just because it’s a cold call doe’s not mean it’s a scam.
But the methods of outreach to investors has moved on considerably by both FCA authorized and unregulated companies as more are using digital marketing or lead generation companies to filter interested prospects. The reason you have received a cold call nowadays is because at some point you supplied your details when you were looking for that high yield investment. You just did not realize where your details would end up.
The problem is not so much the call but how it’s handled.
For example, last year in January 2016 a project I under took involved promoting Bitcoin to Investors @ $350.00 per coin. The forecast I was advising on was looking for it to break the $500.00 mark within the next six months and that investors should hold it for a year at least. A Bitcoin miner needed the funds to invest in more capital to mine more Bitcoins; the offer was to repurchase the coins with 10% on top!
During that time, I had the pleasure of speaking with a Farmer who had purchased $250,000 worth of Bitcoin @$120 per coin.
When I was speaking with people about Bitcoin back then those in the IT sector had an interest, the remainder totally uninterested.
Tomorrows World 1967
If you are looking for higher yield ask for information and read it . Do your due diligence as outlined in the 11th of May Blog. Check out the products liquidity, check if you are investing in the company or through a “Broker”. At anytime if the sales man tells you a product is guaranteed – terminate the call. At best your speaking with an inexperienced sales man at worst it’s a scam.
If you are no longer interested simply explain why. You may have misunderstood the proposition or it was not explained well. If after an evaluation of it’s merits based on the facts you find it’s not for you – tell them. Often the buyer has decided not to invest for whatever reason but thereafter, ignores calls from the company, or say their busy. The mistake here is assuming the sales person can read your mind. Sales, by it’s very nature, means a Sales Man has to be an optimist. When you directly tell them after evaluation the offer you have decided not to buy, end the call by asking to be taken off any list and for no further callbacks. Once you have been frank any legitimate company will let the matter rest there.
Some cultures and nationalities are particularly good at this. They are generually unambiguous in their dealings.
Alternative investments that have performed well have been wine, classic cars, Bitcoin, managed accounts and Forestry.
Forestry has many benefits in term of it being uncorrelated to the stock market volatility and it enjoys significant tax breaks. Be sure to buy the land and not the harvest of trees though.
On the downside, rare earth metals, diamonds (in storage) and some wine investments such as en premier, car parking and worst of the worst Carbon credits have been disastrous to the unsuspecting.
The main problems with this type of investment, even when the investment is kosher, is that the large fees are paid up front and one generally has to hold the investment for over 5 years. Most importantly, the asset is illiquid and has no secondary market. In short once you have brought it it’s very difficult to sell it on and collect your profit.
High yielding bonds, aka Junk Bonds, are very problematic. This is because if you receive 10% return on the latest property bond and you invest GBP 100,000 over a 5-year period, you could receive 10 coupons (bonds usually pay out coupons twice a year) over the duration only for the company to default before returning your stake back. What you have done is taken all the risk and limited your upside.
Now click on the Reality of this Investment : Store First Court Action
You live in an Age that investments are essential to boost your Pension Pot and repay your mortgage, by generating wealth through capital appreciation or income. However this is leading you down a veritable minefield. How do you come out the other side smelling of roses?
The solution is to choose the best investment you can obtain on the market………….Your own education.
Back in the day when I was serving in Airborne Forces at Brize Norton, the No1 Parachute Training School had as its motto:
“Knowledge dispels fear”
Most of the successful investors I have worked with or met are self taught. Let’s face it unless you were ever going to be a Blacksmith or Carpenter what good was metal work or woodwork in School…. Money and the power of compounding and the financial system in which we live seems never to be placed on the curriculum at school. Now that’s some oversight! Or is it an oversight?
When it comes to investing in stocks and shares Edwins Lefeve’s “Reminisces of a Stock Operator” I cannot recommend this more highly enough. Based on the Life of Jess Livermore. The second Book would be Jim Slater’s “ The Zulu Principle” and “Beyond the Zulu Principle” this is an essential book for evaluating small Aim type stocks for capital grow. Another book is an old classic “The Battle for Investment Survival” by Gerald M Leob.
(If you go through the contacts page I shall send you a copy)
Private Equity is a strong route to go for capital growth. If you get involved in the sector you find interesting and you can take an active role with not only your money but also your expertise this can be a very rewarding area.
The bottom line is that privatization, the emergence of Artificial Intelligence, dwindling Tax revenues all conspire to place the financial responsibilities on the Individual. The term “Jobs for life” is disappearing into folklore. When the head of State at the age of 92 is still working you know that taking control of your financial future needs to be in your hands and not some “Expert” Stockbroker or IFA that gets their information form the same sources that are available to everyone else.
Finally, when seeking higher growth you must appreciate RISK and Reward. Gordon Gecko's iconic speech on "Greed is Good" should really be " Risk is Good" . One needs to appreciate the role in which RISK play’s. People are generally uncomfortable with risk, which is why many Investments down play it’s role. You cannot have high returns without high risk. Long Term Capital Management LLC is testament to that fallacy. Doing a parachute jump is risky, but knowing the drills and having a reserve chute mitigates that risk considerably. You need to educate yourself on how you can mitigate your risk. The best way is never invest above your “Sleeping point” as Jesse Livermore would say. Never invest so much of your capital that you are worried about the outcome of that investment.
Remember Risk is ever present in your hunt for yield but Education and Preparation WILL mitigate your risk and REWARD YOU:
" Your pension pot needs to be GBP 550,000 that is a shortfall of GBP 477,020 for men and GBP 526,720 for Women. How does someone close that short fall in say the next 10 – 20 years?"
NB: The opinions given are of the authors and should not be treated as advice on particular products.