Today I want to share with you my investing journey. Starting from when I was a young pup in my teenage years through to today. I hope you find it an interesting story.
As I’ve mentioned in my backstory I started saving from a very young age. In fact, as long as I can remember.
I have fond memories of going to the bank with my parents as a child. Depositing money from Christmas, birthday’s and doing chores and errands. Yes – I was really cool.
Over time I built up a big pot of cash. Partly due to the generosity of my family; partly due to being frugal, even as a child; and partly because savings rates were incredible in the 90s and early 00s.
As I wrote in my post When cash was king, I can remember interest rates of over 10% on deposit accounts in the 1990s. I wasn’t able to find any documents from that far back. But what I have been able to find in the old family records shows how good cash was back in the day.
The first thing I found was a one-year bond certificate from 2004 with an interest rate of 6%. Given inflation was 1.3% in 2004 this worked out at a real return of over 4%!
The second thing was even cooler (yes, I know what you’re thinking). I found an old building society deposit book dating back to 1998. Back then, you could get 6% on an instant access account. Again, a real return of over 4%. Mad times.
Of course, this all changed with the credit crisis. As you can see from this chart from my When cash was king post. Bank rates fell off a cliff from around 2009.
Good old Nationwide stopped paying out cracking rates of interest.
So I ended up putting my money in two sets of bonds. The first was from Northern Rock(!). In its desperation to build back its deposits post-nationalisation, they offered a heady 3%. The second deposit was with Bank of Cyprus again offering 3%.
Thankfully I dodged the Icesave bullet, though Bank of Cyprus also ran into problems several years later thanks to some bizarre EU shenanigans.
That said, when these bonds matured in 2010 and 2011, it was clear that the days of solid cash interest rates were gone.
I felt that it was time to start investing. Though I had one problem. I had no idea how to go about it.
Up steps Monevator
Back in 2009, there was little in the way of proper investing information on the internet. Even MoneySavingExpert looked like a site designed for £100 in Uzbekistan.
I think I googled something along the lines of: “how the bloody hell do you invest in stocks and shares?”
Up popped Monevator.
For those not in the know, it’s the top UK investing website for personal investors. Perhaps most unbelievably, The Investor, the owner of the site, even lets me write on the site every now and then.
The site was a revelation to me. In clear English, it explained the why, what and how of investing. I was hooked.
But more importantly, it gave me the confidence to chuck in my pathetic Cash ISA and move into a Stocks and Shares ISA.
Confessions of an ‘active’ investor
At the time I was at university studying finance and economics. I was both young and foolish enough to think my studies would be of great use in the world of investing (nowadays I’m just less ‘young’).
So, as one does, I started ignored all the conventional wisdom and started actively investing in specific stocks. Yes, I was a stock picker.
In my defence, I enjoyed ‘analysing‘ companies, reading their accounts and learning about investing. It helped me with my studies and, in the long the run, with getting a job in the dire post-crash market. My ‘strategy‘, if you would be generous enough to call it that, was a value approach. Looking for companies undervalued for a specific, transient reason. I can’t remember all the companies I invested in, but some of the ones I recall are: Apple, BP, Vodafone, International Power, Alcoa, Mulberry, F&C Asset Management and Travis Perkins.
I think in total I had about 15-20 holdings. And overall I did pretty well out of the portfolio. I think I ended up selling most, but not all, for some good gains.
A change in philosophy
However, the more I read Monevator, and in particular the wise preachings of The Accumulator, the more I realised that stock-picking was a loser’s game (at least for me). Passive investing (and garlic bread) was the future.
As my cash deposits trickled to redemption, I bunged the funds into index trackers. Eventually, my passive investments dominated my investment portfolio.
The second death-knell to my stock-picking came from my Alcoa investment. I had bought it on the back of terrible commodities run which had tanked the share price. Thinking there would be an inevitable rebound I bought the stock. It reached my ‘target price’ quite quickly and I sold most of the holding, netting a decent return. But from that point on the stock went on a terrible long downward run. Eventually, Alcoa ended up being booted from the Dow Jones 30.
I realised that I had lucked out. If you wanted to invest in stocks you really had to delve deep. I hadn’t. It was luck of the draw, and nine times out of ten you are on to a loser.
The final straw
The third and final reason came in 2012, several months after I started work.
I had a small role working on a massive financial dispute. The company in question was being sued for hundreds of millions of dollars. In turn, it was counter-suing for hundreds of millions of dollars in return. My job was to collect publicly available information about the dispute: news articles, press releases and equity analyst reports. The consistent message among all these sources was that our client was on a hiding to nothing. It was likely going to lose and lose big.
A few months later our team huddled around as the court judgment was sent over. Not only did our client win the case, but they also won a hefty amount from their counterclaim. It was a shock, even to our team.
Over the next week or two, I sat watching the company’s share price. It didn’t move an inch. The company was literally hundreds of millions of dollars better off. But you’d hardly have noticed it from the stock market. One by one the analysts forgot about their provisions in the DCF forecasts. The news articles moved on to new stories. Basically, the company had netted a windfall and nobody cared.
It struck me. Even if you get your value calls spot on, there’s no guarantee the market is going to wake up and smell the coffee. You could sit there being right for years and it would all be for nought. Or as the famous investor Howard Marks puts it: “Being too far ahead of your time is indistinguishable from being wrong.”
Catching up to today
Shortly after my realisation, I sold all my individual stock holdings in one swoop. I pumped it all into index funds and never looked back.
Over time, the case for passive investing has grown to the point that it has become common wisdom. For me, the most telling anecdote comes from Lars Kroijer, an ex-hedge fund manager. In his excellent book Money Mavericks* (amazon affiliate link), he sets out his experiences as a hedge fund manager. In the end, his he closes his hedge fund after receiving a pile of redemptions from investors after a trade goes wrong. He argues, very persuasively, that for most investors, passive will always win out.
As I became more comfortable with investing I started investing in fixed income trackers and designed a suitable asset allocation. Then I did the most difficult thing of all. I leave it alone. Save for bi-annual rebalancing and tidying up my portfolio (simplifying, defusing capital gains) I do very little. Since late 2013, I started tracking my investment returns (you can see the fancy pants spreadsheet I use here). My portfolio has returned around 8% (down from 11% in my How I invest my money post in mid-2018). This is pretty much exactly the same as the Vanguard 80/20 LifeStrategy Fund I benchmark against. So maybe I could have just jacked in all the investing lark and dumped it in that fund.
Then again, that wouldn’t have been much of a story.
All the best,
Young FI Guy