Wealthwatch meets Nicola Horlick

www.grahamrowan.com
Wealth Coach & Renegade Investor...
GRAHAMROWAN’S
WEALTHWATCH
Wealthwatch meets
Nicola Horlick
page 4
OCT 14
For savvy
investors
who don’t
follow the
crowd.
£5.95
where sold
The Elite
Investor’s Club
page 2
Rowan’s Rant
page 3
More evidence
that prosperity
is heading East
page 8
News in Brief
page 10
Marcus de Maria
page 11
Wealth Pyramid
page 14
Wealth Works
page 15
Last word
page 16
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Wealthwatch Newsletter OCT14.indd 1
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WHAT IS THE ELITE INVESTOR CLUB?
The Elite Investor Club exists to help savvy professionals and business owners
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Wealthwatch Newsletter OCT14.indd 2
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ROWAN’S RANT:
For years now
there’ve been
mutterings
about the
data that we
so willingly
volunteer to
social media
sites. Who
owns it? How
will it be used?
Do I have the
right to remove
something that
could harm me
in later life?
THE FASCISTS AT FACEBOOK
Facebook has been at the epicentre of this storm with its total disregard for its
users’ privacy. I worry about the naïve teenagers who post images of what they
consider harmless pranks with their mates. How will it look when a potential
employer searches their name five years later? The recent landmark victory
against Google is encouraging. It would seem people can now elect to have
items removed if they so wish. But I’ve just experienced another aspect of
the power of these online leviathans that sends a chill down my spine. Their
control over commerce through the advertising platforms from which most of
their revenue is derived.
When Facebook went public the focus was on how many billions Mark
Zuckerberg would now be worth. That euphoria turned to anger as Facebook
fans who’d made their first ever stock market investment saw their shares
lose thirty per cent of their value in a matter of weeks. A fundamental flaw
had been revealed. While Facebook was a world champion at generating hype
and buzz, there was one element that those boring old beancounters noticed
was missing – profit. Any sane business should be valued on a multiple of its
present and future earnings. What happens when all you do is bring sad people
online to pretend what a great life they are living to virtual friends they’ve
probably never met? You have lots of costs to provide the IT infrastructure but
no money coming in to pay for it.
Somewhat belatedly, there was a post-IPO focus on how to
‘monetise’ the Facebook platform. Put simply, they copied
Google. Advertising on Facebook would have the edge
on the search engine geeks because of all the extra data
Facebook collected about its users. If you want to target
tennis playing bankers in Surrey, a few keystrokes
and you’ll know the size of your target market. If you
want to interrupt their timeline with mention of an
event that might interest them, you now have the
means to do so. This is where I have to admit to
being a hypocrite. While I’m not prepared to waste
a solitary second of my real life living a pretend
life on a computer screen, I realise that many of
my potential clients willingly succumb to this temptation. The marketer in
me couldn’t resist trying a campaign. Lacking the technical skills to set it up,
I appointed a freelance expert just before nipping off to Juan Les Pins for a
couple of weeks. While there I got an email from him saying I needed to add a
credit card to the account to cover the advertising costs. So I logged on from
France, entered the details and got on with my life.
A few days later I get a message from Facebook saying that ‘due to suspicious
activity on your account your advertising account has been suspended’. The
link took me to a questionnaire asking if I was in a different country, had I
tried to set up a payment method on my account and about 20 other questions
based on the obvious assumption that I was a terrorist, a drug dealer, a
paedophile or probably a combination of all three. I even had to scan and
upload photo ID to prove I was the person I claimed to be. Daphne took the
brunt of my cursing and swearing as I reluctantly complied with these overthe-top demands. Remember, I am trying to spend money with Facebook here.
I am the valuable client supporting their share price. My crime is to have a
second home in a different country and to dare to log on to Facebook from
there. For the record, this home is not in Iraq or Afghanistan, but in France.
I heard nothing for a week and then received the email shown on this page
saying that my account has been closed and the decision is irrevocable. I wrote
a reasoned response and have, of course, heard nothing more. Any company
that goes to these lengths to treat its customers with such contempt can suffer
only one fate. It will become a High Street bank. If you still own shares in
Facebook, now might be a good time to sell…
...THIS DECISION IS FINAL
Wealthwatch Newsletter OCT14.indd 3
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WEALTH WATCH MEETS
Nicola Horlick
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This month Wealth Watch meets arguably the highest profile
woman in the City of London these last 20 years, Nicola
Horlick. Now she’s always fought against any sort of labelling
as being a superwoman as she juggles family life and
business, but she’s right back in the limelight today as she
launches her latest venture, Money & Co, which is a peer-topeer lending platform that’s going to help small businesses
to raise funds and help investors to get a better return on
their money.
GR Nicola Horlick, welcome to Wealth Watch.
NH Thank you.
GR I’ll tell you what, going into this space is really playing to one of my hobby
horses because you’re helping to drive a coach and horses through the banking
sector and make them out to be the old dinosaurs that I think they have become.
What was the motivation for you in getting involved in this peer-to-peer lending
space?
NH Well just that, the banks have let everybody down, it’s been particularly hard
for small businesses over the last few years since the heart of the crisis occurred,
when Lehman’s went bust in 2008, so its been very, very rough for businesses.
The economy is beginning to pick up and actually when things get a bit better and
companies are beginning to do business again, that’s when they need cash. Their
working capital requirement generally goes up and then they need to invest in
machinery and more staff and so they actually need more and the banks just simply
aren’t there for them. And I see it because I also have private equity businesses, so
I’m talking to companies all the time that we’re raising equity for and what they’ve
been telling me is ‘we can’t get any debt from the banks still, despite what they
say and despite all the advertising’. It’s a little bit strange isn’t it, you see all these
adverts on the television and yet actually they’re not really lending.
GR No, it seems to be all just
going into shoring up their
balance sheets and they’re
just hoarding their cash.
NH Well actually to be fair, it’s very
difficult for them because they’ve got
regulators telling them they’ve got to
rebuild their balance sheets, they’ve got
Basel II which they had to deal with and
next they’ve got Basel III. And so actually
they are very constrained and I think the
mistake is for them to sort of say, ‘oh yes, yes we’re going to lend’, well they should
be honest about it and say to the government, you can’t ask us to do this on the one
hand and that on the other, the two aren’t compatible. But I think the government
sort of realises that and has been encouraging peer-to-peer lending, peer-to-business
lending or person-to-business lending or whatever you want to call it.
GR
P2P, P2B but I think obviously your background is in big city institutions where
there’s all kinds of regulatory requirements, back office procedures and disciplines.
The peer-to-peer space is very new; some would say it’s a little bit like the Wild West
at the moment. Do you think there’s a need to introduce some of those rigours and
disciplines that we’ve seen in the other financial institutions?
NH Well I suppose that’s our USP really, I mean everybody’s getting very concerned
about being regulated by the FCA but I’ve been regulated by the FCA and its
predecessors for my entire career, so it doesn’t faze me at all. Also I bought a very
sophisticated administration platform to do all of this and it can do an awful lot
more than just the lending that we’re doing at the moment. So for example, Foreign
Exchange is another area that is a bit of a hobby horse of mine because the banks
really rip people off on that and we can do that on our platform as well. And so, as
you rightly say, when you’re dealing with money its not just about being clever at
digital marketing or whatever, its about making sure that all the money is properly
looked after and the right payments are going to the right people on the right day.
And my background is that for 31 years I’ve been managing people’s money, so I’m
obviously ideally placed to do something like this.
CONTINUED OVERLEAF
THE BANKS HAVE LET EVERYBODY DOWN
Wealthwatch Newsletter OCT14.indd 5
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WEALTH WATCH MEETS
GR Fantastic! And we’re seeing NH Well I think we’re going to end up doing larger
and that’s already been demonstrated in our
players like Funding Circle get loans
first two months of operation. Within our first month
some real traction in this space of operation we actually managed to fund a £1 million
now, what are your plans to
corporate loan and according to the Financial Times that
differentiate Money & Co from was the largest corporate loan to be crowd-funded ever
the other players in this sector? anywhere in the world, never mind the UK.
GR Wow.
NH So I think we’ve already differentiated ourselves. If you actually look at how Funding Circle began
four years ago, they started off with loans in the range of £5,000 to £50,000, our minimum loan is
£50,000 and our maximum loan is £3 million. So we are dealing with much larger amounts of money
and beginning to involve institutional investors in our pot of lenders as well as individuals; we want
both.
GR Okay, that’s interesting. And so as those kind of people and organisations get involved, obviously
some big numbers being talked about there, what kind of due diligence and validation are you doing
on the companies who are looking for these kinds of amounts?
NH Yeah, well that’s obviously absolutely crucial and we have a Credit Analysis Team which came
from Santander Bank and that team numbers four people. So for a start-up business having four credit
people is quite a major investment. And we also have a proprietary tool, a Credit Analysis System,
so as long as we’ve got access to three years of full accounts from the company that’s making the
application we can actually approve a loan within half an hour. Now we obviously don’t say that on the
site, we say 72 hours because we don’t want any hostages to fortune, but in theory we could approve
it in half an hour compared to months and months of waiting to hear from banks and things being
referred back to Credit Committees and it’s all a nightmare for companies. So speed is something that
we have perfected and we’ve done dummy batches of 50 companies overnight before we started and
got them all approved overnight. So I’m pretty confident that, as the volumes of applications pick up,
we will be able to give very quick answers to companies.
GR
Okay because one of my fears in this sector sometimes is the little old lady who puts her life
savings into a biotech start up or something, it all goes horribly pear shaped, so you’ve got some kind
of rigours and procedures in place that would prevent that?
NH
We don’t do start ups and we don’t deal with companies that are very young you know and are
still loss making. So companies need to have three full years of filed accounts, so often they’ll be four
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or five years old and they also need to have been
profitable in their last full year. So yeah this is a
cautious approach, we’re not getting involved with
companies that no one else wants to lend to. If
you actually look at the SME lending market at the
moment, 92% is still done by the banks and 8% by
alternative finance providers. Every day I say to my
team we’re aiming for the 92% not the 8%. We’re
not trying to take money or deals from Funding
Circle, we’re trying to take deals from the banks.
NH No I don’t
GR Okay and my own
think that’s fair
thoughts are that
because it’s
as somebody who
senior debt and
wants to perhaps put
it’s secured on
all the assets of
money into this kind
of transaction, it needs the business,
so it’s not like
to be approached
With
more as an investment equity.
equity you can
than say a savings
lose all your
mentality. It’s almost
money and
people have
like a mini corporate
to be aware of
bond with a relatively
that; with debt
small company on
it’s far less
the other side of the
likely.We’re
transaction, a little bit right up at
perhaps like say AIM
the top of the
shares in terms of risk creditor list, so
if something
and reward. Would
goes horribly
you think that’s a fair
wrong you
analogy?
know all the
cars, all the
computers, whatever the assets of the company
will be sold and the money will come back to our
investors. Now obviously we don’t want to be in
that position and we’re trying to find companies
that are really strong. So if you take the £1 million
loan that we did, that company has actually
been going for 20 years. This is a very strong
company which has doubled its turnover in the
last five years. So that’s not the sort of company
that’s likely to fail. So we are very rigorous in
our approach and very conservative because this
is fixed income which should be relatively safe.
The other good news is that the government has
recognised that these are potentially attractive
investments for individuals and its also attractive
to the government to make sure that small and
medium sized companies have access to finance.
And so it was announced in the 2014 Budget that
shortly these loans will be eligible for inclusion in
ISAs. ISA allowances have now risen to £15,000
per person and the distinction has been removed
between cash ISAs and stocks and shares ISAs.
So, when our loans become eligible for inclusion
in ISAs, people will actually be able to invest up
to £15,000 a year with an ISA wrapper around the
investment in our loans and get the returns which
are 6%-7% tax free, so that’s very attractive.
NH Right so the
GR Absolutely and
Credit Analysis
clearly, within ISAs,
Team analyse the
one of the biggest
company and give
drawbacks has been
it a credit rating
the really low interest and we have five
credit ratings. So
rates available for
the cash elements of we’ve got A+, A,
those. You mentioned B+, B and C+. So
company has
6% or 7%, I was going ifanaA+
rating we
to ask you how do
would expect them
you calculate the
to pay around 6%
for their money
interest rate to offer
on these kind of loan and if they have
C+ 10% and all
transactions?
the other ratings
in between. So
it’s between 6% and 10%. And I think the really key
thing is that people must not be tempted to go
and have a portfolio of C+ loans because I can’t
guarantee that there won’t be failures. , there
will be the occasional failure and if you’ve put all
your eggs into the risky basket that’s very, very
dangerous and not advisable. And the worst thing
you could do is to put all your money into one C+
loan, you know that would really not be advisable!
So it’s very important for people to be sensible
and to have a number of loans and to spread them
amongst the different risk categories.
GR
Okay. So Nicola, a lot of the people reading
this will have a portfolio of something between
£100,000 and £1 million, what proportion of that
do you think might be appropriate to put into this
kind of platform to benefit from the sort of returns
you’ve been talking about?
NH Well diversification is key with any investment
portfolio, so I would not advocate having more
than about 10% in this area.
GR From the investor’s point of view, are there
any fees and charges involved in getting into this
scheme?
NH The investor pays an annual fee of 1% per
annum. So if you’ve got something that’s yielding
8%, then you’ve got to pay us 1% so the net return
to you is 7%.
GR
Okay, so finally, where can people go to learn
a bit more about the services that Money & Co is
offering now Nicola?
NH Well it’s a digital business so the site is the
place to go, so its www.moneyandco.com. And on
the site there’s plenty of information about how
to lend, how to borrow and there’s also a lot of
news, we have a news page, we have news stories,
probably two or three stories a day being posted
on the site and also I do a blog once a week.
GR Right, fantastic! Nicola Horlick, thank you very
much for joining us today.
NH Thank you.
WITHIN OUR FIRST MONTH WE MANAGED A £1MILLION CORPORATE LOAN
Wealthwatch Newsletter OCT14.indd 7
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MORE EVIDENCE THAT LONG TERM PROSPERITY
When you studied history at school, did you ever ask yourself what it must have felt
like to live through the momentous events of 1066, or the Wars of the Roses, or the
Great War whose centenary we recently commemorated? My view? It would have
seemed completely normal. For many people, their day-to-day life would have gone
on oblivious to world events. It’s only with the carefully crafted 20/20 hindsight of
the historian that we come to see things in their wider context.
You’ve heard me mention
it before, but I keep
coming back to Chinese
leader Deng Xiapoing’s
famous response. In a
1989 interview he was
asked to comment on
the impact of the French
Revolution two hundred
years on - ‘It’s too early to
tell…’
That’s how I feel about the
structural change going
on across the world today.
The news headlines focus
on the latest flare up in
the Middle East or some
new political gaffe. Life
seems normal as we all
get busy making a living, raising a family, trying
to make some headway. It’s easy to miss what’s
happening on a macro level. Easy, but dangerous
to your long term prosperity.
I’ve surveyed a broad brush of stories and media
to selectively cull the information I’m sharing
with you today, but when you sew the patchwork
together you end up with a quilt that is very
different to how it looked when you and I were
born. It starts with my Harry Dent interview. Not
all of Harry’s predictions come true, perhaps the
inevitable lot of the professional forecaster. But
he gets you thinking. He lifts your eyes and your
mind to 20,000 feet and takes a view that spans
multiple generations. And there’s no denying
that most developed countries have a smaller
generation following a larger one. Even China
can’t escape this fact thanks to its one child
policy. They all share a rapidly ageing population
being supported by an ever shrinking workforce.
The Western countries and Japan share bankrupt
governments printing money to pay their own
bills and passing the bill on to their children and
grandchildren.
Meanwhile China, India and other more ‘frontier’
markets like Indonesia and Vietnam continue
to grow. China’s middle class now matches the
entire population of the United States, and as
they grow richer they develop Western tastes.
This year, China has overtaken France as the
world’s largest consumer
of red wine. According to
Vinexpo, China now guzzles
155 million cases of wine a
year compared to France’s
150 million. The Chinese
see red as a lucky colour
so white and rose don’t
get a look in. The domestic
producers are gearing up
production as fast as they
can, but there’s a vast and
growing demand for the
grands vins of the Fifth
Republic in the People’s
Republic. The Chinese wine
market is expected to reach
$20 billion by 2016.
China has long been
snapping up the world’s natural resources in
Africa and is now spreading the net to Latin
America. China is now a bigger trading partner
than the U.S. to many countries in South America,
including Brazil. Commodities are at the heart of
this growth, with China’s legendary infrastructure
projects requiring vast quantities of iron ore,
copper and oil. Changing food tastes have now
caused a big increase in demand for soy beans
which have become one of the biggest exports
from the region. Even though many observers
consider growth to be slowing in China, inward
investment into agriculture, mining and energy
projects in Latin America continues to grow at a
stellar pace. And it’s much needed, as even the
BRIC economy of Brazil celebrated the World Cup
with a slide into recession after two quarters of
negative growth.
If these developments don’t cause a raising
of blood pressure in the White House, here’s
something that should. In July China and New
Zealand entered into a currency deal that enables
them to trade with one another directly, cutting
out the $U.S. as a means of exchange. Until a few
weeks ago, the significant trade in dairy products
from the Kiwis to the hungry Chinese involved a
double currency exchange. The Chinese would
use yuan to buy the greenback, then the milk
farmers in the Antipodes would convert American
dollars into their own kiwi dollars. As you can
imagine, banks and brokers took a huge nibble
The impact of the French Revolution? Too soon to tell...
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I
Y
IS HEADING EASTWARDS…
at each turn, greatly increasing the true cost of
trade. It’s easy for the Yanks to be complacent as
their currency still accounts for 81% of all world
trade. But, if I was Mr Obama’s successor, I’d be
worried about why countries were trying to avoid
using my currency. Anyone would think that
America’s own economy might not be in great
shape if its trading partners regard its currency as
toxic…
The rosy news on growth doesn’t rest entirely
within China’s shores. India has given a present
to its new Prime Minister Modi by delivering 5.7%
GDP growth in the second quarter. Stock market
investors are giving a hefty vote of confidence to
the business-friendly leader, with shares hitting
record highs. Morgan Stanley see grow reaching
7% by the first quarter of 2016, so India could
take over from China as the next engine of world
growth. But it all depends on whether Modi
delivers on his much promised reform plans.
Indian bureaucracy makes France look slick.
There are still issues around corruption, taxation
and land ownership. But, I’m guessing, Messrs
Cameron, Obama and Abe would give an arm, a
leg and a left you-know-what for growth on the
Indian scale.
Meanwhile, problems in the developed world
stubbornly refuse to go away. At the end of
August European Central Bank President Mario
Draghi gave his strongest hint yet that Quantative
Easing is coming to Euroland. The last three
months of price growth in the Eurozone have been
sponsored by the Flat Earth Society – June 0.5%,
July 0.4%, August 0.3%. Italy has not only slid back
into recession, but it saw retail prices fall by 0.2%
in August. Spain saw an even bigger fall of 0.5%,
a reral setback after some embryonic signs of
recovery in recent months.
The inevitable question this raises is whether
Europe is heading for a lost decade or two like
those experienced in Japan. Luigi Speranza, an
economist with BNP Paribas, reckons that Europe
is ‘one shock away from it’ and ‘if you wait for
the shock to arise it might already be too late’. It
seems likely that the ECB will start buying asset
backed securities, which sounds awfully like QE
to me. Though I’m sure it will be given a different
name in the true, opaque style we’ve come to
expect from Eurozone bankers and politicians.
Even the mighty Germany hasn’t escaped the
latest downturn. The working population that
fuelled the longest economic miracle on the
Continent is shrinking and growth is expected
to fall below 1% a year within a decade. So much
for holding the rest of Europe on its shoulders
like Atlas. When the President of the Chambers of
Commerce likens the German economy to preiceberg partying on the Titanic, it should get our
attention as long term investors.
And where is Britain in this tale of the ups and
downs of the global economy? I hate to sound
like a doom monger when the media is slavishly
repeating government spin on the ‘recovery’,
but I don’t think we’re out of the woods yet by
a long way. For all its troubles, Europe has an
annual budget deficit of about 3%. America has
reduced its deficit from a scary 10% to a more
manageable 3%. The UK deficit once reached a
mind-numbing 11%. Four and a bit years of socalled austerity have brought it down. But only
to 6%, double our neighbours on either side of
the Channel or the Atlantic. Hardly a cause for
street parties. Government spending continues to
rise, tax revenues are below expectation and we
have quietly slipped the date for our next budget
surplus from 2015/16 to 2018/19. Anyone taking
bets on the new target being achieved?
It might take twenty years. Could be fifty. Possibly
a century. Then we’ll have some perspective on
the true level of structural change that happened
in the first two decades of this century. If I had to
take a view today, I’d stand by my guidance of the
last few years.
The best present you can give your
children is a passport and Mandarin
lessons…
What will he call the
version of QE?
Perhaps in a fit of pique at losing top spot in the
wine quaffing league to the Chinese, Francoise
Hollande fired his government. He formed a new
one in short order, minus a few dissenting voices.
But can the neo-communist leopard of two years
ago change his spots to become the capitalist
lion that France desperately needs? That sound
you hear is a guffaw, not your writer holding his
breath…
MARKETS IN CHINA, INDIA, INDONESIA AND VIETNAM CONTINUE TO GROW
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NEWS
IN BRIEF
BANKRUPT PENSIONERS
It’s starting to happen. The inevitable corollary
of the pensions crisis is that retired people are
going to run out of money. The latest analysis
of insolvency data by accountants Moore
Stephens signals what is sure to be the start of
a frightening trend. While insolvencies in every
other section of society are going down, there
was a 22% increase among the over 65s between
2009 and 2013. Age UK has acknowledged
that the sums owed by pensioners who get into
financial difficulty are rising sharply. The Money
Advice Service has identified a segment it calls
‘uncomfortable retirees’ with an income of less
than £15000 a year.
There are no prizes for saying ‘I told you so’,
but when the average pension pot of £30,000
will produce an annuity income of around
£900 a year, and a state pension of £144
a week produces £7488 a year, how many
‘uncomfortable retirees’ will there be in ten or
twenty years’ time?
There’s also evidence of a new, crossgenerational problem appearing. As mum and
dad live longer, their children are retiring while
the parents are still alive. But the only financial
plan the children had was to pay their debts off
with the inheritance from their parents. How
long before we have both generations feeling
‘uncomfortable’ in retirement and turning to a
broke government for handouts?
10
THE DEATH OF THE
GARDEN CENTRE?
You could never accuse me of having green
fingers. My mother’s passion for horticulture did
not make its way into my gene pool. I appreciate
great gardens and will pay to visit them, but
don’t ask me to jump on the lawnmower or hoe
the flower beds. It seems I am a generation ahead
of my time. The under 35s are showing a similar
lack of interest and garden centres are starting to
feel the impact. A combination of delayed home
ownership, more people living in flats and more
people renting means that around £87 million
has been lost from the £5 billion revenue of the
nation’s garden centres. That figure could rise
to a quarter of a billion in the next couple of
decades.
If I owned a chain of garden centres, I’d be
working hard on an I-Phone app that allows
people to spend real money building and
nurturing a virtual garden. No premises, no staff.
And the cretins would sign up and pay for it, I
guarantee.
MORE DATA SUGGESTS
PROPERTY SLOW DOWN
I wouldn’t dream of trying to time any market
downturn, and certainly not a market as avidly
supported as UK residential property. But I do
like to recognise when we are nearer the top than
the bottom so I can make an assessment of the
opportunity cost of investing in property versus
something else with today’s new money. At face
value, the latest data supports the bulls. The
Land Registry is saying prices are up 7.2% year to
date while Nationwide puts the increase at 11%.
But Hometrack report that upward price pressure
is reducing, while mortgage approvals fell 20%
between January and May.
The latest RICS survey reports falling levels of
buyer interest, while the last three months has
seen growth totalling just 2.3%, the slowest
rate of increase in twelve months. Of course the
country is made up of lots of regional markets
and there will be big differences between
Tyneside and Mayfair. But, I repeat my own
feeling that we are much nearer the top than the
bottom of this market cycle. You are unlikely to
find bargains in this phase of the market, and
there are many better opportunities out there for
those ‘in the know’. Like you.
www.grahamrowan.com
Wealthwatch Newsletter OCT14.indd 10
09/09/2014 11:39:50
MARCUS DE MARIA
WHEN DO YOU
SELL YOUR
INVESTMENTS?
Over the past 15 months we
have been discussing strategies
and techniques on how to
successfully trade or invest.
Everyone has a strategy or
technique to enter the trade, but
now comes the tricky bit - exiting
the trade. When do you take your
profits … and your losses.
To get your FREE copy of “The Lunchtime Trader”
go to www.investment-mastery.com/wwbook
INVESTMENT STRATEGIES THAT TAKE JUST 10 MINUTES A MONTH
Wealthwatch Newsletter OCT14.indd 11
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09/09/2014 11:39:50
WHEN DO YOU SELL YOUR INVESTMENTS?
Let me ask you a question – when you go into
an investment, what do you think about? Most
people are calculating how much money they
could make – is it 10%, 20% 30% or more. But
every successful trader will tell you that in
trading, you have to think about the LOSSES
first ie how much you are willing to risk NOT the
gains.
So actually the question should have been the
other way around – when do you take your losses.
We have already discussed the great Warren
Buffet’s 2 Rules to investing:
When trading your money, it is essential that you
use something called a ‘Stop Loss’. This is an
electronic order you place with the broker telling
them the point at which you wish them to exit
the trade i.e. stop any further losses. You don’t
need one when you are investing, because over
the long term stocks fluctuate too much. We
recommend that you risk maximum 1% of your
entire portfolio on any one trade. In other words,
the most money you will lose in one trade is just
1% of your capital. I.e. if you have £10,000 to
invest, you will risk only £100 on a trade.
1. Never lose money
2. Look at rule number 1
Warren makes it very clear that the key to making
money … is not to lose it in the first place. That
way there will always be money around to invest
and grow, and to take advantage of compound
growth.
Here is something that most people don’t know –
the more you lose the more difficult it is to come
back and win. In fact, if you lose below 50% of
your capital, it gets very difficult indeed. Take a
look at the numbers below:
Loss
Recovery/Needed
Recovery/loss
5.0%
5.3%
1.05
10.0%
11.1%
1.11
20.0%
25.0%
1.25
30.0%
42.9%
1.43
40.0%
66.7%
1.67
50.0%
100.0%
2.00
60.0%
150.0%
2.50
70.0%
233.3%
3.33
80.0%
400.0%
5.00
90.0%
900.0%
10.00
95.0%
1900.0%
20.00
If you lose small amounts ie 1-10% then you can
recover easily, but if you lose 20%, you need 25%
to make up the loss. If you suffer a loss of 50%
and you will need 100% to get back to where
you were. Then it gets steadily more difficult to
make it back. At 60% loss you need 150%, 70 loss
you need 233%, 80% loss 400% and 90% you will
need to make a 900% gain ie make 9 times your
money. It is virtually impossible to get back from
these kind of losses.
There are 2 Golden Rules of investing:
1. Cut your losses short
2. Let your profits run
Cut your losses short
Having a stop loss in place ensures you never
make the mistake that most people make. Let’s
see if you have ever made this mistake – you
get into a trade but don’t set a stop loss. The
trade goes against you – you are losing money.
Thinking it will go back up again, you wait. The
loss gets worse. Surely now it must turn. Then
it gets even worse. Now you really don’t want to
sell because the pain is worse than before. It is
just a matter of time you tell yourself. You even
start looking at the position less than before.
The stock continues to fall. You are now in a long
term buy and hold position. It falls further and
you even think about buying some more, it is
so cheap! Does this sound familiar to you – it is
what most people do. All of this could have been
avoided with a stop loss. Cut your losses short,
immediately.
Once the stop loss is in place, you never move
it down. You can move it up as the stock moves
into profit to secure any money you have made.
The stock can continue up and make you more
profits but it cannot go down past the stop loss.
Let your profits run
While it is tempting to come out of a position
once you are in profit, especially when it is a large
profit, it is almost always best to let it run. The
idea is that since it has been going in the right
direction, it is likely to continue in that direction.
MARCUS DE MARIA
12
www.grahamrowan.com
Wealthwatch Newsletter OCT14.indd 12
09/09/2014 11:39:50
So what to do?
If you already have a stop loss in place, then now is the time to move your stop loss up to under the
current price. If you don’t already have a stop loss then now is the time to set one. The stop loss
guarantees that you are going to keep whatever profits you have made so far. It ensures that the
profitable trade does not turn into a losing trade - that would be unforgivable.
So let’s say we have our stop loss in place – we are risking maximum 1% of our entire portfolio.
The stock starts to go up. Let us take a few scenarios of how to get out of a rising stock.
1. Place the order below a trough
3. Place the order at the bottom of today’s bar
This is a nice way of riding it up as it continues
to rise. Each time a new trough is formed we can
raise the stop loss higher.
Being so close, this is quite aggressive as it could
mean you exit the very next day. Use only when it
is time to take profit and you want as much of the
profit you have so far to remain, so this would be
the last thing you do.
2. Place the order above the stock at a
resistance point
This does go somewhat against the golden Rule,
but if there is obvious resistance above then you
can place an order just below the resistance point
and if it reaches this point, it will take you out.
This is called a ‘Take Profit’ order.
If you get out and it does indeed bounce off the
resistance and move back down, you can always
start to take a new position, but wait for it to fall
back at least 10% before you enter again. For a
short term play. For a longer term play, I prefer
minimum 20% fall before entering again.
When do you raise the stop loss?
Everyone has a different rule for this, but a good
one is that if you are in profit twice the amount
you are risking, then you can raise the stop loss
up to the entry point. That way if the stock comes
back down, you cannot lose any money.
I highly recommend you download my book
now, where you can find all the long term stock
investing strategies you need. Just go to
www.investment-mastery.com/wwbook
WHEN INVESTING THINK ABOUT THE LOSSES FIRST
Wealthwatch Newsletter OCT14.indd 13
13
09/09/2014 11:39:50
THE WEALTH PYRAMID
Here’s the current list of investments in the Wealth
Portfolio. They start at just £69 and go all the way to
£5 million
so there really is something for everyone.
The website for more information is shown under each item
Investment
Level
Detached villa in Gibraltar
liveingibraltar.co.uk
£5m
French ski apartment in 3 Valleys
Town house in Gibraltar
luxuryskihomes.co.uk £250,000 £1.9m liveingibraltar.co.uk
Cape Verde hotel suite with
5 weeks usage
£150,00
0
whycapeverde.co.uk
0 £300,00
Leaseback apartment
in Languedoc
Call us to discuss
£1
0
,00
0
2
£
on
ye
ar
th
Hardwood forestry
12 year investment
whytimber.co.uk
0
00
,
9
£
0
/m
9/
14
,000
,00
50
Elite Investor Club
‘Keep Me Informed’
000 £90,000
£36
£10
£6
Care home suite with 10%
yield for 10 yrs
whycarehomes.co.uk
Fractional ownership
of Cape Verde suite
whycapeverde.co.uk
£77,
Care home suite with 0%
developer loan
whycarehomes.co.uk
Loan note offering
up to 15% interest
Call us to discuss
Silver bullion
whybullion.co.uk
Apartment in Cape Verde
whycapeverde.co.uk
r
a
e
/y
Elite Investor Club
‘Wealth Mastermind’
0
0
6,0
£
r
9
£1
7
a
e
y
/
Elite Investor Club
‘Serious Student’
www.grahamrowan.com
Wealthwatch Newsletter OCT14.indd 14
09/09/2014 11:39:50
WEALTHWORKS
HOW TO ‘OWN THE WORLD’
If you’ve read Andrew Craig’s excellent book, Own The World, you’ll
know that he recommends investing in funds that can give you the
broadest exposure to different regions of the planet. There’s always
growth going on somewhere, and it’s rarely in the most obvious places.
Yet, your average Financial Adviser will rarely venture beyond the UK, the US and Japan. There’s so much
happening in other markets that you’d miss out on if you stuck with this limited world view. The problem
is, IFAs just aren’t familiar with the full range of options open to investors in 2014. Even the latest exams
they’ve had to take as part of the ‘Retail Distribution Review’ are more about protecting themselves from a
compliance perspective than helping you gain exposure to some of the most exciting markets in the world.
Ask Andrew – he’s passed the exams and not only confirms their limited value to investors but he found that
some of the ‘answers’ are technically incorrect!
So, as ever, the advice is to take personal ownership and make your own choices. So, with the BIG caveat
that I’m not authorised to give financial advice, let me share with you one of the best fund managers I’ve
found when it comes to implementing the ‘Own The World’ strategy. Quite independently, Andrew has also
nominated this company as one of the cornerstones of his strategy.
The company is Seven Investment Management, run by my old friend Justin Urquhart Stewart. They offer
two main categories of funds, multi manager active and Asset Allocated Passive (AAP). It’s the latter group
that are most interesting to me as they are effectively tracker funds giving exposure to a wide range of
assets without high management fees to pay for ‘star’ fund managers. The AAP funds now stand at more
than £1.5 billion under management, so Seven are able to create their own basket of holdings in many cases
which removes the need for paying third party ETF or tracker fees.
The AAP range gives you five further choices based on your appetite for risk. I’ll cover some of
the ‘model portfolios’ for different stages of life in the Elite Investor Club meetings starting in
October, so for now I’ll list the options and their main points of difference:
MODERATELY CAUTIOUS – This is around 35% invested in equities, 50% in bonds, 10% in cash
and 5% in other investments such as real estate and hedge funds.
Balanced – This is currently 56.5% in equities, 28.1% in bonds, 6.5% in cash and 8.9% in other
assets.
MODERATELY ADVENTUROUS – As we move up the risk spectrum, so the exposure to equities
increases. At this level there’s 75.9% in equities, just 9.9% in bonds, 4.3% in cash and 9.9% in
other assets such as private equity and real estate.
ADVENTUROUS – For those willing to take the most risk, the adventurous fund allocates 85.8%
to equities, nothing at all to bonds, just 1.1% to cash and 13.1% in other investments with the
majority in private equity and debt.
INCOME – Finally, for those who are investing for income rather than growth, there’s a separate
fund dedicated to income generating assets. Dividend yielding shares make up 29.2% of the
portfolio, but as you can imagine the majority, 56.3%, is allocated to bonds of one sort or
another. Just 4.4% is retained in cash, while 10.1% goes to other assets such as private equity and
infrastructure.
While these five headings give you the broad brush
categories, within each fund there are 20 to 60
specific underlying investments. And the allocation
to each varies across the funds. So, for example, the
Moderately Cautious fund has 12.7% in UK equities
while the Adventurous fund allocates 21%. There’s an
Asset Allocation committee that reviews these decisions
periodically and feeds in to the Investment Management
Team that makes the final decisions.
With a repeat of my caveat that I am not giving
investment advice, if you want to learn more about what
Andrew and I are investing in visit www.7im.co.uk
Since meeting Justin, Graham has invested in his funds
Find out more at www.eliteinvestorclub.com
Wealthwatch Newsletter OCT14.indd 15
15
09/09/2014 11:39:51
LAST word.
THIS IS NOT GOING TO END WELL
Early in September I gave a talk
to a roomful of 85 management
accountants at CIMA, the Chartered
Institute for that profession. I asked
how many of these professional beancounters managed their personal
finances with a proper budget. At
most, 25% of hands were raised. It
could be ‘Cobbler’s Shoes’ syndrome,
but if 75% of professionals aren’t
following a disciplined approach to
managing their personal finances what
hope is there for the population as a
whole?
My talk was about the scarily wide evidence of
financial illiteracy in the country, especially given
the new flexibility that the 2014 budget seems
to offer. It’s like giving a 17 year-old the keys to
a Ferrari without any driving lessons. Advice will
be optional and only when people are about to
retire. That’s about thirty years too late. A new
survey shows a 23% rise in insolvencies among the
over 65s in the last five years. The Money Advice
Service has identified a new category of senior
citizen and given it a predictably PC euphemism –
‘uncomfortable retirees’ i.e. those on an income of
£15,000 or less.
Last time you had a real pay rise,
these guys topped the charts…
If that’s what they are setting as the retirement
‘Poverty Line’, I fear the majority of the country
will start feeling that discomfort over the next
couple of decades. Here’s why. Two thirds of your
fellow Brits are not making any savings into a
pension, ISA or savings plan. Rien. Zilch. Of those
that have managed to salt something away, the
average pension pot size is £30,000. Go to an
online annuity calculator and you’ll see that £30K
buys you an income of £900. A year. Yes, you too
could soon be living like a King on £75 a month.
Oh, I almost forgot. The government will chip in
a state pension of £144 a week. That’s £7,488 a
year. Add that to your annuity and you’ll be rolling
in it with a total income of £8,388.
That’s about 50% below what the Money Advice
Service tells us is the ‘discomfort’ level for retirees.
‘At least they won’t pay any tax’, observed one
of the accountants drily. And, of course, there’s
a big fat assumption in there. That a bankrupt
government that’s already paying £1 billion a week
in interest payments on old debt will somehow
keep finding or printing the money to pay the
state pension that’s keeping you alive.
So, we have life expectancy marching on towards
late eighties/early nineties. We have incomes in
real terms that have not increased since T Rex
were topping the charts and tank tops were the
hot fashion item for men. We have two-thirds of
the population saving nothing and the rest with so
little that it makes no difference. How do you think
this is all going to end up?
There’s an URGENT need for financial education
for people in their 30s, 40s and 50s. The
government has missed the opportunity to
mandate the provision of that education. As I
launch the Elite Investor Club this month, my naïve
hope is that thousands of people will knock me
over in the rush to join. It’ll be like the start of the
Harrods sale as people leave their smart phones,
IPADs and TVs to elbow and jostle their way to the
front of the queue. Each one of them determined
to learn the secrets of creating a seven figure net
worth in the next decade or so.
Excuse me while I take another toke. Are you sure
this is tobacco? Mmm. It feels SO
good...
Copyright Wealth Invest limited 2014. No reproduction in whole or in part without prior written permission.
Wealth Invest Limited, 2 Eaton Gate, Belgravia, London SW1W 9BJ.
Disclaimer: This newsletter is provided for entertainment and education purposes only. It does not offer financial advice - anyone seeking to make investments must carry
out their own due diligence and make their own decisions or seek the advice of an independent financial adviser. Wealth Invest Limited, it’s offices and staff accept no
responsibility for the past, present or future performance of any investments mentioned in the newsletter.
16
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