Don’t you just love the Daily Mail?
Don’t you just love the Daily Mail?
It’s a reasonable bet that there will be some APM clients who read this august organ every day. Don’t be embarrassed! I’m not! They’ve got some excellent columnists. But you have to sometimes question the editorial slant. (I have a friend whose grandmother won’t leave the house after dark because she believes every word it says). It’s like their reporters are paid by the alarm quotient they inject into every article.
It was with absolute delight therefore that I came across the cover page of the Money Mail section yesterday. A huge picture of an angry bear, beside the banner headline: “Should you cut your losses and get out of Russia?”
The first question that came to mind was: “how many Daily Mail readers actually have investments in Russia?” That’s not in any way a comment on the readership. It is more a reflection of the esoteric nature of Russia as a target for direct investment. I was a Global Emerging Market stockbroker for 25 years and have been to Russia many times, and even I never made a direct investment in Russia.
It is my absolutely held belief that nearly everyone in Britain who has investments in Russia will do so either indirectly, through owning companies who do business there, or via investments into Global Emerging Market Funds. The article trumpets that “UK savers (sic – I’ll come back to that in a moment) have more than £700m in funds which directly invest in Russia”. Let’s get this into perspective. Barclays Bank’s bonus pool for 2013 was £2.38bn. (I’m not sure that’s a great thing either, by the way!)
I will highlight one or two more aspects of the article, for reasons which will become apparent shortly. The tone is set in the very first sentence: “Nervous investors selling out of Russian funds are having to face huge losses – or face a further hit to their life savings.” (my italics)
“Hundreds of millions more is invested through funds which take bets on emerging economies.”
One “expert” investment manager opines: “It could have a knock on impact on the global economy and stifle the economic recovery.” (You can imagine the editor’s eyes lighting up with delight at that quote.)
Another “financial adviser” helpfully suggests: “You may need to be able to deal with the risk that you may end up with a loss and the economic situation may improve a few weeks later.” (If anyone can tell me what that actually means, answers on a postcard please…)
The market doesn’t fall, it “plunges”; “shockwaves” are going through global markets, and so on, as the whole thing reaches its climax as “terrified savers pile their cash into”…GOLD! The coup de grace sees grain prices “rocketing”, and basically we’re all going to die.
So, I have two comments to make on all this, neither of which would refer to the inflammatory tone which of course we are all very used to by now. The first, is to highlight what I would simply call, poor financial journalism. “Savings”, are not “investments”. Savings are what you set aside for a rainy day. These are your cash deposits and cash equivalents. They are the liquid assets you might need to call on should you face what is now euphemistically termed a “liquidity event”.
Investments are what you pledge in expectation of gain OVER TIME. You weather the “slings and arrows of outrageous fortune” with your investments. You expect gain, but you do not expect it immediately, and you are prepared for “a bit of a ride”. You don’t want the money back tomorrow.
The second point I would make, is that investments are NOT, EVER, simply “bets”. Bets are made in the HOPE of gain, but the expectation of loss. Unless you are a total loser, when you might expect to gain more often than you lose. Las Vegas’s very existence is predicated on this simple fact.
If “hundreds of millions more is invested through funds which take bets on emerging economies”, then you should be sacking the investment manager.
So, what has all this got to do with investing in Fine Wine apart from the observation that it would be really quite difficult to get Money Mail to spend a whole page talking about it, unless something nightmarish had happened like another phylloxera epidemic?
What a sensible commentary would have done, instead of try and scare the pants off anyone of a sensitive nature, would have been to highlight the simple investment fact that prices can go down, as well as up, and in certain cases the degree of volatility will be much greater than in others. Emerging Markets tend to be more volatile than Developed Markets.
Diversification
The best way to guard against this is by diversification. This is the way sensible investors approach the subject. Diversification helps to manage the risk profile of a portfolio. Management of risk is the single most important aspect of any investment process. If you are blind to risk, you are open to loss. In Fine Wine terms, if you invest £100,000 you can either have a balanced portfolio of 25 or so wines across a wide variety of vintages, or a single case of 1996 Domaine Romanée Conti. These are the polar extremes of the risk spectrum.
This is the reason that a purchase of a single £3,000 case of Fine Wine is really quite a high risk investment. The tendency is for people to think that it is low risk, because it is low outlay. But in fact it is high risk, because it is polarised.
At APM what we try to encourage is for investors to take a balanced view. We are not trying to get people to spend more than they can afford. We are trying to get people to become more aware of what they are doing, and the implications of the investment decisions that they take.
All the best,
Philip Staveley
07.03.14