28 Aug 2019

Anyone who cares to investigate can discover that the equities that you probably own directly or through your pension scheme are equitable only with each other. Benjamin Graham, the so-called father of modern investing, called them “common shares” which is a better clue. When a company is wound up this typically means that it has run out of money and run out of people who will lend or give it more cash. Equities represent any surplus assets that are left when all other creditors have been paid off. Every other creditor ranks above the owners of the common shares. First are secured creditors like banks or bondholders who have lent money on fixed terms. If the company defaults on those terms it can be forced into formal insolvency, though sometimes the secured creditors will accept equity in return for a further cash injection, if they judge that their best chance of getting their money back in the end is to keep the business going. In those circumstances they will be issued shares on such favourable terms that existing equity investors are diluted to the point of worthlessness. This is happening now in the case of Thomas Cook. After secured creditors have been paid in full, anything left goes to so-called preferential creditors, including employees, and then to the luckless trade creditors and HMRC. You can infer that common shareholders will usually be completely wiped out. Unsurprisingly, people who invest in equities very rarely think about the risk of insolvency and losing all their money. We all dream of the day when the theoretical value of those surplus assets explodes upwards. Bond holders may get their money plus interest back but as Benjamin Graham pointed out many decades ago, common stocks have “a far better record than bonds over the long term past”. It has widely been accepted as a fact that equities are the answer for a long term investor. Cautious share owners look for sustainable dividends that can rise as the company grows; the more optimistic hope for rising share prices as well. Those are the two elements that drive the long-term performance of common stocks observed by Graham. But stock market investors...

2 Sep 2017

Who is in the room containing those who are supposedly negotiating the terms of Britain’s exit from the EU? We seem to have sent a team of men (mostly) who are used to attending meetings without trousers which is perhaps appropriate.  The Europeans are fielding another team of men (mostly) who are seemingly permanently “flabbergasted” and like to talk about the conditions for talks about talks. Were they to remove their trousers you can be sure that they would be wearing a second pair underneath. But what is that large white quadruped that keeps sticking its proboscis where it’s not wanted? It is the elephant in the room and its name is sadly not Donald the Tusk but Erich the Euro. Here is a picture of Erich, trumpeting towards his glorious target of parity with the pound (the chart runs from 2014 to this week – click to enlarge).   No one knows for sure why currencies move against other currencies. To listen to analysts and other commentators you might imagine that it is quite obvious, in retrospect if not in advance. This is largely tosh. The best answer is the one that I heard every day when I worked on the floor of the London stock exchange: “More buyers than sellers, mate”. THE REASON FOR CURRENCY MOVEMENTS IS UNCLEAR AND UNIMPORTANT Looking at the elephant picture it appears that there have been more buyers of euros than sellers. In 2015 there were more sellers than buyers. Remind me, why was that again? There just were! Okay, okay. I suppose that Brexit uncertainty and a slowing top-end property market (yes, they might be the same thing) have caused foreign investors to buy less sterling this year. You might just about persuade me that others have been buying euros in preparation for opening new offices in Budapest, Valletta and Clermont Ferrand. But currency movements have real effects, though they take time to play out. There has been a 40% increase in UK tourists to Greece this year (doubtless fuelled partly by aversion to Turkey – people prefer oppressed governments to oppressive ones, it seems). As I write, these tourists will be asking themselves why Greece...