Read to succeed
Investing Through the Looking Glass
A rational guide to irrational financial markets
by Tim Price
Book review by Richard Gill
"We're all mad here..."
The Cheshire Cat, Alice in Wonderland
A Mad T(-Bill) Party
The basic premise of Investing Through the Looking Glass is that, following the financial crisis of 2008/09, and the resulting bank bail outs, quantitative easing, bond bubble, zero interest rate policies, explosion in government debt and so on, the financial markets have become unbalanced and flooded with delusional behaviour.
Just like Alice experienced in her journeys into Wonderland, the world doesn't appear to be how it should it be. And while there are always people to guide investors along the way, such as fund managers, financial journalists and other 'experts', their advice can often turn out to be as useful as the Mad Hatter's.
So to help investors find their bearings in this strange new world author Tim Price lays to rest a number of investment myths, combining his contrarian mind-set and alternative way of thinking to explain exactly what is going on. Price is a well-known investment commentator and fund manager with over 20 years' experience in the markets. He worked at various investment firms, including Paribas Capital Markets and Merrill Lynch International, before moving to Union Bancaire Privée where he was chief investment officer, global strategies, managing over $1 billion in an absolute return programme or institutional clients. He currently works as director of investment at PFP Wealth Management and is also the manager of the VT Price Value Portfoio, a value focussed fund which invests in the style of Benjamin Graham.
As the chart below shows, the fund has done well since launch in June 2015, growing in value by over 30% and outperforming the data vendor's bench mark by a decent margin – the fund itself does not compare its own performance against an index. Admirably, (and I have not been paid to say this) the fund has no entry fee, no performance fees and a management fee of just 0.75%.
After a brief introduction on how the financial markets got into their current senseless state, the core text of the book comes in two parts. The first part, which further grows Price’s reputation for being a bit of a doom monger, covers the problems facing today's investors.
Over seven chapters he examines questions such as: are bonds low risk assets to be held for the long-term; does the financial media exist to help investors make sense of the markets; and can fund managers deliver an edge in the markets and deliver the best return for investors?
Each "problem" which is the basis for discussion in part one's chapters is framed as a "delusion". These are written as a simple one paragraph statement, a statement which in recent times has often been considered as a fundamental fact of the financial world. For example, we kick off chapter one with, "commercial banks are an essential part of the modern economy", a proclamation that many economists would have been supportive of over the course of history. Then Price brings in the "reality", in this case arguing that commercial banks have grown greedy and that, while banking itself is essential to a financial system, banks themselves are not indispensable, especially as new technologies are developed and take hold.
My favourite chapter, and perhaps the one most interesting to equity investors, looks at the delusion that stock markets always rise over the long-term. Price argues that returns from equities over time are a lot more variable and modest than you might think. He illustrates this with some interesting data which show that annualised 20-year returns for the UK stock market, going back to the year 1700, have averaged round about.... zero!
The second part of the book focusses on the solutions to the problems faced by investors today, with Price providing practical guidance to readers via three detailed chapters so they can preserve and grow their capital in what he calls,"one of the most challenging investment environments that anyone has ever seen".
Unsurprising given his background, Price's first solution is value investing. He debunks the myth that the investment style favoured by legends such as Benjamin Graham and Warren Buffet is out of date in the modern world and argues that value stocks currently offer unusual appeal. However, given asset inflation caused by quantitative easing, investors may have to look farther afield to find such stocks – perhaps as far as Asia, and Japan in particular. Price is also a fan of gold, arguing that the precious metal, seen by many as being a barbarous investment relic, is important for preserving purchasing power. Fiat currencies – including those such as the pound and dollar – (which are declared by governments to be legal tender and are unbacked by a physical commodity) have plunged in value over time. The US dollar for example has lost over 98% of its purchasing power over the last 100 years. But gold has been seen to hold its value over thousands of years.
Overall, Price sees gold as an insurance policy against breakdowns in the current financial system, with both physical and gold focussed equities recommended.
The book finishes with a useful appendix named the Modern Investor's Manifesto, a list of 99 statements and observations which the author believes describe the state of the current financial system and the challenges facing investors.
The Price is right
In Investing Through the Looking Glass Tim Price has produced a thought provoking and entertaining guide for anyone concerned about their financial future. It is highly relevant to today's market where investors need to stand up for themselves in light of the irrational actions of central banks, governments, regulators and all those other parties who are supposed to be looking after their best interests. Written in an informative and educational style, and packed with stock market history and anecdotes, this is an essential addition to any investor's library.