Back In Action

You may have noticed that as of last week, we are back to regularly scheduled, twice-weekly programming here at Banker On Fire.

Two weeks in Spain flew by. It wasn’t a relaxing holiday by a stretch – a toddler, an infant, and a stream of work emails and calls saw to it.

No chilling out by the pool for yours truly.

And yet, it was still a fantastic break and a great change of scenery.

Surprisingly, the first week of quarantine has whizzed by as well, courtesy of work, post-holiday life admin, and some outstanding items relating to the property we bought last month.

If history is any indication, the four months between now and Christmas will go by just as quick.

Next thing you know, you are taking stock of 2020.

Hopefully, with a sense of content and achievement, and not a wistful recollection of resolutions given up way too early and time wasted away too easily.

What A Difference A Year Makes

This time last year, I was busying myself with some financial housekeeping.

I recall feeling frustrated with only getting a ~1.5% interest rate on the money in my cash accounts.

Little did I know of what was to come…

Asset classes across the board are now firmly in Bizarro land.

I had to give my eyes a good rub when I saw that less than six months after the near-total Covid meltdown, the stock market has notched up a new all-time-high.

S&P 500 YTD Performance

Show me someone who saw THAT coming…

But in a way, should we really be surprised?

Relative Value

Sure, everyone is happy to point to the sky-high valuations of the S&P 500. I tend to agree.

A forward P/E of ~26 times sure seems a bit high, both on an absolute basis as well as relative to historical performance.

S&P 500 PE Ratio

One counterargument is that perhaps the market isn’t pricing in next year’s earnings.

It could well be looking beyond the near-term collapse in earnings and taking a view that in two, three, or even five years, everything will be grand.

I have to admit, I like that vote of confidence in the resilience and enterprising nature of the human race.

The other obvious question we need to ask ourselves is:

What are the alternatives?

Bond yields are hovering around the zero mark.

This means that the P/E ratio of bonds ranges somewhere between 200 times (i.e. a hundred quid worth of bonds divided by the ~50p of interest they earn) and infinity.

When you look at it like that, retail investors should consider ourselves lucky.

Assuming we can still score a 1% interest rate on cash, we pay *just* 100 times every dollar/pound/euro of earnings.

Faced with options like that, paying 26 times for a dollar of earnings generated by 500 (mostly) quality companies sure seems like a bargain.

Which, of course, is exactly what the Fed and other central banks had in mind when they unleashed an unprecedented quantum of monetary stimulus across the globe.

Suffice it to say, the trick worked.

Getting Real

If you still find the stock market too racy but don’t feel like sitting in cash, there’s really only one (credible) asset class you can turn to.

Real estate.

(Mostly) circumstantial evidence suggests that property values have yet to reprice upwards in the same manner as equities.

There’s a variety of factors at play here.

Liquidity is one of them. Buying a house just ain’t as easy as loading up on Tesla!

The other one is uncertainty around commercial property prospects in light of Covid.

The residential segment will probably hold up, but who knows what happens to all those offices and restaurants?

The third one is the pure logistical challenge of acquiring real estate in a pandemic.

Finally, there’s financing.

My sense is that the banks have certainly got the message around lowering interest rates.

At the same time, they aren’t exactly running down opportunities to finance new property acquisitions, especially on the riskier end of the spectrum.

I suspect all four factors above will ease over the coming 6 – 12 months.

Inevitably, this will lead to an influx of money into real estate as an asset class, and boost valuations even further.

Nowhere To Run

All of this leaves us retail investors in a bit of a bind.

Moving money around cash accounts in exchange for an extra basis point of yield is like trying to plug a gunshot wound with a finger.

You may prolong the agony but will still bleed to death, courtesy of inflation.

Bonds will give you the downside protection if the stock market corrects, but not much in terms of upside.

Long term interest rates

Hence, equities represent the only way forward for the majority of investors.

The good news is that some subsectors of the equity market will continue growing their earnings at a meaningful clip going forward.

Make no mistake, tech companies like Microsoft, Shopify, Slack, and Twilio will continue to do well. There’s too much wind in their sails.

Part of the reason investors are willing to pay so much for them is the expectation that these businesses will eventually “grow into” their multiples.

Equally, reversion to the mean suggests valuation multiples will come down eventually. This will create an offset to the earnings growth.

The problem is staying out of the market until that happens is a strategy with a negative expected value. Just ask anyone who went to cash in March.

The Best Investment

There is, however, one asset class I haven’t yet mentioned.  It’s you.

The obvious way to offset a reduction in risk asset returns going forward is to make more money.

Now, it may seem like a crass thing to say in an environment where millions of people are out of work. There’s no doubt that the next few months and years won’t be easy for a big swath of the population.

Those who still have a job should consider themselves fortunate.

Equally, every crisis presents an opportunity.

An opportunity to wipe the slate clean. To go back to school, or simply re-train.

To move cities and countries in search of a better long-term outcome.

And that applies to everyone.

In the few moments of peace and quiet I did get while on holiday, I identified three areas of personal development I am going to focus on starting in September:

1. Broaden my sector coverage at work

With all the disruption that’s going on, clients have been increasingly turning to bankers to help them navigate the new reality. It’s an opportunity I want to capture as I continue rising up the ranks.

There is an inherent investment of time and effort involved in learning about new industries and companies – and building up the relevant network of contacts.

That being said, I am confident it’s worth the effort.

2. Scale up our property investments

Yes, it’s time-consuming and quite frustrating at times.

And yet, not only it represents one of the pillars of our financial independence strategy, but it’s also an area I can see myself spending a lot more time in post “retirement” (whatever that means).

3. Continue growing Banker On FIRE

It’s been less than a year and a half out of the gate, but I am happy to say that this blog has been gaining some decent traction.

Earlier this summer, we had our first day with 10,000 pageviews.

As far as hobbies go, it can sure feel like a time-consuming one.

And yet, it’s a process I find it ever more enjoyable, in particular when I get to engage with readers in the comments section.

In addition, I am sure that in today’s world, a set of my newly-found digital media skills won’t go to waste.

The post-Covid world of high asset prices, zero yields, and ballooning government deficits isn’t an easy place to live.

The good news is that self-development is an option that’s always on the table.

Happy investing!

About Banker On FIRE

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

Find out more about me and this blog here.

If you are new to investing, this is a good place to start.

8 Comments

  1. Morning, yes the market cannot be looking at the economy in 6 or 12 months time. Once the furlough scheme (unemployment delay scheme) ends it’s going to be carnage.

    Not sure I agree people buying individual rental property is a great plan. The increasing inability to offset mortgage costs unless you buy/own the property inside a ltd company makes cash flow terrible.

    Right now there is such a back log of tenant eviction cases that it will take 18-24 months to clear it.
    A very illiquid asset where a tenant can refuse to pay the rent and there is nothing you can do.

    Personally picking some funds that hold property is a slightly more liquid way of investing in property. I agree it’s likely to bounce back but will take some time.

    • Interesting (and not in a good way) days ahead, that’s for sure.

      That being said, I am confident that the unprecedented monetary and fiscal support will continue – and thus support the equity markets. Too much money has been thrown at it already to stop now.

      As far as property, very valid statement in the UK context. The comments section on one of my earlier post is a great guide to the minefield that is BTL in present-day UK.

      I am, however, pretty bullish on the North American property market which is where I invest. Takes some searching but there are good deals, and cost of financing will remain low for the foreseaable future.

  2. Welcome back. Sorry to hear you didn’t exactly get a relaxing break away. Whilst I understand it, especially in your field, have to say I changed my approach on that the closer I got to retiring. Regardless, I do agree how time away is a great way to get perspective & refocus – some good areas there too, like it.

    I hear you on the “well, what else” view point. There’s so much money looking for a decent home that what once seemed unreasonable to accept as risk/reward becomes the new normal. To use an expression I’m becoming sick of hearing! The property one is an interesting one – I can see more exotic locations becoming more acceptable propositions, a little like emerging markets being accepted.

    Btw – 10,000 page views in a single day?! Seriously awesome & well-deserved, I enjoy your blog & the effort you put into it comes across. Congrats – good to hear you’re going to have it as a focus area.

    • Thank you!

      Yeah, disengaging is something I’ve got a bit of an issue with, though to be fair I’ve been getting better at setting boundaries.

      As far as asset allocation goes, sitting on the sidelines is simply not an option for me as it quickly gets into the market timing territory. So if I can find property investments that generate a 6% downside case and a ~10% base case return, I’m happy to allocate a meaningful chunk of my portfolio to them.

      And yes, blog traffic has been growing nicely, to the extent where I now feel like I’m letting people down if I don’t post twice a week 🙂 Thanks for the positive feedback!

  3. I completely agree with @FIRE and Wide, you absolutely deserve the views. Your blog is fantastic.

    I was actually missing the two posts per week. By now I am quite used to going on your blog first thing in the morning every Tuesday and Thursday. Despite this, I am happy to hear that you took some “time off” and please feel free to do so whenever you need it.

    As someone who just recently experienced the amount of time and effort it takes to write a quality article, I’m amazed that you are able deliver two high-quality articles per week. This is considering that you work in IB, have a family, still manage to read at least one book per month,you work out regularly and I assume you also have some social life. Hats off to you! You must be a master in time management (could be a great article on how you actually manage to do this).

    I just started out my career in Corporate Banking (not in the U.K.), where I have some heavy hours as well, but nothing close to London IB hours. Still, I am having difficulties reading more than a book per month, consistently going to the gym, spending enough time with girlfriend, friends as well as family, and I definitely don’t see myself being able to deliver two high quality articles (I barely make one). Time management is definitely something that I need to improve on.

    Just out of curiosity, given where the market is today, did you reduce your DCA number (dollar-cost averaging) and allocate more towards real estate instead, or are you sticking to the same periodic contributions as before?

    • Thanks Jon. Do you run a blog of your own? I would love to check it out.

      Not sure I agree with your highly favourable assessment of how much I actually get done 🙂 That being said, kids have a way of crystallizing your true priorities and forcing you to ruthlessly cut down on time-wasting activities. Besides, my hours are much better now (admittedly off a v. low base) than they were when I started – so there’s light at the end of the tunnel for you!

      I’ve maintained our regular contributions and loaded up our ISAs early in the tax year, which is what I always do. Given I don’t plan to touch our equity portfolio for another 15-20 years, the valuations today are pretty much irrelevant.

  4. Nowhere to run seems just about right – whatever happened to the recession that was supposed to come? Do we even count the one that just passed as one – I’d love to know your thoughts.

    • Unless there’s a miraculous recovery in GDP growth, a recession (as defined by two subsequent quarters of GDP contraction) is a given.

      It’s just that it probably won’t be accompanied by a stock market correction.

      An alternative view is that the stock market “predicted” a steep but short recession, reacted appropriately back in March, and is now pricing in a period of fast economic recovery.

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