Andrew Smithers


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Andrew Smithers founded Smithers & Co. Ltd which provides economics-based asset allocation advice to 80 of the world's largest fund management companies. He is a columnist for London's Evening Standard and Tokyo's Nikkei Kinnyu Shimbon's Market Eye .

Books

Valuing Wall Street , (with Stephen Wright), McGraw-Hill, 2000

Japan's Key Challenges for the 21st Century (with David Asher), published in Japanese by Diamond

Protecting wealth and valuing the stock market

  1. Never delegate asset selection.

    Your interests, as the investor, are different from those of your broker or fund manager. It's not their fault; it's a fact of life. In the case of the broker this is obvious. You both want to make money. The more you deal, the more money he makes and, as a general rule, the less you do. But your fund manager also has different interests from you. As I write [July 2001], Wall Street is over-valued by about twice. The risks of the stock market falling over the next 12 months are around 70%. No one who understands this would put his money into shares. But for a fund manager the risks are different. If he goes liquid with his client's money, he has a 30% chance of damaging his business and possibly losing his job.

  2. Learn how to value the stock market.

    Remember that price matters. Anyone who tells you that it's always sensible to buy stocks is dotty. It's a sign of the times. No one said this in 1932, which was a wonderful time to buy stocks, but lots said it in 2000 which was a lousy year. Remember it can take you up to 20 years to get your money back even from a badly timed purchase of an indexed fund, and individual companies go bust. It's quite easy to know when share prices have gone too high. In a competitive economy, everything from toothbrushes to computers sells for what it costs to produce. The same is true for companies, though their prices can be above or below cost for several years. This is the problem. Sensible investors can have a bad time at cocktail parties for several years. They will get out of the market too soon in the bubble years. There is no answer to this. If there were, the stock market would never get over-priced. Sensible investors can't be greedy or boast at parties. (This doesn't just apply to bull markets. Humility is valued in those rare bear market parties).

  3. Know your aims.

    Think carefully about what you want. If you are saving for a comfortable retirement, remember that when you invest. Don't forget to diversify - concentrated portfolios have huge risks. It's different if you think you are rich enough to retire and have made some money. Then you can have fun trying to pick winners. Unless the market is generally over priced (remember Rule 2), this is rather like playing the tables at Monte Carlo, but with odds in your favour. Instead of being certain to lose if you play long enough, you should win and you could win a lot. It's not very sensible, but if you want to have an outside chance of riches it's better than anything else on offer.

  4. Remember your age.

    If you are aged 30, stocks will normally be the right asset class for you. Even then remember Rule 2. If you are 70 it won't. Concentrate on TIPS (Treasury Inflation-Protection Securities) or cash. For ages between 30 and 70, the proportion of TIPS and cash should rise steadily. Over 10 years the real return on 10 year TIPS is virtually certain, but stocks can give big losses. At 70, 10 years is a lifetime.

  5. Understand risk.

    Stocks are highly volatile and therefore very risky. They are less risky over the long term than over shorter periods. In addition to the normal way that risks even out over time, there is an added reason for this. It is because their long- term returns tend to 'revert to a mean'. After periods of low returns, the next period has an above average chance of being a good time to hold stocks. Equally after a good period - and the last 20 years have been phenomenal - it is a bad time to hold stocks.

  6. Costs are important.

    Investors nearly always underestimate the importance of costs. The longer term your investment horizon, the more important this is. Over the long term, the real return on stocks, before tax or expenses, has been around 6.5% p.a. So if inflation runs at 2.5%, the nominal return that an investor can reasonably expect is around 9%. If you get this over 30 years, and start with $200,000 you will have $2.6 million at the end. If your costs come to 2% p.a., which they easily can, you will only have $1.5 million.

  7. So is tax.

    This is even truer of tax. There are ways in the US and UK for investors to save tax-free for their retirement. If you paid tax at 30% every year the investor who would have got $2.6 million will only receive $1.25 million. If he paid 2% costs he would only get $700,000.

  8. Get interested and enjoy it.

    This is a hard world where professional investors' interests are in conflict with yours. Understanding investment pays better than trust. Those who enjoy learning are those who do it best. If you can, get interested; if you can't, get out.

www.smithersandco.co.uk

'Many investors try to place buys with limit orders just below the ask, and wind up missing the purchase. If you really want a stock, particularly a big position, place a limit order at the ask, or even slightly higher. You will at least get the order. Don't miss the train to shave a dime.'

”Robert V. Green



Global-Investor Book of Investing Rules(c) Invaluable Advice from 150 Master Investors
The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors
ISBN: 0130094013
EAN: 2147483647
Year: 2005
Pages: 164

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