All fall down
by Doug Brodie
It’s not just a country separated from the UK by a common language and different football rules. The US’ retail banks are not like ours - bust banks are not unusual over there. According to Forbes, since we entered the new millennium 566 US banks have gone bust, though Silicon Valley Bank seems to have stolen the limelight.
The contagion doesn’t spread our way; although Credit Suisse has also collapsed, that one is an unusual case but at the same time very unexpected. Badly run businesses need exemplary talented and strong-willed directors to turn them round, and that apparently wasn’t available in Paradeplatz 8, Zurich, nor in Taos, New Mexico when First Community Bank tripped up.
Etcetera, etcetera, and don’t let the media tell you otherwise:
Emulation, following or simply copying – we like to check out who’s doing a good job of running pensions so that we can benchmark ourselves and to see if there’s anything we’re missing.
Cash is king (just ask the board of Silicon Valley Bank)
You’d be forgiven for thinking that we don’t need cash anymore; my Cypriot barber was telling me the other week that he felt the dollar had run its course, that crypto currencies are here and will grow, and that non-western countries will simply shun the greenback to reduce the US’ influence in global affairs.
Normally we discuss Arsenal, so I was a little surprised by the latest chat. I didn’t mention the slight irony of a Cypriot barber talking about currencies – it’s now 10 years since Cyprus enforced a ‘haircut’ on bank deposits, with some large deposits being skimmed by around €3.4 billion. In 2003 Cypriot bank deposits were around €25 billion however by 2013 Russian deposits on their own in those banks were more than €30bn. And perhaps it’s only a Scottish slant on irony that noted that my barber has a notice on the wall saying:
… yeah, right.
Surely the relevant on the greenback’s strength is that China holds $859 billion, Japan holds $1.1 trillion and the UK has $668 billion. Much as they may complain, India holds $232 billion and Brazil’s foreign reserves are 80% in USD and only 5% in the Euro. The US economy pumps out $29.4 trillion per year which is more than China, Russia, Brazil and South Africa combined at $27.15 trillion.
News of the dollar’s death is clearly somewhat premature. Yes indeed, by next year China could indeed have overtaken the US – it’s interesting to see its jump in the league table since 1992 and the fall of the European powerhouses, Germany, France, Italy, UK and Spain.
Countries with the highest GDPs on earth in 1992, 2008 and 2024 (projected)
Image source: World Economic Forum
How to walk like a duck
Warren Buffett is now 92, and readers of this newsletter have seen the discussion he had with Jeff Bezos explaining the cause of many human investment errors being that people don’t want to get rich slowly. He hit $1m by the time he was 30, in 1960, having grown that from $140k four years earlier, investing with Benjamin Graham, his mentor. Five years later that had grown by 26x, but ten years later it had fallen back to ‘just’ $19m.
Buffett bought his house in 1958, before he was a millionaire, and that is the home he still lives in. In today’s dollars it cost him $330,000.
Personal wealth, on a daily basis, is having more money than you need, and Buffett certainly aided his wealth by not spending what he was making.
It works, and if your life satisfaction is your one house in your hometown, eating burgers and drinking coke then his is a path you could follow. If you were twenty-something again that is.
So spending all day every day taking investments very slowly and not spending what you’re making works as a method of accruing wealth. Oh, and he has a side-kick he worked with all his investing life so you’ll need a buddy with whom to spar, chew over, critique your investment decisions with. Charlie Munger is now 99, still working.
And then there’s the pension big boys: the largest pension scheme in the UK is the USS, the Universities Superannuation Scheme which has £90.8 billion under management. (Just as an aside, Buffett’s company, Berkshire Hathaway, has a cash pile of £103 billion). It invests 40% in listed equities and 28% in unlisted:
Image source: USS
It is geared – it borrows money just like an investment trust.
It has cash inflows of £3.3 billion to fund current annual payments of £2.2 billion in benefits.
Members pay 9.6%, employers pay 21.4%, total 31% of salaries.
It costs 0.29% to run the £90.8 billion.
Note – it invests long term, and it receives more in cash income than it pays out each year. That is a model we ascribe to – you can see from above that the income paid out to the members does need capital returns, it is funded by cashflows. It is cashflow that is the important bit to get right because if your numbers don’t add up, you will have to spend down your capital or cut down on lifestyle spending. This is why we focus on income investing – and if its good enough for 500,000 members of the USS we think we’re probably following the right path.
Quack.