The 'home bias' error in investing
🔸 Plus: The Trump auditor who keeps misspelling his own name 🔸 Record prices of for gold 🔸 "Weather derivatives" get bigger as the weather gets more extreme 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,187.70 ⬆️ 9.38%
FTSE 100: 8,313.67 ⬆️ 8.24%
Bitcoin: $62,322.20 ⬆️ 40.99%
GBP to USD: $1.2489 ⬇️ 1.87%
GBP to EUR: €1.1617 ⬆️ 0.74%
Don’t get hung up on UK stocks
The London Stock Exchange has taken a battering this year. Half a dozen of its biggest names have said they want to leave the UK, or are considering doing so.
The most recent was Flutter, the bookmaker that owns Paddy Power and Betfair, which said it will move its stock listing from London to New York. Among the others:
Tui (travel) - moving to Germany.
CRH (construction) - moving to the US.
Invidior (pharmaceuticals) - proposing a move to the US.
Ocado (groceries) - considering a move to the US
Shell (energy, oil) - considering a move to the US.
Darktrace (cybersecurity) - being taken private by a US company.
It’s humbling, from a reputational point of view.
London was once the financial centre of the world. But that was a long time ago. The reality is that the London Stock Exchange is currently only the 9th biggest globally.
We look cheap
The US, Europe, and China all offer stock markets that are much bigger. And while there are few meaningful barriers to buying a stock listed in another country, investors tend to pay more attention to stocks listed in “their” country.
That’s why UK companies are generally underpriced compared to American ones. There are fewer investors here offering to buy our stocks. We look cheap by comparison.
It makes British companies vulnerable to foreign takeovers. Darktrace is probably one of Britain’s most sophisticated tech firms. It is about to be acquired — i.e. taken off the public stock markets — by a US private equity firm for £4.3 billion. If Darktrace were American it would be worth many times that amount, simply because more investors, with more money, would have heard of it.
If you’re running a big, global company you want your shares to be available to the biggest, deepest markets, it’s no wonder that companies move from the UK to the US.
Home sweet home (but not for investment purposes)
From the point of view of an investor, particularly a British investor, there’s no cause for concern. It’s as easy to buy a US stock as it is to buy a British one.
Unless, of course, you’re making the mistake of assuming that your own country is somehow the best or safest place to invest.
It’s an easy error to make. The FTSE 100 hit record highs recently. If you’d bought into it a long time ago you’d now look like an investing genius … maybe.
But as the above chart shows, the FTSE has lagged US stocks (the S&P 500, the primary index of major American companies) and global stocks (the MSCI World index, a popular index of about 1,500 stocks from 23 developed countries).
These charts from Fisher Investments show why that is:
The lefthand chart shows the market value of all stocks divided by country. The UK is only 4.3%. The US, notably, is 68%.
So if you are only invested in the UK you’re missing 95% of the rest of the market. Where are the winners most likely to be? There’s a 95% chance they’ll be outside the UK.
Britain lacks tech stocks
The righthand chart shows the industrial sectors that make up UK stocks. Notably, if you’re betting on Britain you’re overbetting on “consumer staples” (food) and “financials” (banks and insurance companies). And you are massively underbetting on “information technology” and “communication services” (tech stocks).
By comparison, tech stocks are about 20% of the MSCI World Index. In the S&P, they are 40% of the market.
Tech stocks are important because software companies can scale their operations faster and more cheaply than industrial companies that make physical stuff. A company launching a new app can double its consumer base without the need to double its staff — and quickly double its profits. A company selling physical goods can’t do that. That’s why tech stocks outperform analog stocks.
Nonetheless, maybe you don’t want your financial future in the hands of Joe Biden and Donald Trump?
Fret not!
“American” stocks aren’t all that American (as the number of British names among them indicates). Roughly 40% of the revenues generated by S&P 500 companies come from outside the US. So you’re getting plenty of global exposure, as well.
That’s why Moneyin2’s general advice for anyone investing to secure their financial future is this:
Put 60% of your money into an S&P 500 index tracker or exchange-traded fund (ETF).
Put the other 40% into a fund that looks like the Nasdaq (a tech-heavy index).
Leave it there for the long run.
No need to worry about the FTSE or the London Stock Exchange.
And for dessert …
Trump Media’s auditor keeps misspelling his own name. Ben F Borgers of the accountancy firm BF Borgers has filed official documents in which his name is spelled Ben F Brogers, Blake F Borgers, Ben F Vonesh and (not making this up) Ben F orgers. The US SEC recently shut the company down, alleging “massive fraud”.
“Weather derivatives” — contracts that pay out if your company is hit by the “wrong” weather — are now a $25 billion business as meteorological conditions become more extreme.
Record prices of gold are being driven by demand in China. It’s a sign that Chinese consumers are worried.
The average British worker would be £10,400 a year richer if wages had stayed on their pre-pandemic growth trend, according to an analysis by the TUC. That’s a loss of £200 a week, the union group claims.
Brexit is hurting British florists because they can no longer move truckloads of flowers across the channel quickly enough.
Sarah Butcher is reporting that an associate at a US investment bank died after working 120-hours a week four weeks straight. Neither the bank nor the deceased have been named.
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Photos: Matt AJ via Flickr; The Liverpool School of English via Flickr.