Economic Tricks - The Ibiza Mix

In January 2002 only 4 months after 9/11, investing in shares still didn’t look like a great idea.  The Dotcom bust in March 2000 had done terrible damage to investor sentiment never mind their wealth.  You may not remember it now but most world stockmarkets fell over 50%, with the U.S. NASDAQ down 78% before the dust finally settled.  Apple shares belonged to the infamous “95% down Club”.  Ouch.

So that January wasn’t a great time to be presenting to hundreds of Mail on Sunday readers about investment at their London Money Show.  I must have done OK though because five months later I was asked to Barcelona to cheer up the newspaper’s management at their Annual Conference.  To talk about what?  Economics they replied.  “But I’m a cheery soul” says I.  Good came the response.  Just give an optimistic message as you gave in London.

Problem was their event was in October and I’d already booked a fortnight break then in Ibiza.  But if they were flying me from Scotland why not a shorter hop from Ibiza?  Done.  Now I had a few months to think about the presentation.  I had an idea….Ibiza.  Perfect.

I first visited the island in October 1977.  Those were the Island’s hippy days.  A beautiful Mediterranean paradise, it wasn’t difficult to get hooked.  And yet in 1994 when I met Fran my second wife and asked her to come on holiday with me to Ibiza she wasn’t keen.  Ibiza?  She replied incredulously….. “why would you want to go there?  It’s full of tattooed yobs, druggies, drunks, fornicators and clubbers” she assured me.  (I was unaware accountants went there).

“Really, so why would I have gone there all these years with my kids and owned a home there from 1982 if it was that bad?”  Had she been then?…. “Well no, but I do read the newspapers.  And I saw Ibiza Uncovered on the TV and the telly doesn’t lie.”  Oh really.  Let me tell you folks what Channel Four did before making that programme.  They asked permission from the Island Government to film a series showing the Island’s beauty.  Then they went there and paid teenagers to get drunk and boast about their sexual conquests on camera.  Fact.

So if the media can do that to one of the world’s most beautiful Islands that you can visit, see, touch, smell and feel, what can they do to intangibles like Economics and Investments?  Hence the presentation “Economic Tricks the Ibiza Mix” was born.  In it I compared the fiction about Ibiza to the scary stuff dreamt up by pessimistic economists…. the ones the media typically quote.  You’ve probably heard of the young lady who, when told she only had 6 months to live her doctor suggested she marry an economist.  Not that she’d live any longer it would just feel like it.  A dismal bunch at the best of times.  If all the economists were laid end to end round the world not only wouldn’t they reach a conclusion, 65% would drown.

The presentation went down well, helped no doubt by the music and surprises embedded in it.  When the word economist appeared on screen a loud thunder crack was accompanied by the Grim Reaper.  Kept them awake it did.  Attendees came up to me afterwards to say they’d decided to hang on to their shareholdings instead of selling them.  Bet they’re glad they did. From then to June 2007 the FTSE Index doubled.

What’s this all got to do with now?  Well on Saturday coming I’m presenting the latest updated version of the “Ibiza Mix” at the Master Investor Show in London in front of a few thousand investors who are most probably far more interested in what super investor Jim Mellon has to say.  This time round I’m just a warm up act.  But at least they’ll be entertained with music, surprises and some simple analogies explaining how to invest well without anxiety. 

Today we live in a world of short termism, information overload and constant interchanging problems that “they” tell us will bring our economy to its knees.  Meanwhile far too many are obsessed with mobile phones/latest gadgets and convinced a looming mortgage rate increase will dump them into poverty.  My generation, the Baby Boomers, are apparently to blame for all current economic woes.  We had it too good they say.  So how did we manage to save for retirement with double digit inflation rates, high taxes and mortgage rates that swung crazily between 9% and 15% pa?  Plus we had to pay back the capital we owed.  No Interest-only 1% or 2% liars loans back then.  No Panama manoeuvres either.

But generally generations don’t change in the way they live their lives financially.  In every generation only a few it seems create sufficient wealth by to live in financial comfort in later years.  It’s been estimated only 4% manage it.  Research among the terminally ill tells us one of their biggest regrets is not saving enough.  Yet it’s not that difficult.  But today the average pension pot on retirement is below £50,000.

So on Saturday I’m going to share what I’ve learned since becoming an IFA in January 1973.Quite a baptism then by the way.  From Oct ’73 to late Dec ’74 the FT All share Index fell 73%. Pure coincidence though.

First up will be the Latin motto of the Royal Society formed in London in 1660… Nullius in Verba, which roughly translated means “don’t just take their word for it, check for yourself”.  (Try it out on Ibiza, have a look at the website for boutique hotel Atzaro.)  What do you believe to be true that’s false?  Example… GDP.  Every week the media obsesses about the latest GDP figures and investors panic sell or greedily buy in response.  In the US new research has established initial GDP estimates from 1990 are constantly significantly wrong….  Shock horror.

Next up its Broccoli versus Chocolate.  My way of reminding investors that setting long term meaningful goals is superior to following short term fads.  That disciplined investing rather than emotional knee jerks is the only way to create real wealth over a lifetime.  Did you know that over 97% of Warren Buffett’s wealth was generated since he was 50?  Hope for us all yet.  He must have known before me about The Rule of 72.  Another wee secret.

A Deserted tropical Island forms the backdrop to a simple lesson in Supply and Demand, and why you need to be contrarian to find undervalued investments shunned by the herd.  Three bricks explains why a trend is difficult to spot, and showing the human brain with a tiny embedded Amygdala (panic button) which evolved over many thousands of years surviving dangerous savannah lands reminds us why it’s almost impossible to remain unemotional in the face of constant bad news headlines.

Then we look at how Stockmarket Indices are formed (and skewed) by revisiting the Normal Distribution Curve, and why spending time searching for the finest fund managers makes sense.  Barcelona as a team of investment managers is a better bet for superior performance than a Barnsley equivalent.  And finally it’s significant, is it not, that ALL successful sportsmen and women, despite their natural talents employ coaches to improve their performances, especially specialist coaches.  Dave Stockton for example is THE top putting coach in the world.  So if you want his expertise you have to go to Arizona.  These folks don’t come cheap.

And that’s the process I’ve learned over the years since the depths of despair in 1974.  Over the years it’s stood our clients in good stead.  Especially over the last seven years when your returns have left “cheap” Index Trackers and “Passives” trailing in their wake.  Broccoli not chocolate.  Nullius in Verba.  Rule of 72.  Coaches.  And the odd bit of luck.  Hope mine holds up on Saturday.