Books to restore financial common sense in 2023
What is a share price? It sounds like a stupid question — the answer to which is “the amount of money the market is prepared to pay for a share in a company on any one day”.
But that’s not enough of an answer. You must then ask why anyone would ever pay anything for a share. Sure, it represents ownership of a tiny fraction of a company. But then what? What can you do with the theoretical ownership of a few bricks, a tiny bit of goodwill, an itsy bit of an app or a few pipettes of pharmaceutical product? Absolutely nothing, of course.
As the late Robin Angus, one of the founders of Personal Assets Trust, has written: “a share in an operating company is by itself actually entirely useless.” An asset is only an asset if it fulfils one or more of three criteria: It must be capable of producing an income (income value), it must be useful (utility value), or a significant number of people must think that it has value for some other reason (conspiracy value).
Those that have only the latter two qualities are not of much interest to real long-term investors: Conspiracy value will all too often end up worthless and utility value disappears once used. The first is then the most attractive — which is why one buys shares. A share offers income value as it entitles you to a tiny fraction of the profits the firm makes and to the same tiny fraction of the price should it be acquired.
A share is, therefore, worth what its future income is worth to a buyer today. There is (very obviously) never an exact present-day value for anything (all forecasts of future income being uncertain), but the higher the certainty over future income, the more it should be worth. This is why we should value each unit of forecast growth in a startup or not very profitable company at significantly less than we do an established company.
I am telling you this simple stuff because in every bubble — when conspiracy value goes mad — large groups of people forget it. And in the wake of every crash — whether it’s crypto, tech stocks or country houses during pandemics — we need to relearn the basics.
If 2023 is going to represent some return to common sense (and I think it is), then one of the best Christmas presents you might give yourself this year is Angus’s anthology of his own writings — A Shared Journey: Extracts from Personal Assets Trust Quarterly Reports 1994-2021. It is gorgeously written, quite funny and jammed with pure investing common sense. As a bonus, you will find other books with utility value suggested along the way.
If you haven’t already, make this the Christmas to read D H Lawrence’s first collection of short stories, and focus in particular on The Rocking-Horse Winner. The moral of that story is there’s no such thing as free money. Anthony Trollope’s novel, The Way We Live Now, also gets an honourable mention for its fabulous description of one of the worst corporate boards of the pre-crypto era (the last few years have produced boards more awful than even Trollope could have imagined).
The next step in our post-bubble rehabilitation is to understand how we got here. One of the best books on this is The End of the Everything Bubble by Alasdair Nairn, one of the founders of Edinburgh Partners. He published it in October 2021 — that’s the kind of timing you don’t often see from fund managers. Next is The Price of Time by Edward Chancellor, the story of how negative interest rates, “the craziest innovation in finance” in 5,000 years, gave us one of the greatest asset bubbles ever, by taking out the anxiety (and hence care) that should be associated with borrowing. This is a must-read, even if it does not fit one of my main criteria for Christmas books: They should be light enough to read in the bath.
The Money Game by Adam Smith (actually George Goodman) does, however. I got a rather lovely hardcover first edition from the organisers of a symposium on the Market Mind Hypothesis at Panmure House in Edinburgh. But if you hurry you should be able to get a light paperback before the holidays are over. The Money Game was first published in 1967, but every word is as valid now as then. There’s much on the emotions and psychology of markets (“if you don’t know who you are, this is an expensive place to find out”), but those who are down 40% on their techy growth stuff this year should turn straight to Chapter 15 (The Cult of Performance) for a reminder of just how often conspiracy value confusion makes people poor.
The next thing you might want to read over the holidays is something rather different. I would never normally suggest spending downtime reading things written by Blackrock Inc Chief Executive Officer Larry Fink. But if you have not yet read his latest letter (ostensibly written to clients but designed for public consumption), it is time you did.
Fink has, says his one-time employee Tariq Fancy, made the world’s largest asset manager into a “political football”. While he’s not ESGfocused enough for some — in particular for those who add conspiracy value to stocks with high ESG scores — he’s too ESG-focused for others. In the US, some anti-woke politicians are pulling cash from Blackrock in protest of its policies. Rock. Hard place. But his January letter and recent follow-up missive show a way through: Blackrock will create systems to allow clients — “the true owners of the assets we manage” — the right to use their own proxy votes. If none of them like the way he votes to direct companies’ behaviour, let them do it themselves. This, he reckons, could give us a “new era of shareholder capitalism”. Bravo.
Finally, a note on what you do not have to read: anything on cryptocurrencies. You might have gone into last year with a touch of crypto FOMO, a feeling that you must read Bitcoin Billionaires, Digital Gold, The Age of Cryptocurrency and so on. By now, you probably don’t. Focus instead on reminding yourself of what gives an asset value. A bird in the bush is never worth as much as one in hand.