Ask the Financial Writer - Robert Cole 

  

Ask the Financial Writer – Your Questions Answered by Robert Cole

You may remember our previous article, where we gave Trust Online readers the opportunity to ask financial writer Robert Cole a question on finance or the global economy.

Graduating from City University in London where he lectured in financial journalism for 11 years, Robert Cole has pursued a 21-year career in financial and business journalism.  Until recently he was the home News Editor at The Times and penned the weekly "Personal Investor" column in the Saturday Money section.  He has also written for The Independent, Daily Telegraph, and Mail on Sunday.  Robert is currently Assistant Editor at Reuters Breakingviews, the financial comment and analysis unit of the global news service. 

Thank you to everyone who submitted a question.  Those that have had their question answered below will receive a signed copy of Robert's current book “The Unwritten Laws of Finance & Investment”.

The questions and answers are:

Q. The unexpected crisis of the last decade has been the banking crisis in western economies. What do you expect the next unexpected crisis to be?

A. The thing about crises is that they often come as shocks, and therefore tend to take you by surprise. But the next unexpected crisis could involve China. Most people assume it will motor peacefully to ever greater economic strength. I do, too, really. That is the more likely option. But nothing is guaranteed: and a China crisis could bring world economic growth to its knees.

Other dangers? An almighty blow up in the Middle East that turns an Arab spring into a hydrocarbon winter? Residential property prices may have further to fall and gold is due a drop too. I do not like the look of bonds, either, especially sovereign European bonds.

All that said, I reckon you can prepare yourself for the unexpected, notably by remembering that debt usually makes financial crises intolerable. If you have modest and manageable borrowings and a diversified investment portfolio, you will probably survive most things.

Q. I was reminded recently of an old stock-market adage that "If you read about it first in the newspapers, it's already too late". In the context of your book "The Unwritten Laws of Finance and Investment", and as a widely published media contributor on these topics, how do you view the above old saying?

A. If you are looking to trade in the very short term, it is undoubtedly true that papers are pretty hopeless. Today’s day trades, almost by definition, are history by the time tomorrow’s news is printed. Even online editions quickly fall behind the curve. But if you expect papers to be useful for day-trade activity you misinterpret their purpose.

Papers give context: without broad knowledge of current affairs – financial and otherwise – you cannot hope to make sense of events that happen and trends that emerge. I think you need to be quite careful – there is an awful lot of rot written and spoken in the media. It is good to sample widely too. But in the final analysis remember what Sir Francis Bacon is widely thought to have said: “Knowledge is power.” On balance, papers will feed the reserves of facts you need to make sound financial decisions.

Q. Inflation seems to be on the rise today. How can the impact of inflation be incorporated into the investment appraisal decisions.

A. Inflation is the Big One. It sucks value out of money and makes everyone poorer. The danger of inflation is all the greater because it destroys value stealthily.

Nor should you assume that monetary authorities – such as the Bank of England - can bring inflation down. Hopefully they can, but interest rates are a blunt instrument and higher rates may not even get to the cause of the UK’s current difficulty with consumers prices. If higher rates mean lower inflation I’d be all for them. But taxes and energy are causing UK consumer prices to rise: how will UK interest rates bring them back into line? Higher inflation might be something we all have to deal with no matter what.

For investors the battle against inflation means holding assets that have income streams such as dividends, capable of keeping up with inflation. Capital value, without support from income, is most vulnerable. Shares and commercial property (and inflation-linked bonds if you can find them) are the things to have.

Q. The extraordinary remuneration paid in the world-wide finance industry makes one wonder whether the industry is sufficiently competitive - with greater competition possibly resulting in lower margins, lower returns on sector capital & less added value to be shared between employees & investors?

A. I quite agree. Sky high salaries are wrong on so many levels. They are rarely deserved, for one thing. They distract attention too: behaviour of bosses, workers, customers, suppliers and regulators can be warped in response to excess pay – just look at the mess bankers are in. As you suggest, sky high salaries also point to a fundamental imbalance in the market mechanism. People say that to attack these salaries is to attack essential market freedoms. But silly salaries actually point to an absence of competition: and vibrant competition is elixir in a healthy market and the best antidote to its excesses. Investors should exercise all the power they have to promote competition.

Q. Over the past 20 years my investment philosophy has been to concentrate on the management of a company or trust and its fundamentals in terms of long-term income and return on capital employed. I have done this sometimes at the expense of timing as I take the view that if a company is worthwhile investing in today, it is probably worthwhile investing in it in 3 months time. What are your comments?

A. There is a difference between price and value. The two should be about equal: but the market is not always efficient and market prices are sometimes higher, or lower, than the fundamental value. Financially, it can be a good thing to sell shares in good companies and buy shares in bad ones. On the whole, however, I agree with you. Companies that stack up with reference to the measures you mention – and maybe a couple of others depending on the asset in question – are the ones to go for. And no, it does not matter if you buy now or in three months. In fact one can and should insure oneself against nonsensical price volatility by drip feeding money into and out of markets wherever possible. At the same time, it is essential to keep a close eye all investments. Nothing is for ever. Even good, sustainable and sensible companies and trusts can change remarkably quickly.

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.  They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. No representation or warranty, express or implied, is made to the accuracy or completeness of the answers.