Transforming personal finance since 2011

#44 — Zoom out. See the big picture.


June 21st, 2019

By Andrew Craig

Reading time: ~ 7 minutes

I don’t think that it would be particularly controversial of me to say that there has been a great deal of negative press about investment recently. There has been even more than usual - and that is saying something.

This has been as a result of the very public problems faced by Neil Woodford - one of the UK's leading fund managers of the last two or three decades.

For those who may have missed this story, or don't know who he is: Until the relatively recent past, Mr. Woodford was one of only a handful of people who could have reasonably been described as "Britain's answer to Warren Buffett."

If you had invested £10,000 into his funds in the mid-90s, you would have had nearly £350,000 by about two years ago. During 25 years at the fund management group Invesco, he famously avoided the worst of dot.com crash of the late 1990s and the financial crisis of 2008/9 and churned out many years of high returns.

Source: BBC

As a result of this pretty stellar track record over such a long period of time, he became one of the biggest names in UK investment and one of the very few near-household names from an industry which has very few of these.

In April 2014, he left Invesco to set up his own fund – Woodford Investment Management. Given how high profile a name he was, he was able to attract a large amount of money into that new company very quickly – more than £10 billion in fact.

Sadly, in the recent past, he has been caught in a veritable perfect storm of bad news and negative press. This has resulted in a self-fulfilling downward spiral which is still ongoing as I write.

A city grandee who I am lucky enough to know reasonably well described the situation to me over coffee recently with an excellent analogy:

“If 100 people were in a life-boat and a large wave washed over the side of that boat, this wouldn’t necessarily be sufficiently problematic to sink it. If, however, all 100 people in that boat were sufficiently panicked by the wave to run to one side to avoid it, the boat would very likely capsize and sink.”

I think this describes the Woodford situation reasonably well. He has had a couple of years of weak performance, that is undeniable. But I would argue that this has been much more of a problem for him than for vast numbers of other fund managers throughout history who have performed significantly worse over the same time frame or even longer. He has been a victim of his own success, front and centre.

The trouble with being a ‘star’ who has walked on water for decades, is that there is far more attention focused on what you are doing. A relatively low-profile fund manager who gathers assets slowly and surely over a long period of time would be a great deal less likely to endure what Mr. Woodford has just had to endure in the event that they suffered two years of bad performance.

The problem with having a massive fan club and most of the financial (and even more mainstream) press watching your every move, is that you are likely to secure investment from “fast” money. And the problem with fast money is that it tends to be even faster on the way out than it was on the way in.

I am not saying that Mr. Woodford's company has been blameless, but I do think that his travails have a great deal to do with a number of factors that are being largely ignored by the febrile and witch-hunty atmosphere we find ourselves in these days.

More than meets the eye (as usual)

I firmly believe that his problems have had more than a little bit to do with changes in the way finance and investment has been regulated in the last couple of years – particularly something called MIFID2. These changes have fundamentally changed the market in the sort of smaller company shares that have got Mr Woodford in trouble in the last couple of years and it is no coincidence that his problems began at roughly the same time that this new legislation came in. As I have pointed out above, they were then compounded fiercely by his being so much in the public eye.

I hope to write more on this subject in future, on the specifics of what has happened and how little of it seems to be making it into the mainstream press, but today I want to move on to my bigger point – namely how important it is for your ability to succeed financially in the long run to zoom out and consider the big picture when facing these sorts of situations.

How to ensure these sorts of news stories don’t make a mess of your finances

By now, regular readers of these posts should be familiar with a theme that I have returned to on several occasions: The fact that human beings are hard-wired psychologically to focus on the extraordinary (and negative) to the exclusion of the unremarkable (and positive). Journalists are particularly prone to this phenomenon given that this is what sells cop and generates clicks.

Why is this important when it comes to being a successful investor or making the very best of your finances? The answer is because all this bad news and the fear that results from it is one of the key reasons that so few people succeed in investment.

Last week I attended an event where a senior PR professional was telling me that they estimate there have been more than 1,500 pieces of negative press about Mr. Woodford, just in the previous two weeks.

…and it isn’t just Mr. Woodford who has been dragged through the mud: The story has bled across to impact a large number of other players in the finance and investment industry, including huge companies like Hargreaves Lansdown and St. James’s Place.

It has also reached Westminster, with MP Nicky Morgan, Chair of the Treasury Committee, getting involved and writing to these companies and to the regulator, the Financial Conduct Authority. (You can see her letter here).

A decent number of people have got in touch with me since this Woodford story has emerged to ask what it all means and what they should do with their investments. Do I still think ISAs are a good thing? What about pensions? Do I think they should switch their money out of funds and into cash, gold or even bitcoin?

I would stress that I get these sorts of questions pretty regularly whatever is going on, but the cadence / number has certainly increased in the wake of this Woodford story. This reality is what has driven me to write today’s post.

Zoom out. Big picture. Long game.

…and what I want to say about this is that I cannot understate the importance of the big picture and the long game when it comes to investment and, more importantly, investment success.

This Woodford story is a big story. Brexit is a big story. An ongoing ‘sort of’ trade war between the US and China is a big story.

But, truly, if you were to go back through every single year since journalism was invented, you would realise that there are similarly ‘big stories’ week after week, month after month and year after year. Every year. Without fail.

Your best reaction to this – if you want to succeed at investment at least – is to ignore all of these stories completely... Truly!

As near as we can calculate it – the world economy as a whole was worth about $32 trillion in 2000. In the following 15 years, we had the ‘cataclysmic’ dot.com crash and then the global financial crisis of 2007-2009 and countless other terrible news stories about war, famine, terrorism, global warming and on and on. Yet by 2015 the world economy was worth about $85 trillion – i.e. about 165% more than in 2000.

Cars are better. Planes are better. Smart phones have been invented. Global travel had massively increased. Hundreds of millions more people had been lifted out of poverty and the world is the most peaceful it has ever been by some margin. The list of positive developments is remarkable but few if any of them ever make it into our news.

Anyone invested in this reality has done extremely well. I would argue that anyone invested in this reality who has also had the self-discipline to ignore ‘the news’ along the way has done extremely well and enjoyed wonderful peace of mind and a generally sunnier disposition.

At times like these – it pays to remember that, over time, we really don’t need to worry in the slightest about 99.9% of the news stories du jour whether that be Woodford, Brexit, Trump or trouble in the straits of Hormuz.

To live a good and prosperous life, with far less stress than most people seem to be suffering these days, you simply need only set up your financial affairs to benefit from mankind’s inevitable progress and then get on with far more important things like looking after our loved ones and otherwise enjoying life…

This has never been easier than it is today.

Zoom out. See the big picture.