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What QPR tells you about price and return & bond bubbles
Gavin Lumsden visits Premier League stragglers Queen's Park Rangers to talk about his 4-3-3 approach to investing.
by Gavin Lumsden on Nov 22, 2012 at 13:10
My weekly Lolly Investor Programme has recently taken a shine to using football as a way of explaining some of the basics in investing.
This week I popped down to Queens Park Rangers' Loftus Road ground in west London to talk about price and return and the threat of a bubble in expensive government bonds.
This is my third video with a football theme. My first foray was a visit to my beloved Arsenal to talk about 'What does a fund manager actually do?'. I held my nose and followed that with a trip to Chelsea to explain 'how football can help you think about investing'.
You can see all my other videos in this series on The Lolly Investor Programme page.
If you can't watch the video you can read what I say instead using the link below.
Hello and welcome to the Lolly Investor Programme.
This week I'm continuing my theme of using fantasy football to explain some of the basics in investing.
The analogy I'm making is that the way a football manager positions his players on the pitch can be compared to the way investors can spread their savings across the stock market.
It’s my 4:3:3 guide to investing!
The topics I want to address today are price and return and what makes a defensive asset.
To discuss these I’ve come to the Loftus Road ground of Queen’s Park Rangers in west London.
At this point in time in November 2012 QPR have had a dreadful start to the season. They’re sitting at the bottom of the Premier League, with just four points from 12 games, none of which they’ve won.
Manager Mark Hughes is under pressure and there is speculation he may be replaced.
QPR’s problem has not been a lack of cash. With the backing of Malaysian business man Tony Fernandes, the club has spent a lot of money on new players, often on high wages.
Perhaps they’ve just been unlucky. Other clubs have spent fortunes on players and achieved better results.
You see in football spending a lot of money on players can be justified commercially.
An expensive star signing may help win the club more trophies and bring in a bigger fan base that can be exploited commercially.
In the crazy world of football economics a high price may generate a high return.
In football you can’t be sure whether QPR’s decision to spend £9 million on midfielder Esteban Granero will pay off or not.
This is not the case in investment.
On the stock market QPR’s current experience is the norm. The more you spend on an asset the less likely you will get a good return.
Remember the rule of ‘buy low and sell high’?
In investment price is inextricably linked to return.
Nowhere is this rule more pertinent right now than in bonds.
As I’ve described before bonds are kind of like the opposite to shares. They’re the defenders in the team rather than the strikers.
Generally it’s regarded as a good thing to mix bonds and shares together in your savings.
So let’s recap on what bonds are.
Investors who buy bonds are effectively lending money to the government or company issuing that bond.
Unlike shareholders, bond holders do not own a stake in the entity behind the bond.
However, if the bond issuer fails or goes bust the bond investors stand a better chance than shareholders of getting back some of their money.
Also bond holders receive a regular, fixed amount of interest every year until the bond matures.
This is in contrast to shares where dividends are not guaranteed. Although dividends may grow, they may also be cut if times are tough.
For all these reasons bonds are regarded as a more defensive investment than shares.
However, that appearance of security is misleading because it ignores the price you might have to pay for that bond, or your defender.
Bond prices often rise during tough economic times like today as investors appreciate the regularity of the income they’re receiving.
However, the Bank of England’s policy of ‘quantitative easing’ has pushed up the price of bonds to record highs.
Under QE the Bank has created a staggering £375 billion worth of new money and used it to buy government bonds, or gilts, so as to inject that extra money into the economy and to avoid a depression.
The fear is that at some point the bonds bubble will burst and unwary investors could lose a lot of money.
This could happen if it looks like the economy is starting to recover from the financial crisis, or if interest rates start to rise or if the Bank of England attempts to sell the gilts it has bought.
Invest too heavily in the apparent ‘safety’ of bonds and you could end up scoring an own goal.
Invest too heavily in shares, however, and you could have an equally uncomfortable ride.
This is the quandary of asset allocation. How much and how far should you spread your money around?
Next time I will consider in more detail the sort of investment squad formation you could consider.
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by Gavin Lumsden on Apr 16, 2014 at 15:17