Testing Times

These are testing times. I’ve talked before about my feelings of anger in What Next! and Charlie countered that emotion with her blog entitled Finding Joy. Thankfully this blog isn’t going to be about coronavirus testing at all, even though Bolton seems to have become notorious as a party town, inhabited by gangs of soap dodgers.

No the testing I’m referring to is the daily test we are being subjected to as investors. Everyday, another UK company makes thousands of individuals redundant and declares as upbeat an earnings call as they can. We have seen a gradual fall in the value of our savings over the last few months as it has become clear that the recovery has been kicked down the road somewhat. This year may even turn into a reprieve from death row for countless turkeys.

The Behaviour Gap

The graphic above is what I look to when I get sidetracked. It’s OK to worry and speculate over what could happen but there’s no point really. We need to focus on those things that matter which also lie within our control. It was given to me by Carl Richards when I attended one of his workshops. His financial graphics are powerful stuff.

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Size Matters

We invest in shares of many different sizes. Nucleus for instance is worth about £110,000,000 (£110 million). Together we own £1,250,000 worth of shares (£1.25 million). We therefore own about 1% of their shares. Together we could buy 75% of Nucleus, but that would be putting all of our eggs in one basket.

The largest share in the UK right now is Astra Zeneca at £110,000,000,000 (£110,000 million or £110 billion). So Astra Zeneca is 110,000 times larger than Nucleus. Together we own £2,100,000 of their shares (£2.1 million). Thankfully they have many more drugs in their pipeline, other than the recently stalled Covid-19 vaccine. We own only an infinitesimal amount of their shares between us.

Astra Zeneca is the largest component of the FTSE 100 index. It accounts for 7.2% of the index which in turn tells us the overall size of all 100 shares. The FTSE 100 index currently stands at £1,527,778,000,000 (£1,527,778 million or £1,527 billion or £1.5 trillion)

Comparisons

These numbers tell us something about market indices. If you have been a client for sometime you will remember that the FTSE 100 index is a market weighted index. In simple terms it means that although there are 100 companies on the index, every company is not represented with an equal 1% holding. If you buy the index, £7 in every £100 invested is in AstraZeneca. In fact £24 in every £100 invested would be in AstraZeneca, BHP, GlaxoSmithKline, HSBC and Diageo. One quarter of your investment in just 5 shares alone.

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Get up those stairs!

I wasn’t a terrible child, but I do recall my mother, when pushed to the limit, would always shout “Get up those stairs”. It meant that I was really in trouble and was certainly in for it when my father got home. Currently I’m not afraid of the phrase, during our FaceTime meetings we say it in encouragement when Lucas and I study the charts of the major indices. The stairs are our comfort blanket, but they are hopefully our early warning system.

Up the escalator but down the elevator

Very American I know. We would say up the stairs but down in the lift. That’s how the markets were explained to me. Stock-markets shouldn’t rise like a lift. If they do, the likelihood is that the rapid climb precedes a spectacular plummet. Rises should be gradual, building support at each stage of the way. They should climb the “wall of worry”. When everybody is afraid, it usually means there is no chance a bubble is forming.

BC (Before Corona) things were looking good. They weren’t climbing like a jet fighter, they were looking steady. Solid. But then panic struck. AD (After the drop) we had fits and starts to begin with, but at the moment the gradual upward progression is quite reassuring.

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