Three books I read over Christmas

I read three books over Christmas that changed my thinking on my pension preparations.  Two were by Mebane Faber, with the third by Philip Scott.

Shareholder Yield - A Better Approach to Dividend Investing

The second book I read, but the easiest to deal with.  Written my Mebane Faber, its key tenet is:

Focussing on dividends alone does not enable the investor to properly assess a business's ability to return cash on the investment

Faber observes that cash generated by business activities can be returned to investors in three ways:

1. Dividends - the 'traditional' approach
2. Share buy-backs - by buying shares on the open market, the company reduces the total amount of shares in circulation thereby increasing each share's 'worth' as a holding in the overall business
• He observes that share buy-backs are a rational economic reaction to a change in the way the US government taxes shareholder earnings from capital appreciation and dividends, and counter to others arguments are an efficient way to create value for shareholders
3.  Reducing debt - thereby removing creditors from the queue of people waiting to get a share in the company's assets prior to the shareholders themselves

All interesting stuff which I may integrate into my own models in future.

The Commodities Investor

 This book is focussed, as the name suggests, on commodities explanation and investment.  It should also have 'using Exchange Traded Funds (ETFs)' as a subtitle, because that's Philip's most recommended approach to each of the commodities he reviews. 

Its a reasonably good primer - broken down by commodity, it reviews the 'how' and 'who' of consumption, as well as the drivers of the price.  I wouldn't use ETFs for all of the commodities listed, but that's personal preference.

I read this after the two Faber books, which was (by chance) the right order - as it made me think about how I might construct my view of this 'asset class'.

The Ivy Portfolio: How to invest like the top endowments and avoid bear markets

Co-written by Faber and Eric Richardson, this book very usefully laid out the main asset classes that comprise the 'world view' of Ivy League university investment groups.  It also covered momentum investing, which is (to be frank) something I do not have time for.  It is also US-focussed, but that did not deter me from some useful thoughts off the back of it.

Depressingly it appears that a vast amount of the success that US endowments have had is driven by private equity investments that individual investors such as myself will never be able to access (there was talk of funds that have been closed for a decade plus) - BUT the asset model approach was useful.

Off the back of this book I had a look at creating an weighted model across five main asset classes, and comparing my current investments to these.  The classes are:

• Shares
• Commodities
• Bonds
• Property
• Cash

I equally weighted these, although I made a few interesting decisions e.g. money lent out through Zopa and Funding Circle are really bonds (I do not think this is unreasonable), and cash held in my pension is also a bond (i cannot get it out for 23 years, and it's acruing interest!).

I have subsequently broken the classes down further, with the 20% allocation for each asset class equally weighted across all the sub-classes.  Having read a book on commodities, I was able to create a LOT of subclasses (whilst trying to stay manageable!) - whilst knowing little about bonds I couldnt really say much at all.  And I couldnt initally decide if premium bonds were bonds (like the name says) or cash (which i decided they basically were).

It was interesting to review what the numbers told me - the second percentages below are the absolute variation from the 20% (so -10% means I have 10% of my assets in that class):

• Commodities     -     7.21%     -     -12.79%
• Property     -     15.38%     -     -4.62%
• Bonds     -     21.13%     -     1.13%
• Shares     -     27.37%     -     7.37%
• Cash     -     28.90%     -     8.90%

What this told me was I needed to shift more of my pension cash into commodities, and more of my cash to hand to property.  It also showed me I was well overweight in equities (although my intention is to continue to invest in market tracking ETFs via the Shiller p/e model).

The significance to this model is that I expect for a lot of 2014 to be looking at commodities-related shares - so hard / soft commodity ETFs, mining companies, water companies etc - and less at the types of shares I have looked at over the last 24 months.  The discrepency in the model is also such that I intend to increase the rate at which I invest - moving towards investing every 28 days, as opposed to 37 days (the current rate).  This means my first purchase of commodity-related stocks will be on the 7th January 2014 ... so I better get researching!