Lessons from Five Decades of Financial Mishaps: Illustrative Blunders in Investing
In the early 2000s, many shares that fueled the market's growth had either vanished or were shadows of their former selves. This shift was a stark contrast to the mid-20th century, a period marked by significant differences in capital market performance between the UK and the US.
During this time, US equities demonstrated a steady growth, with prices doubling over a span of 50 years, translating to an annual gain of approximately 1.4%. In comparison, UK equities remained essentially flat in real terms, offering no significant capital appreciation after inflation.
The performance of UK fixed income assets was particularly poor. An investor starting in 1926 would have lost over 90% of their capital in real terms by 1976, even with reinvested gross income. US Treasuries fared slightly better, with a real loss of around 75% of their capital over the same period. UK property, while not provided with exact figures, is implied to have had modest or poor real returns relative to equities.
These findings reflect broader economic challenges faced by the UK, including the inflationary environment of the 1970s, the impact of the 1973–1974 stock market crash, and monetary and fiscal policy constraints linked to the Bretton Woods system and its collapse. In contrast, US markets showed steadier growth partly due to more favourable economic conditions and different monetary policies.
Fast forward to the present day, and the cryptocurrency market, estimated at $3 trillion, is a subject of debate. While it offers accessibility to people in countries with exchange controls or unstable economies, it is estimated that legitimate investors account for less than 10% of the market. The attraction of cryptocurrencies, however, comes with its own set of challenges, including its association with funding conflict and the potential for instability.
In the UK, strict rent controls dating from the First World War ruled out buy-to-let for all but the most unscrupulous landlords. In 1999, Gordon Brown, Britain's chancellor, sold half of Britain's gold reserves, raising $3.5bn against a current value of $46bn.
The idea behind GARS, launched in the wake of the 2008 financial crisis, was to offer investors hedge fund-like performance at lower fees and better liquidity. However, GARS peaked at £53 billion under management in 2014 but was shut down in 2023 due to poor performance. Many defined-benefit pension fund managers in the UK were heavily invested in government bonds and suffered significant losses when rising inflation started to push bond yields higher.
Neil Woodford, who built a reputation at Invesco managing unit and investment trusts offering generous income, left the company in 2014 to found his own business. His equity income fund, at its peak, managed over £10 billion. However, his investment process for Patient Capital, his subsequent venture, was criticised for being akin to throwing mud at the wall in the hope that some of it would stick.
In conclusion, the mid-20th century saw a significant disparity in capital market performance between the UK and the US, particularly for fixed income assets. Fast forward to the present day, and the landscape is marked by the rise of cryptocurrencies and the challenges they present, as well as the lessons learned from past missteps in investment strategies.
- In the early 2000s, newsletter headlines might have expressed concerns about the decline of many shares, some of which had been major contributors to market growth.
- For investors interested in personal finance, understanding the performance of investment trusts like bond funds could be crucial, given the poor performance of UK fixed income assets in the past.
- Despite the poor performance of UK property in the mid-20th century, it remains a part of many investors' portfolios, especially those focusing on property.
- The gold market also offers an investment opportunity, as demonstrated by the significant increase in value of Britain's gold reserves sold by Gordon Brown in 1999.
- In the realm of technology, the cryptocurrency market, worth an estimated $3 trillion, presents unique challenges for investors, ranging from funding conflict associations to potential instability.
- On a broader scale, general-news outlets might discuss the impact of strict rent controls and their role in shaping the UK's property market and the rental industry.
- Personal-finance blogs might analyze the investment strategies of individuals like Neil Woodford, discussing his success with Invesco and the criticism he faced for his approach with Patient Capital.
