A 1.25% charge to manage a bond fund targetting LIBOR + 2%? This advert doesn't even tell you the annual charge or that there's an initial fee.

A miserable return at the top of the market from Crystal Man

BNY Mellon have taken to using risible Iron Man style imagery to promote their Newton Global Dynamic Bond Fund, whose performance ought to be predictable and dull. Money Week (13 June) has a teaser ad (right) followed by a full page ad.
It was the dissonance between the dynamic, futuristic and exciting Crystal Man and the performance aim of LIBOR +2%* before fees that caught my attention. Woo-hoo, LIBOR plus two percent! I'm going to smash my way through concrete walls to reach that sort of return.
* over five years

"The Power of Ideas"

You can see that Crystal Man's chest logo is The Power of Ideas. Only the idea here is for BNY Mellon to make guaranteed easy money while you take all the risk of buying bonds at the top of a bubble market. They omit the level of the performance fee even from the feint small print. And why do they do that? Is it because it's over half the plus two percent?
Also the ad does not even say that there's an initial fee of up to 4%.

"If a bond fund can make a 25% cap gain as bond prices rise that can reverse"

The fact sheet gives the management charge as 1.25% PA. With 1 month LIBOR at 0.2% the charge is 57% if the targeted gain.
Now the fund has done a lot better than LIBOR+2% over the last three years, averaging 5.1% PA including the management fee.

I doubt that bubble-boosted returns (these include capital gain) will continue. In 2009 the fund returned 31.6% of which 25% was capital gain. If a bond fund can make a 25% cap gain as bond prices rise that can reverse. There's a very strong chance of you losing money in this fund if you buy now, especially after the initial fee of up to 4%.
I shall ask the Financial Conduct Authority (FCA) to ban this advert unless it states the fees. It's not enough for the manager to say that you should read the documents for the fund in which you want to invest. Obviously you should but there's plenty of room to be transparent about charges in the ad. Ryanair ads got banned for hiding charges on the website.
It's a shame that the Advertising Standards Authority has no remit on financial press ads. They are much tougher and quicker than the FSA were. Will the FCA be any better?

If you see a financial advert that you think the FCA should act on, email fintrom1@fca.org.uk

A career on Wall Street? Consider first the gospel of the drunk drivers and the cheating spouses.

The 32-year-old investor who spotted the subprime bubble in 2004 warns students against mortgaging their futures for short-term gains

Immortalised in the brilliant book The Big Short as the man whose "mind had no temperate zone", Mike Burry spoke to UCLA economics students last year.
After relating how he was hounded by US authorities merely for speaking out on their failure to see not just what might happen, but what he was sure would happen to the financial system as the poison of subprime coursed through the veins of the banks, he cautions his young audience against the seductions that will come their way.

"If you're considering a career on Wall Street or Washington DC you should be aware of the social proof that operates there. This is that many if not most people will be doing questionable things that obviously make money and obviously earn respect from common peers. 
If you find yourself in such a place I would ask you to consider a rule I learned as a physician - 'First do no harm'.

Besides life is not that short. Life is well and long enough for you to come to regret any activity or habit involving an exchange of long term risk for short term benefit. This is what many if not most Americans did during the refinancing and consumption boom of the last decade and it is what our government did riding on the boom. This is also the gospel of drunk drivers and cheating spouses.

Of course, when you encounter the opposite, the short term risk exchange for long term benefits, consider hitting that button again and again and again."

You can skip to 14m in the video if you are in a hurry but I recommend watching his whole speech from 2m30 in.

A flavour of The Big Short is in the Vanity Fair article Michael Lewis wrote about Burry and subprime crisis.
Notice how untidy his office is despite knowing a photographer was coming. He just did not care what judgement readers might make. In fact it probably did not even occur to him to tidy up.

Evil Knievil's Life and Times at T1ps.com

For Evil to succeed all it needs is for good men to do nothing except make sure he's comfortable

After many years of attending the Master Investor Show I have never, ever

seen Simon Cawkwell standing. He is either seated within very comfortable distance of several good bottles, walking to the stage, or sitting in a two-seater sofa.

Not only did I witness Evil Knievil (EK) standing, but reading a prepared text. This is the second Miracle of Upper Street, for I have been assured by Tom Winnifrith at previous shows that it's useless to ask EK to give a presentation, he cannot be relied to write it in time.

Jim Mellon must be cracking some extra-large whip, for EK delivered a long speech complete with jokes to warm us up for his peroration. This had little to do with a history of t1ps.com.

EK laboured though his jokes like a diesel lorry up a motorway incline, mentioning Tom Winnifrith six times with varying conceits in a vain effort to repudiate the claim he had been forbidden to mutter the sacked founder's name.

"This is not going well," I thought. But soon the top of the hill was past us and he powered down into his comfort zone of shorts, malfeasance and the uselessness of our regulators.

A very clever bear

EK boasted he is the only person he knows to have won on the capital of t1ps [Rivington], claiming he invested £1500 at the outset and sold out for £250k.
Jim Mellon eventually stepped in to save the t1ps parent, with a £3m of cold, hard cash.
EK prefers to see t1ps as the purveyor of suggestions not share tips, despite its name.

The problem with stockbrokers

One of EK's bete noirs is the stupidity of modern day brokers [compared, I imagine, to the gentlemen of good breeding he used to speak to on his Bakelite dial telephone.]

"Those over 40 are driven mad by compliance officers, those under 40 don't know anything"

Evil Knievil's Diaries - a caution

He asks readers of his diaries on t1ps to take account that their isn't enough time to take in all the morning's news and to "use their brains" when reading his online diary.

The importance of asset value

Always have the tangible asset value in mind when evaluating shares - it has to be the basis of all investments. Why buy companies that can be replicated by spending less than the equivalent capitalisation?
[As a long time fan of his I can tell you that principle has gone spectacularly wrong on occasion - ASOS (ASOS.L) and Regus Group spring to mind. He has a blind spot for brand value, perhaps because it is the hardest part of the balance sheet to quantify.]

Oranges are not the only short

Apple ($AAPL) is still brainwashing investors including 'The Debonair One'

Jim Mellon. EK again used the TNAV argument. A PE of 10 is used to argue by supporters that Apple is cheap. In his view it is still a short for the next 2 years.
He was told that Apple plan to buy a television station [really? Is he confusing Apple's rumoured launch of an actual television?].  That doesn't make any sense he asserted. It took 50 years for ITV to reach a value of £6bn and even then that's pennies compared to Apple's size.
Apple is facing more and more competition and that will push up the PE ratio.

An old plastic adversary 

3DM [now reborn as Environmental Recycling Technologies ENRT.L] had many accounting stories to be explained but the old management got clean away. An example of their dubious accounting: £2m was 'invested' only to ping back to the company as a 'receipt for a licence' i.e. revenue.
He blamed the FSA and its totally supine performance. The 3DM problems were relayed to it in detail and yet they did nothing.

"The bare faced tolerance of fraud is degrading."

EK has lost count of the frauds the FSA has waved through mainly through idleness and stupidity.

Libel law

Major firms of solicitors turn out to be "conniving filth" when it comes to helping clients bring libel cases. There has been no punishment for failing to substantiate libel claims when challenged to do so.

Short and curlies

It has become ever more expensive to short shares listed in New York. American banks have lost confidence in a lending US stock in London. Qihoo360 ($QIHU, an alledged Chinese internet fraud) has a borrow charge of 20% PA in London but only 2% in the US.

The equity death spiral

A recent financing innovation, the Standby Equity Distribution Agreement (SEDA) is a death spiral, an invitation to fraud.  [Also called an 'Equity Finance Facility', it involves ongoing dilution at whatever the prevailing share price is] He cites Noventa [a junior miner NVTA.L] which were at 1.5p with 100m shares in issue  When they hit problems the proper thing to do in his opinion was to liquidate the company. Instead the SEDA financer Darwin sold 500m shares (as a hedge, driving down the price?). In affect he alledged £500k was filtched from shareholder. Cash is now only 0.02 p per share. The authorities should clamp down on SEDA.

The British economy

EK is staggered how the Pound holds its value.

 "Our debt position is terrible and has been swept under the carpet by politicians."

The trade for 2013

The government bond markets will break and it'll be huge. Short Gov't bonds and don't delay on the grounds that we don't know when the collapse will come.

Disclosure: I am short of Qihoo360

Nine Quotes From The Master Investor Show 2013, London

I had yet another very enjoyable visit to the sixth Master Investor Show I've attended. It was the first year under new management but with a few familiar faces.
This is a quick blog for now, I'll cover the speakers I saw over the next few days.

"The Euro is the greatest short I have seen in my thirty years of foreign exchange experience."

Jim Mellon

"Hold 5 to 10% of your portfolio in gold as insurance and hope it doesn't go up because that would mean everything else is bad."

Merryn Somerset Webb

"Those over forty are driven mad by compliance officers, those under forty know nothing." 

Simon Cawkwell on the problem with stockbrokers

"Gold is the Anti-Christ of investment. It's what everything else isn't."

James Ferguson

"Interest rates at a 300 year low tells us that nothing is normal now."

Merryn Somerset Webb

"I don't know why they've asked me to the Master Investor Show, I'm a rubbish investor. In fact I ran my own Rubbish Investor Show but it wasn't very successful."

Richard Reed

"President Truman demanded to see a one-handed economist - all the others began their advice with 'On the one hand...but on the other hand."

Jim Mellon

"The bare-faced tolerance of fraud by the regulators is degrading."

Simon Cawkwell

"QE is now running at three times the rate the Bank of England used during the worst of the credit crunch."

James Ferguson

Presentations

Master Investor have started publishing presentations from the show:. For viewing compatibility, I have put Powerpoint files through an online viewer:

Managing the t1ps legacy - Peter Webb

Zinbcoin, the Elephant in the Bitcoin Vault

The supply of Bitcoins is restricted, sure, but what if...

" Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more." - http://www.zerohedge.com/news/2013-04-25/guest-post-bitcoin-cryptographic-gold

 "Bitcoins could be worth thousands of Dollars per coin" - http://www.runtogold.com/bitcoin-price/

I haven't had a cab driver tell me he's buying Bitcoins yet, perhaps because I'm too cheap to take cabs, but we are heading that way. The key to the fevered speculation is the absolute limit to the supply of Bitcoins, set at 21m. If there were no limit, if a new cyber-seam could be discovered tomorrow, the current speculation would be madness. It probably is anyway. God, maybe if the upside is infinite that's actually a good risk-reward opportunity.
Whoa! No it isn't. The problem with the limited supply argument was staring me in the face: May I present:

Zinbcoin

WTF is Zinbcoin? Zinbcoin is not Bitcoin! Geddit? *

Bitcoin has first-mover advantage but guess what? It's easily replicated. What if Goldman Sachs backed a rival to Bitcoin, Zinbcoin? Zinbcoin would still live in the cloud - a peer-to-peer mediated currency. But the Goldman imprimatur and perhaps some attractive sounding twist (a shrinking supply?) could see it overtake Bitcoin as the speculator's weapon of choice.

There's no limit of the number of Bitcoin rivals. Another degree of uncertainly will have undermined the mine.

The domain zinbcoin.org etc are available. Will someone register it? What will be the next puncoin? Will Google create one? How about Nioctib? Why Nioctib? Nioctib is often compared to innovator Bitcoin.

* Older geeks will remember an operating system called Xinu. Xinu is not Unix.

Insights and tips from the UK Investor Show: The Long, the Short & the Wide

A good Christian loves his enemy but good shorter knows his enemy

Most of the notes I wrote during Tom Winnifrith's UK Investor Show will remain in my book since Paul Scott has made far better write ups of fund manager Mark Slater's presentation (excellent as always) than I could. You'll find them on Stockopedia: Pt1 and Pt2.

Shares mentioned in this blog

Alliance Pharma (AIM:APH)
Derwent London (LSE:DLN)
Shaftesbury (LSE:SHB)
Zoltav (AIM:ZOL)
Gulf Keystone Petroleum (AIM:GKP)
Churchill Mining (AIM:CHL)
Ocado (LSE:OCDO)
Cupid (AIM:CUP)
Proteome Sciences (AIM:PRM)
Quindell Portfolio (AIM:QPP)
ASOS (AIM:ASOS)
Juridica Investments (AIM:JIL)

The Long: Nigel & Nick

Tom conducted an interesting interview with small cap investor Nigel Wray and property developer Nick Leslau. Both are sure Britain's economy is heathier than the media, particularly the BBC, portrays.

"The UK is doing a great deal better than we're being told. A lot of companies are being created, there's real energy out there."

Retail property

House prices are too high according to the property man. Buy-to-let is dangerous, particularly in London. "Overseas buyers see London as a safe place to be" but it could go sour for instance if a new Gov't made a tax raid on non-doms.
Wray was not as negative, venturing that London & SE will continue to outpace the rest of the country and "There are houses in the south east worth buying."

Retail retail

Whole rows of high street shops were unanimously condemned, if not to demolition, at least to residential conversion. Tesco et al bully local councils to allow new superstore sites by playing them off against neighbouring councils, threatening to close stores and move.

"Pricing pressure will squeeze high street shopping into a third of its present size"

There are plenty of walking wounded chains who will pre-pack shrink themselves on the next blow. In a few years all you'll be doing is sipping a Starbucks while you plan whether to buy more shoes/clothes/bling in the boutiques.

The magic of franchising

A lot of Wray's fortune has come from his Domino's Pizza (LSE:DOM) holding, "The most predictable business I've ever been involved in." The outlets have remained 100% owned by franchisees, against his early expectations. That has helped the company's growth since a franchise owner will run the stores better than HQ ever could. It's a tough business late at night when the weirdos and drunks turn up. Wray is slicing his stake only because, at £1bn cap, Domino's no longer has the exponential growth potential he looks for.

Wray's wrap up

"Buy good small companies, on modest PEs, where directors own a meaningful percentage of shares."

He did mention Alliance Pharma (AIM:APH) where he is a 15% holder. I've noticed over the years that he does talk his own book.

Leslau's warning

"Leave property investment to the property specialists"

He recommended niche operators: Derwent London (LSE:DLN) and Shaftesbury (LSE:SHB).

The Short

Lucian Miers gave a walk through his process for selecting shares that deserve

short shrift, and particularly how to avoid disasters in these unlimited downside plays.
Miers finds short selling comes to him more readily than ownership simply because he finds it easier to spot companies that will fail than those than will win, especially in smallcaps.

Market timing and God save us from QE

Shares are being pushed up by negative real interest rates. "People think they are smart enough to see the warning signs and get out." They are deluded. History shows that optimists claiming QE will not end badly are wrong. The consensus is that QE countries will gradually inflate themselves out of trouble. In fact we will probably see a sovereign debt crisis.

The shorting process

1. Read the accounts. Miers reads three or four years of his prospect's RNSs.
2. Look at the corporate website to get a feel for how the company presents itself to the public. Is it all substance or show?
3. Know your enemy: who are the company's owners, brokers etc. Are there bulletin board cheerleaders?
   An example of a share he did not short is Zoltav (AIM:ZOL). It is "grotesquely overvalued" but Roman Abramovich's son is part owner so it is too risky a situation.
4. Instinct: Miers has often been advised to short Gulf Keystone Petroleum (AIM:GKP) but there's something about it he can't put his finger on. Thats' not much help to the rest of us who have a fraction of Mier's market experience.
5. Timing: Avoid selling when the price is hitting new highs every day. He is currently monitoring Churchill Mining (AIM:CHL) whose only asset is interst in a court case in Indonesia. It has zoomed up on no news. Risk manage your short by waiting for it to drop 15% or even 25% from its peak.
6. Patience: If you are forced out of a position don't try to get your money back ASAP. Wait until it's coming down the mountain.
7. Getting out of a disaster: He doesn't hang onto soaring shorts like Evil Knievil does. He took a loss on Ocado (LSE:OCDO) at 100p from a 74p start. The newsflow was relentlessly positive, buy notes were appearing. It's on his watch list, waiting for sentiment to turn negative again.

Top tip - if a company tells you the shares are probably worthless then guess what, they are probably worthless. The RNS will use a phrase like "there is likely to be little or no value left in the equity" yet the market cap will often continue to levitate at well above worthless.

Lucien's top shorts

1. Cupid (AIM:CUP) - the dating site operator. The business model is non sustainable - they are not providing the service the clients expect. The related party deals are "reprehensible" and it's not OK for those deals to be brushed aside in an RNS. The business will unravel quickly when it happens.
2. Proteome Sciences (AIM:PRM). Previously known as Electrophoretics International, its shareholders have been waiting years for the jam. The CE is bailing it out and he's kept the balls in the air for nearly twenty years. The rule of thumb is:
   

   "The longer the potential has been there, the less likely it is to be realised."

3. Hibu (LSE:HIBU) = Yellow Pages. The company has implied that the equity is worthless.

He also added one for the watchlist: Quindell Portfolio (AIM:QPP). It ticks all the boxes but it's too soon to short. The cap is £485m. The CE tweets every time a broker buy note comes out. The website is more focussed on pushing up the share price than explaining what the business does.

The Wide

I caught the end of a ding dong between the alarmingly large but charmingly civil bear Evil Knievil (Simon Cawkwell) and the CE of advfn.com, Clem Chambers. Evil said he did not know why he got ASOS (AIM:ASOS) so wrong - his short has cost £250k so far (and that's not his most expensive mistake by a long shot).
Clem: "Because it's an Internet company."
Evil: "Be that as it may."
Clem, even louder: "Because it's an Internet company."

And so on twice more. It was more of a heckle than help and Evil had had enough (and so had I). Being a bear of good manners he merely said "Please desist" but I'm sure the words in his head were shorter than that.

Evil's latest long tip is Juridica Investments (AIM:JIL) which is throwing off cash. I looked at this share a month ago. It has very tasty value ratios but the corporate governance* is unacceptable to me.

Evil's short tip was also Cupid (AIM:CUP) which to my amazement he called "a fraud, and I'm prepared to take a writ on Monday."
Find out why Cupid is a hot potato from these tweets.


* Juridica's funds are managed by a 36% owned company, Juridica Capital Management Limited (JCML). JCML charges its parent hedge fund type fees: 2.5% flat plus a performance fee that starts at 20%. This climbs in steps up to an incredible 50% of the increase in adjusted NAV. There is a hurdle but still. Oh and all three of JCML directors/managers are directors of Juridica. Why don't they just work full time for Juridica's shareholders instead of creaming off profits in the good times. More views on the Motley Fool boards here and here.

Disclosure: I am long of Alliance Pharma and short of Ocado.

Oil barrels, scraping the barrel and Farage giving it both barrels at The UK Investor Show

The percentage game of hard selling

I returned with ten tiny pages of notes and a squeezy red oil barrel from the advfn/Tom Winnifrith UK Investor Show at ExCeL. Winnifrith may as well have called it Dolly the Show, so hard has he worked to clone Master Investor, the event he founded. The show was as enjoyable as always, with great insights from the speakers. If it wasn't free, I'd certainly pay to go again.

The speakers and company stands were just as I expected from previous years. The functional squareness of an ExCeL hall was not - I missed the echoey cavern of the wrought-iron and glass building in Islington, once the Royal Agricultural Hall.
Standing out from the rag bag of early stage oil explorers and Dirty Harry ("do you feel lucky?") miners were Stockopedia and UKIP. The latter now feels the need to include non-racist in its proclamation, which shows how concerned they are with this perception. Their stand was crowded round with non-racist libertarian admirers when leader Nigel Farage was there. He's an outstanding speaker too, if his populist demagoguery doesn't make you too queasy. He's also speaking at Master Investor early doors if you want to catch him on 27 April. Here's a taste of his theme on youtube.

"I never imagined that the Troika would resort to the level of common criminals and steal money from people's bank accounts in order to keep propped up this total failure that is the Euro."

Ed Croft was giving non stop demos of Stockopedia's share screeners. His energy was like the sun's gravity, pulling in listener after listener. Damn his easy charm and good looks.

There was one stand which caused me to say "WTF are they doing here?", Emerald Knight. I received an email ad of theirs three years ago. They were promoting a carbon credit scheme in the Amazon with a fixed 30% return on investment. I'm pretty greedy but 30% seems too good to be true. If there was a moderate-to-high risk opportunity paying 30% PA then the investment banks would be all over it. They were the guys don't forget who thought subprime mortgage bonds paying 0.25% over T-notes were a monster deal.

When I threw this truly Amazonian money-making opportunity open to the cynics on the the Motley Fool boards it prompted a vigorous debate.
There's another discussion here too and a blog.
The FSA has said this about carbon schemes sold to the public:

"Trading on carbon credit markets requires skill and experience...

Beware that VERs certificates are often labelled as ’certified‘, but this certification is voluntary and involves a wide range of bodies and different quality standards that are not recognised by any UK compensation scheme...

Even if a firm involved in the sale or trading of carbon credits is authorised by us, as we do not regulate carbon credits you will not have access to the FOS or FSCS [protection schemes]."

After he clocked my glance at the stand, the Emerald Knight salesman appeared at my side as though he's been teleported and started his pitch. He was by far the best (er, most effective) representative of any company I spoke to. I dead batted away his first offering of a bamboo plantation in Nicaragua

"My right arm merely hovered, untouched by human contact"

Sure I said, I'll charter a Black Hawk plus ten Marines and check it out next week. After 5 minutes I'd really had enough of feigning interest and thought he might notice my choking on the blood from biting my lip. I applied the handbrake of a thank-you and a handshake. My right arm merely hovered, untouched by human contact. Mr rep then pitched the admittedly much more attractive idea of being a Brazilian landlord.
My dangling limb was an embarrassment though, so I made a tactical withdrawl and informed him I wasn't interested in South American social housing either.
A very decisive lunge by me clinched the deal of a handshake the second time.

Although his first refusal to shake my hand was pretty rude, in the percentage game of hard selling it was a price worth paying to allow him a second pitch. Skillful, no?

Six months ago I'd had an email from another company offering oddball investments, Capital Alternatives. Sure enough they had a stand as well. Here's some discussion of the African land they were offering me. Money Observer ran a detailed piece on a problem with a hotel share scheme in Slovenia.

I'm not saying that you would necessarily lose money investing via Emerald Knight or Capital Alternatives. I am saying that their schemes are likely riskier than is apparent to the naive. I'm also surprised that advfn and Tom Winnifrith took their shilling but that merely shows up my own naivete.

I'll follow up with what I learned from the speakers. Paul Scott has written two excellent pieces already: Pt1 and Pt2.