How to protect your savings from the ECB – part 1 – buy stocks

By
Pieter Cleppe
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Copyright: "File:Benjamin-Graham-fundamental.jpg" by Equim43 is licensed under CC BY-SA 4.0

In a series of articles, BrusselsReport.eu looks at how savers can protect themselves from monetary debasement. This article is merely summarizing possible strategies to follow and none of this should be taken as investment advice. 

By Pieter Cleppe, editor-in-chief of BrusselsReport.eu

Introduction:

As inflation is picking up both in the United States and Europe, savings at bank accounts are near an all-time-high, something obviously caused by the Covid pandemic and accompanying lockdowns, forcing people to put aside funds for a rainy day and hold off on investment.

It remains to be seen whether inflation will be transitory. On this website, Fabian Wintersberger makes the case that will not be the case, as governments are now incentivizing banks to lend, by taking over the risk if things go wrong, a factor which wasn’t there in the post-2008 monetary response.

Even if inflation as measured in statistics does not go through the roof, however, savers are faced with a tricky challenge: losing 1 or 1,5 percent of the value of savings every year is not an attractive prospect. Low interest rates are largely a result of deliberate central bank policies, according to the chief economist of the Bank for International Settlements (BIS), Claudio Borio. Politicians may be wary to allow central banks to increase interest rates, as this would trouble public finances, given that many eurozone governments are drowning in debt. Therefore, savers are basically being forced to consider alternatives to traditional fixed income investments. 

As personal finance blogger Mike Piper puts it:

“In a low-yield environment, there’s no way to get anything other than low expected returns without taking on significant risk”

In this article, one such rather risky investment option is being explored: stocks (Gold bugs shouldn’t despair, as the second part of this article series will be devoted to that asset class).

Only with savings that can be missed for about five years

Given the risks involved, one should really only buy stocks with savings that one can miss for about five years – an admittedly arbitrary time frame for what can be described as “medium term”.

For savings that one cannot miss, there is unfortunately no other way than to simply pay the “inflation tax”, which may be higher than official inflation data reveal, as explained by Daniel Lacalle on this website.

That said, it is of course possible to sell stocks earlier than five years, at the risk that the price of the asset is going through a downturn just when one is in need of cash.

Option 1: The best performing investment funds: 15 to 20 percent average annual return

A first option is to invest into an investment fund. There is abundant literature on what the best performing investment funds are, comparing risk profile, cost structure and any other important element, including the investment strategy (“value investing”, technical analysis, etc).

What kind of return can be expected, in case one manages to pick the very best investment funds?

  • A comparison of investment funds that featured the best performing funds over five years in 2018 concluded they typically provided a 15 to 20% average annual return, which compounds to a 100% to 150% return over five years, meaning 10.000 euro invested would have turned into 25.000 euro.
  • A 2019 overview of “25 Best Mutual Funds of All Time” lists 25 great funds providing an annual performance of 13 to 16 percent, with some of those funds even predating the 1987 Wall Street financial crash.
  • Looking at the last 10 years, a 2019 overview of the “Top 10 Mutual Funds by 10 Year Performance”, reveals annual performances of 14 to 19% with “Morgan Stanley Inst Growth I (MSEQX)” listed as the winner with 19.72%.
  • “Investopia” details the “Top 5 All-Time Best Mutual Fund Managers”, whereby it includes Benjamin Graham (picture), the teacher of Warren Buffett, estimating his performance at 21% average annual return over 20 years – that is between 1936 and 1955, not the most rosy period of the 20th Sir John Templeton’s fund provided 14.5% average annual return between 1954 and 1992, while the Fidelity Magellan Fund of Peter Lynch returned an average annual 29% between 1977 and 1990. Since 1990, Warren Buffett’s Berkshire Hathaway returned an average 14.2% (and 15.7% in the last five years).

Obviously, many caveats need to be mentioned, with cost structure and taxes only one of them. But it does give an idea of what good “stock pickers” are able to do in a relatively consistent manner.

Option 2: ETFs and average stock market returns – 10% average annual return

A second option is to invest in an exchange traded fund (ETF) fund. This is “a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock.”

What to expect here? Historically, the average stock market has delivered 10% annually before inflation. ETFs offer a way to simply shadow the average stock market.

Opponents of stock picking will say that “study after study shows that it’s almost impossible for even the professionals to beat the market”.

In other words, while it may be true that there are stock pickers out there able to beat the market, the big question is how to find them. Looking at the historical track record is the obvious place to start, but past performance is not a guarantee of future results. Simply pumping cash into an ETF or diversified selection of ETS, to shadow the market, should in theory then result in average annual returns of 10%.

Option 3: Shadow contemporary star investors – here’s one with 34% average annual return over the last eight years

The fact that only exceptional star investors manage to beat the market’s 10% average annual return consistently, holds an important lesson: stock picking is best left to professionals. Going through corporate balance sheets and deciding when and what to buy? It’s probably not something most people should try at home themselves. This is not like buying a house, something which most people are perfectly able to do.

A better idea is to invest time and energy into figuring out who the excellent stock pickers of the day are and to simply invest in what they have decided to invest into. 

Here, I’d like to single out one particular investor with a 34% average annual return over the last eight years. This is my friend Jeppe Kirk Bonde, a Danish investor based in London – who also happens to be the son of the late Danish EU reformist MEP Jens Peter Bonde.

He is the absolute star of the investment platform, eToro, which enables so-called “copy trading services” and counts over 12 million investors. Etoro allows professional –and non-professional – investors to showcase how they’re performing, whereby people can “copy” them, meaning that whatever cash people invest will be invested in the same manner as invested by the trader.

Jeppe is truly beating Warren Buffett and Benjamin Graham to it. With a 34% average annual return over 8 years – since July 2013 – he is even doing better than Peter Lynch’s annual 29% average return between 1977 and 1990, while that was of course still over 13 years.

In the following visual, Jeppe also compares his performance with those other successful investors, also highlighting his great score on the so-called “Sharpe Ratio”, which adjusts an investor’s performance to volatility. So despite Jeppe’s two negative years – where he lost 12 and 14% – he still beats Buffett. The fact that he still loses money 25% of the time (two out of eight years) should serve as a reminder that even great stock pickers can lose money.

Jeppe’s investments are primarily in stocks, with only minor holdings of ETFs, Forex, Commodities, and Cryptos. As a result, those that want to avoid holding ECB-sensitive paper claims should feel safe. Pretty much all of the stocks he picks are established, multinational, well-known companies, like Amazon, Nintendo, UBS, Novatek, Apple, Kering and Husqvarna. He doesn’t go into leverage or anything, and only makes minor changes to his portfolio every month.

Unlike certain other Etoro investors, Jeppe currenty only holds less than 1% in the volatile and yet uncertain asset class crypto, while he always sells an asset whenever it exceeds more than 5% of his portfolio.

His performance, the kind of stocks he picks and the percentage invested into each asset are perfectly traceable on the Etoro website, even for those that are not a client of Etoro.

Etoro makes it very easy to invest. Investing in stocks is commission-free, and despite some doubts I used to have over this, one actually owns the stocks bought via Etoro, following a recent change (something important in case Etoro would go bust). Given that all Jeppe’s choices are visible, one can also buy the stocks he has selected through whatever preferred alternative platform, as taxation may also play a role for some people.

65 Million USD in investor funds now copy Jeppe’s portfolio on Etoro. That may seem like a massive amount for a sole professional, but it is truly pocket change in the light of his performance.  

Jeppe Bonde’s strategy

On his website, Jeppe explains the “six cornerstones” of his investment strategy: “Strong Fundamentals, Macro Economics, Mega Trends, Focus on the long term, Risk Management through diversification and Keeping fees low”.

He specifies that “investments are primarily in stocks, with minor holdings of ETFs, Forex, Commodities, and Cryptos. Geographically, the portfolio is primarily diversified across North America, Europe, and Asia. Industries have included financial services, tech, consumer goods, energy, auto, telco, games, consulting, mining, food & beverages. cannabis, genetics research, etc.”.

All his current investments can be checked out here.  

Every quarter, he also explains his strategy in an Etoro webinar, which is published on youtube:

 

Some excerpts:

  • Here, Jeppe basically explains how his analysis of what constitutes the underlying value of a stock may be more complete than how “value investors” traditionally look at it:

 “[Many investors] are looking at price/earnings ratios, which is quite a useless metric. You can’t compare growth companies and value companies based on how much value they are creating right now. That is like comparing a baby with an adult and saying: ‘the adult is going to have a better life cause he is already an adult’. I think, based on that, there are many amazing growth companies that despite not even being profitable today, will have an amazing future”, given Google as an example, saying: “I would be more afraid not to be invested in Google when they invent general AI than for anything else to happen”. (26′ in)

  • His take on Tesla, with which he made great profits, only to sell his position for the most part in January 2021, which was great timing:

“I never cared about electrical cars. I always found it a completely uninteresting market. When Tesla first came out, I did not invest in it, because it was, again, an electrical car company. It was when self-driving became a thing that I invested in Tesla, and I invested massively in Tesla, and every time Elon Musk did something stupid, I invested more and that has turned out great. But also recently, I sold most of my Tesla shares as … I do not think Tesla is going to have the most amazing cash flow this decade. But I do believe they are among the three big players that could become the biggest company in thirty years. For example, having out that fleet out driving, collective data, that really is enabling machines to view, to look, and to analyse what they’re seeing, and to think about what that could be used for, is amazing.” (29′ in)

Jeppe does acknowledge the effect of politics, like the U.S. Presidential election or central bank policies, but only acknowledges this as one of the factors, also stressing that it is wrong to think the stock market is necessarily going to be aligned with developments in society, as this never really has been the case.

International stocks correlate with global liquidity provision so the real job for savers is to find good stock pickers

To return to protecting savings from the ECB, buying stocks may well be quite a good idea, despite the risks – that one can always mitigate through “stop-limit orders”, “periodic investing” and overall diversification.

At least since 2015, there is a clear correlation between the “MSCI World” index – a good metric of how global stocks fare – and global liquidity, as the combined liquidity provision of leading central banks does of course affect stocks more than only the ECB’s provision): 

When taking a degree of risk to buy stocks, one may as well opt for maximum returns. In that regard, Jeppe Bonde’s performance over an eight year period, backed up with profound and diligent analysis, is hard to ignore.

 

 

  

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