FTSE correcting rapidly

So the market is crashing down to the 15% reduction I said I was hoping for... I would like to take this opportunity to confirm that I am not part of the Bilderberg Group, Bullingdon Club or an Illuminati puppet master setting global stock market prices!

Given the sell offs I am looking to Vanguard high yield ETF as a default buy when there are falls like this. The FTSE100 is so commodity / energy heavy that all the highest yields are related to those sectors, so I'm looking about for companies hit simply because they are listed - Vodafone looks interesting with some heat taken out of their share price given the amount of investment and their general business model.

The opportunity to bag some bargains is quite exciting!

As always, good luck and DYOR...

To BP or not to BP?

BP currently yield just under 7% and a market cap of c£70bn, it’s a global, vertically integrated company who generated $32.8bn in operating cash flow in 2014. Share prices across the industry have fallen significantly recently providing a potential chance to buy slices of companies at multi-year lows – what’s not to love?! The world needs oil and they’re providing it!

There are two issues at the moment – the first is the oil price, crashing through the floor as Saudi / OPEC do battle with the US shale producers, the glut builds, supply and demand do their dance and we, the consumers at the pump see little change in the price being paid… but this puts pressure on those dividends. As a contrarian you might take it as a bargain and the best time to get in. The oil industry is used to shocks and upheaval and this is no different, buy on the cheap, wait for the rebound and off you go, capital gains and a strong, high dividend.

Hopefully a period of low prices will help stimulate general economic activity and prices will drift upwards, all your shares follow and all is well. Except it’s not because the second issue and elephant in the room is the fact that oil will become economically unviable.

There are two ways this could play out; Mad Max style, or like the gradual replacement of steam locomotives, with change coming quietly and without revolution, no one will really feel any difference because you’re still getting a train, it’s just running on different juice.

So, should I invest in an oil company? I’ve no doubt that the larger companies will survive, and may be a profitable bet in the short term and they are used to dealing with the fluctuations of a volatile market. The question is whether I could fire and forget for 20+ years.

In considering this and keeping an eye out in the press I wonder if it is with deep irony, crystal clear foresight or a sense of moral imperative that the likes of the Rockerfeller investment arm and Norway’s sovereign wealth fund are divesting from fossil fuels? Is there a still a business for the likes of BP and Shell in 15yrs? The pace of change and the ability for individuals to create products that change the world combined with the fact that climate change risks seem to be more mainstream means there may be a snowball gathering pace, coming to wipe out our dependence on fossil fuels.

We may already be witnessing the first revolutions – it is not inconceivable that in 10yrs you will have a solar array on the roof and a battery pack in the garage allowing you to draw only a small amount of electricity from the grid. This would mean the current lot of power stations don’t need to be replaced with such urgency. Electric cars may become the norm, congestion falls, oil consumption drops and car ownership in general becomes the equivalent of owning a horse, a pleasant pass-time for those who can afford it, but not actually practical or cost effective as a means of transport for the majority. Perhaps 3D printers become standard kit in everyone’s home and the waste associated with current production and distribution methods falls away, further limiting demand for oil products.

The above is science fact, not fiction, these and many more will disrupt different industries, the question is how much. Oil companies are also threatened from more conventional areas such as state backed companies of nations who may not have governments or judiciaries that are beyond reproach.

How is big oil responding? A number of European oil majors including BP backed plans to introduce a “substantial” deal for energy efficiency recently, and websites include references to renewable energy generation. However, these are not anywhere close to replacing, or even hitting parity with oil revenues, so you could say it’s just lip-service to keep the active investors happy and keep the CSR / PR team in business. The Shell deal with BG gives them “cleaner” reserves, but that’s prolonging the status quo, not leading the industry into the solar powered uplands. Maybe they are secretly developing the renewable sources of energy, seeking to corner the market and nimbly outflanking the still fledgling renewables sector ensuring their ongoing cash and profits for generations… I hope so, they have the clout to at least go some or most of the way to doing so.

I fear it may be death by a thousand cuts, of Porter’s classic five forces model, they could be said to be facing all five. Which brings me back to the main question – take 7% income now, but risk the industry declining into dwindling profits, or look to invest in companies that will have a viable model in 15yrs time (potentially when I’ll be hitting FI if things go well!) I suppose the answer is both. I can’t see BP ceasing to be, but will it go nowhere over the next ten years and will the dividend be cut reflecting a lesser company? The thinking continues!

Just a thought

I’m not great at critical thinking and my boss is.

This is not to say he nit-picks and in what seems to be a departure from most FI’ers he’s a good boss, good at his job and I respect him. It’s recognising this trying to get better on my part. At its extreme it’s like I wait for the answer to pop into my head rather than follow any considered process, whereas he seems has the ability to focus and zero in on what needs to be found and question things appropriately even when the task in question is boring or repetitive. If I read something work related questions or errors will be flagged automatically, other times they won’t and I move serenely on oblivious! I don’t always look for ulterior motives or sub-text, my mind isn’t skipping from place to place drawing parallels or recalling information that could be influential from abstract locations. Well, sometimes, but not always, and not as a rule.

So trying to get better at this I set out seeking some instruction. The problem was where to start. In randomly looking around I went to a book I’d heard of called Thinking, Fast and Slow and with a bit of luck this book provides some great explanations. The main thrust is that we have two thinking and response systems, referred to as 1 and 2. System 1 is the fast and immediate one, it calls on learned experiences and skills to react quickly. It simplifies situations and ignores that which is too hard to deal with – great for knowing to jump out of the way of a bus hurtling towards us, bad for more considered responses to more complex situations. System number 2 is more logical and will consider things more carefully, but is unfortunately easily tired out by excessive analytical processing.

Various examples are included to show how we regularly use system 1 and stop there because using system 2 takes a lot more effort. We humans, like most organisms, seek the easiest route, and coming up with a nice quick answer allows the brain to release a little shot of dopamine (the pleasure hormone) for a job well done.

So for me when it comes to work related tasks I need to realise that I’m using system 1 too much and need to engage system 2 more frequently and be able to identify when I’m slipping back into system 1 and stop it.

At a similar time I learned a little of mindfulness. I’d steadfastly ignored mindfulness because of its popularity and because it is said to be a Western interpretation of Bhuddist teaching involving meditation… I took it to be twisted and tortured beyond the intended purpose having been taken out of context in the first place.

That said, as something that keeps on cropping up with people I respect, I became more curious, so when the opportunity to hear a brief introduction to it came up, I took the plunge. The speaker outlined the main elements of mindfulness as being; in the present, on purpose, paying attention, non-judgmentally and in a particular way (a little woolly, but never mind). In pursuing mindfulness you seek to train to make better use of your Human brain, which has only developed recently (c100,000yrs ago) as opposed to our reptilian or mammalian brains which are much older and deal more with surviving on the savanna and avoiding being someone else’s lunch. The Human brain, being more advanced and social, deals with higher functions such as meaning and emotions, rather than basic fight or flight responses. One example was to apply mindfulness when a work-shy colleague slacks off for the umpteenth time. You may wish to lay hands on him and eject him from the nearest exit, maybe the 4^th floor window, but this would be a mammalian response. Mindfulness teaches that such quick, instinctive responses are a bit basic and require more thought and recognition of facts or emotions which may not immediately be obvious – the point is you consider more clearly, without judgement, keeping your cool and responding via the human brain and importantly recognise what thoughts come and go, how and why they form and then react accordingly.

The connection between Thinking Fast and Slow and mindfulness was clear as well as being mutually beneficial, which was nice. The mindfulness added the element of seeking calm and adding context to your reactions and therefore how to train yourself to react in a more Human way!

The other benefit of mindfulness is being in the present. Pursuing FI involves a lot of forward planning. You try and spend less next month than you did this month, you consider XYZ PLC’s ability to perform next year and the year after. These are good things to consider in their place, but when in the early stages of the journey as I am it can also be depressing. You can find yourself wishing months away, looking forward too much to receiving the next payday and making the next investment or paying down a bit more debt, being in the present becomes frustrating – you’re trapped, if only the next 10yrs could slip by I would be so much closer to being free…

You can start to resent the now and yearn for the future. The risk is you become miserable and miss all the good stuff around you now. Mindfulness, or rather my recently and briefly initiated interpretation, isn’t a glossy sales pitch with attractive young things living in the moment in fashionable clothes, drinking fashionable drinks and generally being better than you (unless you buy this reasonably priced product), it’s the opposite. It engages the Human brain, thinks more slowly and deliberately, of knowing yourself better and understanding your thoughts and motivations, of recognising that negative thoughts of jealousy or anger are just thoughts and not to be acted on.

So this brings us to FI; recognising the immediate responses to advertising or seeing your neighbour with a new car, identifying them for what they are and letting them go. This allows you to enjoy today and then, when you hit FI, there’s no real change apart from how you spend your time. You don’t need FI to be able to self-reflect and by seeking FI you’ve probably already done a fair amount of it anyway, it’s then about implementing it in a positive way. In the mean-time it might help me train my brain to use those higher functions, or at least realise why I’m not succeeding!

I am a latecomer to this Mindfulness lark, but Raptitude has done a fair amount in the topic and Thinking, Fast and Slow by Daniel Kahneman is well worth a read too.

Bedding in good habits

Does anyone else tend to focus on the income coming into their accounts rather than looking to see how much the overall value is going up and down?

I logged onto my trading account and got excited by the fact that another dividend payment had come through! This was a welcome surprise as June and July had been bumper months for my little portfolio, I was expecting a gap before the next payment, so another deposit was exciting to see!

This is what's all about, the steady stream of payments that has is not linked to my employment (aside from earning it in the first place, but lets ignore that for now). The direct link between money being saved month on month, and money being invested to pay me for doing nothing.

The random movement of the underlying market was irrelevant to me.