He says the lesser an investor pays for a stream of earnings, the higher will be the chances of his return over time.
“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. If the assets you bought got pushed up in price simply because they were risky, you are not going to be rewarded for taking the risk; you are going to be punished for it,” he told investors in his quarterly letter.
Jeremy Grantham is a British investor and Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), a Boston-based asset management firm.
Grantham has a reputation for accurately predicting about three major market bubbles: Japan’s asset-price bubble in 1989, the dot-com bubble in 2000, and the US mortgage crisis in 2008.
Grantham’s investment strategy
Grantham’s investment strategy is built on the idea of mean reversion. He makes his investment choices by looking for irrationally priced stocks.
He says financial assets can be too expensive or too cheap at any given moment, but will always go back to average. The worst thing investors can do is to get in or out of an investment for the simple fear of lagging behind their peers, says he.
Why individual investors are at an advantage
Grantham says the basic truth of investment is that investor behaviour is driven by career risk. He feels most investment managers fear taking bold calls and prefer going with the flow and doing what their peers are doing, because it is the safest option to survive in the investment industry.
Grantham says individual investors can take advantage of this practice of investment managers, as it creates herding and thus drive prices well above or below their fair values.
“The prime directive is first and last to keep your job. To do this, you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority ‘go with the flow’, either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price,” says he.
Giving the example of the Internet Bubble, he says companies that were suffering big losses and had no future were getting billion-dollar valuations and fund managers were buying them at excessive prices, just because they feared missing out or deviating from the performance of their peers.
10 lessons for individual investors
Grantham lists out 10 timeless investment lessons for individual investors setting out on dangerous investment voyages.
1. Believe in history: In investing, history tends to repeat itself and all investment challenges pass away in due course. Investors should try and survive the tough times and ignore vested interests of the industry who try to mislead them from time to time about the market, says Grantham.
“The market is gloriously inefficient and wanders far from fair price but eventually, after breaking your heart and your patience (and, for professionals, those of their clients too), it will go back to fair value. Your task is to survive until that happens,” he says.
2. Don’t be a lender or a borrower: If an investor plans to borrow capital for investment, it tends to interfere with their survival in the industry. The temptation to borrow has proven to be so seductive that individuals have shown themselves to be incapable of resisting it, as if it were a drug.
“Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces patience, an investor’s critical asset. It encourages financial aggressiveness, recklessness and greed. It increases your returns over and over until, suddenly, it ruins you. For individuals, it allows you to have today what you really can’t afford until tomorrow,” he says.
3. Don’t put all of your treasure in one boat: It is best not to put all the capital into one investment, as several different investments give a portfolio resilience and the ability to withstand shocks. “Clearly, the more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you,” he says.
4. Be patient and focus on the long term: It is important for investors to have patience to exploit favourable market conditions. There will always be ups and downs in the market. So it is best to invest for the long term when a good investment opportunity arises. “Wait for the good cards. If you’ve waited and waited some more until finally a very cheap market appears, this will be your margin of safety. Now all you have to do is withstand the pain as the very good investment becomes exceptional. Individual stocks usually recover, entire markets always do. If you’ve followed the previous rules, you will outlast the bad news,” he says.
5. Recognise your advantages over the professionals: Individual investors have a big advantage over professional managers as they don’t have to report their results to anyone but themselves. Also, they don’t have to match the market’s return every year and don’t have the fear of getting fired. Also, unlike a professional investment manager, individuals can afford to hold a temporary loser for a winning outcome in the long run which is a huge advantage for many reasons like minimising taxes and transaction costs.
“The individual is far better positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals,” he says.
6. Try to contain natural optimism: Although optimism is often regarded as a positive survival characteristic in the investment world, it comes with a downside, especially for investors who don’t like to hear the bad news. “In a real stock bubble like that of 2000, bearish news in the US was greeted like news of the bubonic plague; bearish professionals were fired just to avoid the dissonance of hearing the bear case, and this was an example where the better the case was made, the more unpleasantness it elicited,” he says.
Investors should not be overly optimistic and learn to give importance to both the good and the bad news of the investment industry. One should be willing to hear bearish, bad news about the risks they have taken with their capital and make informed decisions about them.
7. On rare occasions, try hard to be brave: Professional investors have the ability and the skill to often spot bargains, but they can’t and don’t always act on it. This is due to the fact that professional investors don’t want to risk lagging behind their peers and lose their jobs if they go wrong on an investment bet.
But Grantham feels individuals don’t have that worry and they should trust their research if they find an investment that looks cheap even if it’s likely to be out of favor for a while. “You can make bigger bets than professionals can when extreme opportunities present themselves because, for them, the biggest risk that comes from temporary setbacks – extreme loss of clients and business – does not exist for you. So, if the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it,” says he.
8. Resist the crowd, cherish numbers only: It is toughest for investors to resist the enthusiasm of a crowd. “Watching you neighbours get rich at the end of a bubble while you sit it out patiently is pure torture,” he says. So, Grantham advises investors to do their own simple measurements of value, or find a reliable source and check their calculations from time to time.
He says investors should ignore especially the short-term news like the ebb and flow of economic and political news. “Stock values are based on their entire future value of dividends and earnings going out many decades into the future. Shorter-term economic dips have no appreciable long-term effect on individual companies let alone the broad asset classes that you should concentrate on. Leave those complexities to professionals, who will on average lose money trying to decipher them,” he says.
9. In the end it’s quite simple. Really: Investors should look to calculate estimates and forecasts of an attractive investment proposition by using simple methodology and shouldn’t let any external factors affect their research. “These estimates are not about nuances or PhDs. They are about ignoring the crowd, working out simple ratios and being patient,” he says.
10. This above all, to thine own self be true: To become successful, it is imperative for investors to know their limitations as well as their strengths and weaknesses. “If you can be patient and ignore the crowd, you will likely win. But to imagine you can, and to then adopt a flawed approach that allows you to be seduced or intimidated by the crowd into jumping in late or getting out early is to guarantee a pure disaster. You must know your pain and patience thresholds accurately and not play over your head,” he says.
He also believes that if investors cannot resist temptations, then they should absolutely not manage their own money. People can either hire a manager who has those skills to manage their money efficiently or they can pick a sensible, globally diversified index of stocks and bonds for investment which they should never look at again until they retire, says he.
Grantham also feels that if individuals have patience, a decent pain threshold, an ability to withstand herd mentality, some basic college level education in math, and a reputation for common sense, then they can be successful in the investment world.
“In my opinion, you hold enough cards and will beat most professionals which is sadly, but realistically, a relatively modest hurdle and may even do very well indeed,” he says.
(Disclaimer: This article is based on Jeremy Grantham’s GMO Quarterly Letter).
Key Outcomes for Foreign Investors in Vietnam's New Law on Investment – Lexology
Vietnam’s revised Law on Investment (Law No. 61/2020/QH14)(“LOI 2020”) enters into force from January 1, 2021. The National Assembly adopted the LOI 2020 on June 17, 2020. It will replace Law No. 67/2014/QH13 (“LOI 2014”), which has been in force since 2014. Notable provisions of the LOI 2020 for foreign investors in Vietnam include the introduction of a “negative list” for foreign investment, increases in ownership thresholds for treatment as a national investor, a “national security” provision, new investment incentives, and additional measures to streamline investment procedures.
The LOI 2020 will be accompanied by implementing regulations, which are currently being developed by the Ministry of Planning and Investment, providing additional guidance as to conditions for investment in certain sectors, procedures for obtaining project approvals, and other key details.
Key outcomes in LOI 2020
Negative list. The LOI 2020 introduces, for the first time in Vietnam, a market access “negative list.” This means that foreign entities are afforded national treatment with regard to investment except in those sectors explicitly set out in an accompanying List of Restricted Sectors. This is a more permissive approach than previous iterations of Vietnam’s investment regulations, which followed a “positive list” approach, blocking market access except in listed sectors.
Under the LOI 2020, investment in certain sectors may be entirely prohibited or subject to certain restrictions or conditions. All investment, foreign or domestic, is banned in eight enumerated sectors (including trading in certain chemicals and identified narcotics. Under the LOI 2020, debt collection is newly added to this list of restricted sectors.1
Certain sectors are considered “conditional” for all investors, foreign or domestic, and may require formal approval (i.e., in the form of business licenses or other certifications).2 Such conditional sectors must “satisfy necessary conditions for reasons of national defense, security or order, social safety, social morality, and health of the community.” These sectors are listed in Appendix IV (“List of Conditional Investments and Businesses”) of the LOI 2020. The Government of Vietnam is expected to release implementing regulations further detailing conditional investment rules and procedures. Conditional sectors will also be listed on the National Business Registration Portal.3
Conditional investment rules apply to foreign investors, with additional potential restrictions including:
(i) Percentage ownership limits;
(ii) Restrictions on the form of investment;
(iii) Restrictions on the scope of business and investment activities;
(iv) Financial capacity of the investors and partners; and
(v) Other conditions under international treaties and Vietnamese law.4
These rules will be further explicated by forthcoming implementing regulations.
The List of Conditional Investments and Businesses of the LOI 2020 details 227 sectors with some changes from the LOI 2014. For example, sectors added to the conditional sectors list include water sanitization and architectural services. Certain sectors, including franchising and logistics, were removed from the list.
Lowering “foreign investor” threshold from 51% equity to 50%. Under the LOI 2014, enterprises 51% or more foreign-owned were treated as “foreign investors” for the purposes of investment activities. Thus, a company more than 50% owned by a foreign entity could still receive the benefits afforded to domestic enterprises. The LOI 2020 changes this, lowering the “foreign investor” threshold to 50%.5
Restrictions relating to “sham” nominee transactions. The LOI 2020 tightens rules regarding the use of Vietnamese nominees in order for foreign investors to access restricted sectors. An investment undertaken “on the basis of a counterfeit civil transaction” – also translated as a “sham” or “façade” transaction – can be terminated by the government.6
National security measures. The LOI 2020 states that investments shall be suspended or terminated if such activities are “harmful, or are in danger of harming national defense or security.”7 Notably, the terms “national defense” and “security” are not defined, leaving the Government of Vietnam interpretive freedom in applying this provision.
Investment incentives. The LOI 2020 introduces new incentives for investment in certain sectors, including:
(i) High-tech sectors, including software development, clean energy technologies, and information and communications technology-related products;
(iii) Public transportation;
(vi) Pharmaceuticals and other health industries; and
(vii) Investment projects for creative startups.
Further, the LOI 2020 provides for investment incentives in “[a]reas with difficult socio-economic conditions” and industrial zones.8 Such incentives may include tax incentives, access to credit, support for research and development, and other measures.9
Other notable provisions. The LOI 2020 includes a range of provisions dictating the terms for Vietnamese outbound investment and includes additional rules and guidance regarding investment approvals, including procedures for issuance, adjustment and termination of outward Investment Registration Certificates.
While the LOI 2020 appears structurally more permissive of foreign investment, certain administrative hurdles remain in place (e.g., the requirement that investors acquire project-specific Investment Registration Certificates and high-level approvals for certain types of investments). Further, uncertainty remains as to the specific conditions for investment in the “conditional” sectors, as well as the potential use of the blanket national security provision.
Despite these administrative and political considerations, foreign direct investment in Vietnam continues to increase at a consistent pace – reaching US $38.2 billion in 2019, up 7.2% from the year prior – and appears poised to continue. Vietnam’s ratification of the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in August 2020 and January 2019, respectively, also support the Government of Vietnam’s commitment to provide additional certainty and opportunities for foreign investors.
Two other notable laws of interest to foreign investors will also enter into force from January 1, 2021. The new Law on Public-Private Partnership (PPP) (Law No. 64/2020/QH14) will strengthen and codify provisions relating to PPP projects at the law level (as passed by the National Assembly), which could potentially reduce the uncertainty and ambiguity of the legal framework applicable to a particular infrastructure project. Meanwhile, the amended Enterprise Law (Law No. 59/2020/QH14) streamlines the regulation of the establishment, operation and governance of corporate entities in Vietnam and enhances protections for minority shareholders, among other key provisions.
Foreign Investment in UK Finance Set to Drop on Covid, Brexit – BNN
(Bloomberg) — Big financial services firms are set to avoid investing in British businesses next year, discouraged by the uncertainties of Brexit and the Covid-19 pandemic.
Only 10% of of global financial services firms are planning to establish or expand operations in the U.K. in the coming year, down from 45% in April, according to a report by consultancy EY published Monday.
“U.K. financial services entered the pandemic in a very strong position, having led the rest of Europe in attracting overseas investment over the past 20 years,” said Omar Ali, U.K. financial services managing partner at EY.
The decline in appetite suggests the sector’s absence from the European Union trade talks “may have started to affect investor sentiment,” Ali said, while Covid-19 has made government support and infrastructure more important for those looking to invest.
The poll of 220 decision-makers painted a rosier picture in the medium term, with 53% expecting the U.K. to be more attractive for foreign direct investment in three years’ time.
©2020 Bloomberg L.P.
COVID-19 Investment Warning: The CRA Can Tax Your TFSA! – The Motley Fool Canada
A lot of Canadians weren’t actually that great at saving before the pandemic. Many lived during the last decade in relative ease, knowing that we had a strong economy that was only getting stronger. However, what we probably weren’t aware of was the increasing debt that both our country and others racked up.
Then the pandemic hit, bringing the Canadian government’s debt up another $15 trillion between January and September for a grand total of $272 trillion as of writing. We’re actually leading the charge in debt, ahead of countries like Japan, the United States, and the United Kingdom.
So, Canadians started to get their affairs in order, and that included their cash. In many cases, it meant opening up or taking advantage of a Tax-Free Savings Account (TFSA). With another TFSA contribution limit on the way in January, many are looking for another opportunity during perhaps another market crash. But before you do, the Canada Revenue Agency (CRA) has a word of warning.
The TFSA can be taxable
The TFSA can be taxed, but only under certain conditions. The TFSA is meant to get Canadians investing in Canadian business. So, the first problem is if Canadians are investing in companies outside Canada. If so, you’re subject to taxation on those returns. This can be a serious problem, as with a market crash, there were tons of great companies that saw the share price plummet. Just make sure those shares are Canadian. This also means making sure you’re investing in a company on the Canadian market, as many companies are listed on both the TSX and NYSE, for example.
Second, you can be subject to tax if you go beyond the TFSA contribution limit. If the TFSA was limitless, you could invest any time you wanted, as much as you wanted, and potentially make a killing! The CRA doesn’t want to miss out on those taxes. So, it creates a limit year by year. That way, if there’s a huge initial public offering (IPO), you only have a couple thousand to invest, rather than a hundred thousand.
You also can’t use your TFSA like a business. This happens if you’re making huge trades, trading too often, or making too much money basically. This is a bit of a grey area, so you must be careful. It seems the number right now the CRA is going off of is $250,000. If you make that much in returns, the CRA will want to take a closer look at how you’re making that money.
Finally, beware the TFSA contribution limit! Yes, I already mentioned this, but there’s another problem. You have $69,500 worth of contribution room this year. But let’s say during the pandemic ,you took out $20,000 to help with bills. Now, you’ve made that money back and want to put it back in your TFSA. Not so fast!
If you’ve already reached the TFSA contribution limit for the year, you cannot put money in your TFSA again, or it will be subject to taxes. You have to wait until next year, and then check out MyAccount on CRA or call CRA to see how much room you have available. Don’t mess it up!
The TFSA is an excellent tool to use during the pandemic, but be careful. You don’t want to take full advantage and then fall under these categories. If you do, it’ll make that TFSA contribution limit basically worthless.
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