Saturday, March 31, 2012

Cheap sugar puffs and other investment tips

Can you make money as an investor eschewing the business press and trusting your own observations and experiences?

Normally I scoff at people who say things like "I'm buying Thomas Cook - people will always go on holiday", completely ignoring the current share price and the company's competitive and financial position.  In fact Thomas Cook is down 90% over the last 2 years; people may always go on holiday but they are also free to book with online competitors.

But a walk down the cereal aisle at Tescos this week did give me an investment insight.

I bought Tesco shares quite heavily in January after their first profit warning in 20 years had caused them to fall by 20% or so in a matter of hours.  I thought the fall overdone and expected to be quickly up on my investment. It turns out I was wrong about that as the shares have hovered around the same level ever since and even gone lower on occasion.

It was a long term investment of course and I can wait.  TSCO yields 4,5% and the significant business that it does outside the UK should ensure that group profits continue to grow and give me a healthy return.

Certainly beats any cash ISA investment I know of.

There is no denying though that Tesco's UK retail core is suffering and its not just the recession. Other supermarkets are doing well and stealing market share.  There are problems with non-food and the bosses admit that they have let standards of service and store presentation slide.

But fundamentally it's a question of their prices.  They have got used to growing by simply opening more stores and retaining customers with gimicky Clubcard offers.

It has been obvious for some time that Tescos has become an expensive place to shop particularly when compared to Asda.  To be fair to the management they recognised this long before the profit warning and acted last year with the Big Price Drop promotion.

The City was lukewarm about the plan and it didn't help much at Christmas when other stores, particularly Sainsburys, won custom with special offers and one off bargains which made Tescos "5p off own-brand cheddar" look a bit weak.

That's where the Honey Monster comes in.  I noticed his Sugar Puffs were an eye-catching £1 under the Big Price Drop sign.  Looking around I saw a host of other meaningful price falls right through the aisles.

What does that say to you?  Management is backing its own judgement and sticking with a strategy that is aimed squarely at the right target - Tesco needs to be genuinely cheaper.  Also they have listened to criticism  and made the campaign stand out more.  Tell'em About the Money! (imagine monster voice)

The news for Tescos has actually been pretty bad this week with an embarassing mice infestation in a London store grabbing the headlines ("Mice refuse to leave sinking ship").  All the articles have trotted out the lines about how Big Price Drop has failed and the company is on the ropes.

But if you take a contrarian view now would be a good time to buy Tescos.  All this bad news is in the price and if the company is still holding its market share (down a mere 0.1% this year) while its everyone's favorite whipping boy and when it is still struggling to get its pricing policy right, what will happen when it puts things right - as I think it is - and the press start to pick on someone else?

From our website:  Massive tax rises for Spain in 2012

Saturday, March 24, 2012

Sympathy for Spanish football clubs in short supply

He shoots!  He scores!  He pays tax!  Er, or he should do.  It's actually more common in Spain and other continental leagues for the clubs to pay a star player's taxes for him.

So recent rises in income tax rates for the super rich are causing more of a problem for Spain's La Liga clubs than their players. 

There are two measures that are biting the most: a rise in the top rate of income tax to 52% for anyone earning more than £300.000 and an end to a special low tax regime for foreign workers in Spain who earn more than €600.000. 

This last measure, making the tax loophole known as Beckham's Law non-applicable for big foreign stars, was a particular blow.  It has always been used by the big clubs to make their overseas stars' tax bills more affordable. It's nickname relates back to the time when David Beckham was at Real Madrid.

It used to mean foreign players wages were taxed at 24% but now they will be paying 52%. Ouch.  Although the burden might initially fall on the clubs presumably players who are due to renegotiate their contracts will suffer financially.

To top it all, both the Spanish tax office and the social security agency are chasing the clubs for unpaid tax and social security totaling €1.3 billions which makes Rangers unpaid tax liabilities look like small change.

Many of these top clubs are weighed down by debt as it is.  A couple of years ago some figures came out suggesting the teams collectively owed €3,5 billions and no one believes things are on an improving trend.

I can't see the football clubs getting much sympathy from the Spanish public still suffering from "El Crisis" which looks to be worsening if anything.  Everyone is being hit by higher taxes with even the lower rate going up:

Massive Tax Rises in Spain for 2012

So when you see Barca and Madrid advancing to the Champions League final, as they probably will, and read of Messi and Ronaldo's incredible goal-scoring feats, remember that Spanish football is not in quite such rude health as it appears.

Thursday, March 8, 2012

The truth about fees that every ISA investor should see

It's the time of year (less than a month to go until the 2011/12 deadline) when many people in the UK are thinking about where to invest their ISA allowance.

If you are planning to invest in a fund rather than cash or self-selected securities, then the table on the left (produced by Vanguard - see this excellent guide "The Truth About Costs")) could be more important than any research you do into which funds are likely to outperform. It shows that a fund with high charges will underperform and disappoint in the long term almost however well the fund manager does or however clever you are in selecting a "hot" investment trend.

For the average investor who doesn't follow and track these things, the effect of fund charges are greatly under-appreciated.  0.25% or 1.6% or even 2.5% don't sound very substantial numbers.  A positive bargain actually when compared with say a 15% tip at a restaurant.

The problem is that fund charges are made every year on your cumulative investment, so over a 30 year period a fund charging 2.3% (many do) will take that % of the money you invest in year one 30 times.  And they will take 2.3% of any gains and dividends.  And all the charges they make reduce your capacity to roll up cumulative gains on the investment.

Small wonder that even a 1.6% charge rate can reduce a potential "pot" of £46k to £29k even before inflation is considered and even before tax because it is in an ISA.  And don't get me started on so called Independent Financial Advisers and their fees.  Or "funds of funds" which have two layers of charges.

If you want to find the real scandal of the City, forget about hedge funds and bonuses: it's the quiet, deadly raids that are being made every day on our savings that are the real disgrace.

What to do?

Option 1 - open a self-select ISA with no annual admin charge and pick out 5 or 6 quality stocks with your allowance (perhaps spread the timing of your investments over the year - one every two months) and forget about them.  Apart from the small commission and stamp duty* at the beginning you will have no charges to pay.

Option 2 - pick funds with low charges. Look for a TER* or Total Expense Ratio and remember the difference between 0.25% and 2.5% is enormous.  Any fund with a high TER must really justify itself.

* - note that dealing costs are not included in the TER - they are taken directly out of the fund - so that actual charges are higher than the quoted TER

Final note to anyone unfamiliar with initial charges: never pay them.  Some funds charge up to 5% simply to buy into their fund.  That's money taken upfront and which never earns you any cumulative return.  It is completely unjustified - it's like being charge commission to enter a really expensive shop and spend money there.  Avoid by going to a broker which waives or rebates the charges.

From our website:  Self employment in Spain - the guide

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