Book Summary: The Key Ideas
#1: Why you should invest and why you can outperform professionals. We must invest to ensure we have a sufficient private pension and to counter inflation. We have multiple advantages over finance professionals when doing so.
#2: Two amazing investment facts and two crucial investment themes. The power of compound interest and improved access to financial products leave few excuses to start this journey.
#3: Beginning the investment journey. Before investing, we need a financial surplus, we need to carefully budget, and we need to optimise our current account and pension arrangements.
#4: Owning the world and owning inflation. To take advantage of global economic growth and to counter the effects of significant real inflation, we must create investment portfolios that aim to “own the world” and “own inflation”.
#5: The case for precious metals. The demand and supply outlook, coupled with the erosion of fiat currency value, suggest a strong case for the inclusion of gold and silver in our portfolios.
#6: Taking investment further. Advanced investing requires a firm understanding of human psychology, use of top-down and bottom-up analysis, and careful arrangement of our financial affairs.
Book Notes: The Key Ideas in Detail
Premise of the Book
Andrew Craig believes that if you do not have a solid grasp of what is going on in the world, then you are likely becoming poorer. The good news is that nobody is better placed than you to make the most of your money and turn that situation around.
As Craig sets out in his book, fundamental changes in economics and technology have altered the playing field. Those equipped with the knowledge to capitalise on these changes can invest over the long run to grow their wealth and reach a point when their money pays them more than their salary.
Craig sets out his proposed roadmap to achieve this: an investment approach that seeks to “own the world” and to “own inflation”.
Key Idea #1: Why you should invest and why you can outperform professionals.
Since 2008, we have faced a paradigm shift in finance and economics, and the rate of change is only likely to accelerate over the coming years.
There are two main reasons why it is more important than ever to invest:
- Inflation: Government-reported inflation figures significantly understate the erosion of currency we are currently seeing, as evidenced by the huge difference in price increases in property, equities and commodities relative to CPI and RPI.
- Poor state pension provision: Major governments have a growing debt hole and simply won’t be able to fund state pensions in future. To support borrowing, governments are turning to QE, which in turn creates inflation. Many end up significantly underfunded at retirement.
We must therefore invest. And Craig suggests we may even be able to do this better than most professionals, for six reasons:
- Conflict of interest and lack of knowledge. Financial advisors are incentivised by commissions, and not necessarily by products’ merits. Knowledge is also often below par and not reflective of the range of asset classes.
- Charges, fees and costs. Financial advice and products cost money, and few advisors will point to the amply available cheaper alternatives.
- Career risk. Most fund managers “find safety in the herd”. That way, their blame can be shifted to the market, preserving their jobs.
- Liquidity. Big investors can take weeks to make a move and may push the price with it. We have the flexibility to pull the trigger quickly and capitalise on short-term savings.
- Tunnel vision and speculation. Many finance professionals fail to see the bigger picture across asset classes. This is driven by the degree of specialisation (often career-long) among finance professionals.
- The financial analysis war. Within the finance industry, there is often a battle between fundamental and technical analysis. The reality is that the best investors embrace both.
Key Idea #2: Two amazing investment facts and two crucial investment themes
In his convincing case for individuals to invest, Craig points to two important realities of investing:
- The power of compound interest: Craig explains the magic of compound interest (where our gains start to yield gains, compounding over time) but also the perils of high fees and borrowing in this equation.
- Better access than ever before: Financial providers now offer us access to a better range of financial products than ever before and it has become far easier to invest at the click of a button.
When making these investment decisions, we should subscribe to the own-the-world approach because of two crucial investment themes.
- The world economy keeps on growing.
Driven by the rise of the developing world, access to resources and overall competitiveness, the world economy has grown remarkably over the last few decades. This is the principal reason why Craig advocates “owning the world”. It’s also why the top 1% in developed countries have grown so much in wealth – by capitalising on growth in the developing world.
- There is significant real inflation in the world
Government-reported inflation figures are distorted for four main reasons:
- Substitution: e.g. changing one product for another where inflation may be lower.
- Geometric weighting: e.g. changing the weighting of products in the calculation.
- Hedonic adjustment: e.g. reducing a price in the calculation according to the perceived utility of the product.
- “Shrinkflation”: where products get reduced in size but treated the same way in the calculation.
The result is that these figures contribute to a grossly underestimated perspective on inflation and, by result, on the impact on GDP and “real” stock market performance. This is masking the impact of significant tranches of quantitative easing (QE).
Key Idea #3: Beginning the investment journey
To start the investment journey, we must first ensure we have a healthy financial surplus.
Craig points to the property market as one of the key risk areas to this financial surplus, arguing that most individuals in the UK and US are overexposed to property. He suggests a property should never burden us with more than a third of our monthly income in costs.
“If the only investment you have in your life is property, then you are missing out on substantial opportunities to grow your money – and your financial situation is fundamentally unbalanced.”
Property investment should be carefully evaluated for its long-term potential, considering the related costs, trends in rental yield, value-to-salaries, and interest rates.
To optimise your finances, you need to focus on the easy wins: by making optimal arrangements for your current account and pension, and by having a good ISA account.
- Current account: Work out how much money you need to live on each month, and then automatically transfer out the rest into accounts that will make real money.
- Pension: If you employer matches your contributions, Craig recommends maximising your contribution. Notwithstanding, there is a risk in the very long run of policies that target private pension assets.
Craig suggests the following order of play:
- Maximise ISA.
- Buy precious metals.
- Spread betting.
- Additional funds in pension account.
Before we try to follow this order, of course, we should map our route.
Craig suggests that relatively few people make a sufficiently detailed budget for their current and future life, and then stick to it. One suggested step is to break expenses down into “Must Spend” and “Might Spend” items and budget daily, weekly, monthly and annual costs.
Key Idea #4: Owning the world and owning inflation
To address the two crucial investment themes (growth of the world economy and significant real inflation), Craig endorses “owning the world” and “owning inflation”.
To paraphrase Craig, owning the world means owning a wide variety of assets, with exposure around the world. This means a portfolio of cash, shares, bonds, commodities and property – and not just one or two of these.
Owning the world has two important advantages.
First, it provides geographical diversification. As Craig observes, apart from in war times, the world economy has always grown as a whole (this was written before COVID-19). This diversification therefore offers offsetting downside protection when one region suffers.
Second, it provides asset class diversification. This offers a similar level of risk reduction, particularly when asset classes show some level of negative correlation.
Owning inflation offers crucial protection against continued quantitative easing. Craig’s endorsement of monetary metals in providing this inflation protection is a theme that runs throughout the book.
To achieve this portfolio composition, Craig recommends three high-level steps:
- Own an ISA with a quality stockbroking company.
- Set up a direct debit to the ISA account. This embraces the psychological benefit of defaults (more on that here) as well as “averaging in” on pricing.
- Split your money between owning the world, owning inflation and cash. Craig suggests 60-70% owning the world, 10-20% owning inflation, and the remainder in cash.
To own the world, traditionally we might have needed many different products. But there are now funds that provide this exposure in a single product, reducing fees for all the products.
To own inflation, we will likely need more exposure to commodities. Craig recommends gold and silver, principally because they have been used as a money alternative to fiat currencies.
Key Idea #5: The case for precious metals
Throughout the book, Craig makes a strong case for dedicating a portion of our investment portfolios to precious metals. He suggests there are 6 main reasons why we should own gold (and silver) in our portfolios.
- This gold bull market is still a fraction of the 1970s bull market. Between 1971 and 1980, the price of gold increased 24-fold. The same growth now would imply a top price of $6,000.
- The demand for gold (and silver) is rising. As a proportion of total invested assets, gold is at historical lows. This allocation is likely to shift, with much improved access to gold as an investment and higher government demand, e.g. from China.
- The dollar price of gold doesn’t tell us much. Relative ratios, such as gold versus property, oil and stock markets, do not suggest gold is overvalued.
- Interest rates. Due to negative real interest rates, there is now little opportunity cost to investing in gold.
- Lower supply. In short, it’s getting harder and harder to find and mine.
- The supply of paper money. The creation of money will push up nominal values in line with the inflationary effects of increased money supply.
Craig therefore concludes that the current climate calls for exposure to precious metals in a diversified portfolio.
Key Idea #6: Taking investment further
For those who want to take things further, there are higher potential returns (and risks) on offer. This requires deeper knowledge and understanding and a bigger time investment.
Craig highlights four key concepts for investment success:
- Human psychology and investing. We must understand that our psychology has a significant impact on our ability to invest successfully. We need to understand the cognitive biases that can affect our investing decisions and have a clear belief that we can make money from money.
“If you believe that you can make money from your money, this is an important step on your way to true wealth and financial freedom.”
- Using top-down analysis. Top-down analysis is where we use our knowledge of current affairs, economics, and all things finance to identify investment trends and opportunities. As part of this approach, Craig suggests keeping a “theme-driven investment shopping list”, writing down opportunities as you think of them. The next step is finding funds the provide access to such opportunities.
- Using bottom-up analysis. This draws on a combination of fundamental and technical analysis to better gauge when to buy or sell. Craig recommends a range of techniques for fundamental analysis, from basic valuation tools such as P/E ratios and dividend yields, to peer group analysis. For technical analysis, Craig points to the relative strength index (RSI) and formula-based trend following.
- Arranging your financial affairs with third parties. The best providers will enable you to invest cheaply in all asset classes and receive a constant stream of investment ideas.
You can buy the book here or you can find more of our book notes here. For further related reading, check out The Intelligent Investor by Benjamin Graham, Think and Grow Rich by Napoleon Hill and The Ivy Portfolio by Mebane Faber and Eric Richardson.