My Say
IT'S ALL GREEK TO ME - My Say No 41
21-12-2009 11:34:05
I do appear to have been rather slack putting digit to keyboard this year but in more ways than one it has been rather busier than I had expected. The 'GFC' and subsequent increase in presentations merely compounded an already busy personal schedule of holidays, an overseas wedding and an additional grandchild.
Oh, did I mention the loss of our redoubtable Volvo in an accident? Readers of my book will either be mildly amused or disgusted to know that I managed to replace it with an almost identical vehicle!
As the year draws to a close I can now roughly summarise the financial outcome for the year (less a few days). Without having an official audit the figures look something like this. Between October 2007 and February 2008 the value of our portfolio was almost exactly halved as share prices fell. From this low point the value has recovered by over 40%.
In my previous two newsletters I looked at the effect the GFC had upon dividend income and I can now summarise. The dividends paid (cents per share) in the first half were reduced by 13% over exactly the same period in 2008. For the second half, the reduction was 20% compared with the corresponding period last year.
These are the results for a sample of some 50+ stocks we held. I also mentioned that we had been purchasers during this whole period so whilst the figures above paint a rather dismal outcome I have run a pencil over our actual income results for calendar 2009 compared with exactly the same time frame for 2008.
This paints a slightly different picture as the purchases completed during this period were instrumental in not only assisting the recovery in asset values but also avoiding the dilution caused by the many rights issues and share purchase offerings made by companies to bolster balance sheets.
For 2009 our actual dividends were only 10% lower than 2008. Remembering the uncertainty we felt at the beginning of the year, this has been a sobering but also heartening result. I will quickly acknowledge again that capital was injected to 'buy' the additional income.
We now face 2010 acknowledging that, as always, the short term direction of the market remains in the hands of sentiment and could thus go anywhere. However, with much of the dross swept aside and corporate balance sheets in reasonable shape we remain optimistic.
It would be fair to say that many of those incinerated in the last year or so, both corporate and individual, are those that borrowed too much and/or spent more than they earnt. I mentioned these two guidelines in my last newsletter and ask those of you with sufficient 'grey' hair to please take time out and, where necessary, remind those that lack the 'grey' of the importance of these two issues.
Despite many people's concerns about their personal finances, it is important to try and maintain a reasonable perspective of current events. I acknowledge that this will always be difficult in the face of the media's almost daily vomiting of much useless commentary.
However, as a farewell to 2009 I thought I would try and revive exhausted spirits with a gentle reminder of just one of the many previous crises that the world seems to have somehow miraculously survived. What has prompted this particular retrospective is the enjoyment of my current 'read': The History of The Bank of England 1640 - 1903. Yes, over two centuries.
It was written by a Greek academic and first published in 1909 (note, the much vaunted crash of 1929-30 was still 2 decades away). The author, Andreas Andreades who was born in Corfu in 1876, strikes me as a remarkable man. Not only fluent in English, French was practically his second mother tongue and he was able to write in it as easily as Greek. However, this newsletter is not about the man but his writings.
The reason I want to explore this book with you is that a number of chapters had me almost laughing out loud. As an academic his style is understated and thus so much more powerful than the increasingly hysterical media. I therefore invite you, as you read this precis, to please mentally change the dates and names to put this into a more contemporary time frame.
We begin with the 'Crisis of 1866' the seeds of which were sown in 1864. According to Sir John Clapham 1864 was "a year of true cotton famine, the last year of a war of attrition in America, a year of war in Denmark and a year of experimental and rather reckless application of British capital overseas".
The blockade of ports in the Southern States of America forced England to seek cotton supplies elsewhere and, with difficulty, import it from all parts of the world. Unable to pay immediately for these unexpected imports with merchandise; payments had to be made in cash and as regards India in particular, in silver. Thus it was that the cotton crisis initially upset both the industrial centres and the money market.
In Europe the crisis was soon completed. It started with the liquidation of the smaller tradesmen and finished with the larger capitalist. Events in England took a slightly different course. Foreign exchanges turned against it towards the end of 1863 and during 1864 the Bank of England had to raise interest rates to 9% which for a time successfully averted the collapse.
The confusion during this period very soon created a speculative atmosphere which highlighted itself in a craze for limited liability companies and financing. The hope of unlimited profit combined with limited risk naturally aroused much enthusiasm. In a short time three hundred limited companies were founded (It has been estimated that 90 per cent of the companies founded between 1862 and 1865 ultimately failed).
Owing to the excessive number of new issues and the lack of credit, people resorted to other means of financing which I won't attempt to describe. Suffice to say that unfortunately the system was employed "without wisdom and sometimes without honesty"
The prospects at the beginning of 1866 were gloomy. A European war appeared imminent and at home the first signs of a financial crisis appeared with the failure of Joint-Stock Discount Company followed by Barned's Bank at Liverpool with liabilities of (Stg)3,500,000.
The situation grew worse day by day with the Bank of England raising interest rates almost daily from 6% to 10% on the 11th May. Towards the evening of 10th May, news spread of the failure of Overend, Gurney & Co. The firm was one of the most respected in the city. A commercial bank, it was the 'bankers bank'; it had no 'retail' customers, its clients were other banks.
Unfortunately, after 1860 the firm had become involved in a series of risky speculations and was actually insolvent without anyone suspecting. An adverse outcome from a court case combined with rumours regarding its solvency caused a run upon the firm.
The directors approached the Bank of England to try and avert disaster but the loan was refused and the company stopped all payments with liabilities of (Stg)18,727,917. The next day (Friday, May 11th) became known as "Black Friday"; Lombard Street became almost impassable as funds were withdrawn and doubt was thrown upon the viability of even the most respected houses.
As an aside, 'Black Friday' was also the tag given to Friday, December 6th, 1745 when the advance of the (young) 'Pretender' struck terror into the London commercial world. Not sure why we have picked Friday as the culprit for our superstitions: However, back to the story.
On the Friday evening of the collapse of Overend Gurney & Co, parliament endorsed steps taken by the Bank of England, which was welcomed by the commercial world, and by the next day seemed to have averted the crisis. Unfortunately this was not the case as, subsequently, more banks failed. Although interest rates were maintained at 10% this was insufficient to attract capital from overseas where interest rates were lower (less than 4% in France).
Despite the lack of confidence from abroad, there was no lack of confidence at home and despite the costs of rescue, the Bank of England reserves rose steadily. This contrasted with huge losses in commerce and savings as a result of the failures of hundreds of companies. Liabilities were estimated at (Stg)50 millions.
The crisis of 1866 did have some good outcomes. The weaker banks and doubtful companies disappeared but the well established banks emerged from it strengthened and were able to "extend their good influence over a wider area"! In addition, all the dodgy financing methods of this period disappeared and were replaced by sounder commercial methods.
I will leave the summation to Andreadas (with my emphasis); "as a result of all this, there was no fresh crisis for TWENTY THREE years".
I leave you with seasons greetings for 2009 and perhaps an inkling of my new year's wish list.
See you next year.
