Investment words to survive by

You've been reading about a lot of things you can't control this week. Today I'm writing to you about the one thing you can control: the decisions you make with your money. After all the facts have been accumulated, weighed, measured, and analysed, you still have to do something with your money. Today I'm going to suggest you have three general approaches: live, believe, think.

Any one of them may be successful. Or they may all be wrong. You never know in life, or publishing for that matter. The best you can do is to surround yourself with smart people who are working hard to figure the world out and have your best interests at heart. You live. You believe. You think.

Because most people are human, they're going to disagree, even if they're smart. A room full of independent thinkers (like the recent MoneyWeek roundtable you'll read about in the latest issue of the magazine) will produce investment views that diverge, and even clash. That's the whole idea. Friction is good. It produces heat and light.

Personally, it's something I'm relieved to have found out in my short time at MoneyWeek Research. There is no 'house view'. There are only smart people thinking, researching, and publishing. They produce the work. You decide what work is best for you.

In my experience, based on ten years running a financial publishing business in Australia (and 17 years in the financial publishing business overall) this is the best way to consistently produce investment ideas that can help you improve your portfolio, and maybe even change your life. Mind you, it's not always a bed of roses.

When your mission is to help people think for themselves and take control of their financial future, you're sometimes going to present them with ideas they don't like or even ideas they disagree with. That's OK. Ideas have consequences. Ideas that challenge your own beliefs and the status quo can make you uncomfortable. They should.

This is exactly what the value of having an alternative source of ideas is: it presents you with another perspective to challenge your own. You still have to decide. But you now have the benefit of a better understanding of your choices and what's at stake. But enough of the theory. Let me show you what I mean. First, we'll talk about George Osborne in China and remind him to read his Lord Palmerston. Then we'll talk about the power of dividends. And finally, your single greatest evolutionary advantage: the ability to use your brain.

A 'Golden Decade' for two great civilisations

George Osborne is in China drumming up business. It's probably what he should do, given that he's the chancellor of a country that runs a current account deficit. To 'finance' that deficit you need capital: the Chinese have it; Osborne wants it.

He's gone to Shanghai to make his pitch. But in broad terms, you could say his investment approach is the first of the three I mentioned above: live. In diplomatic terms, it's realpolitik: don't worry about the drama, get on with living.

China may be a single-party state that's tacking back to its authoritarian roots. But it has a lot of money, industrial might, and people. And as 19th century British statesman Lord Palmerston is thought to have said, "nations don't have friends, they have interests".

It's in Britain's interest to be 'friends' with China. Not like you're friends with someone on Facebook; more like when you make alliances out of cold, hard necessity.

Faced with the prospect of an America in decline, Britain has to be realistic about its place in the world order. If you want a favourable position in the new world order – the one that doesn't include the US dollar as the world's reserve currency – you have to be in the room when the rules are made. You have to be friends with the powerful, especially when you know you're not as powerful. If you don't have gold, you have to be friends with people who have gold.

Why is it in Britain's interest to make nice with China? I'll let Osborne explain – but I should note that his view is largely the view of MoneyWeek's editor-in-chief, Merryn Somerset Webb. This financial crisis, too, shall pass. Tomorrow will be more or less like today, and today was more or less like yesterday, except better.

This is how life works for most of us, most of the time. It doesn't deviate much. it's fairly predictable. It makes investing easier. Don't panic about the future, recognise the facts, be practical. Live.

Here's Osborne's case for Britain's strategic pivot to the East:

"If China continues to grow as the IMF forecasts it would mean going from GDP of $11trn this year to a GDP around $16trn in just five years.

"That would add an economy larger than Germany's or Japan's to world GDP.

"So it is clear that even as China undergoes this transformation, the vast size and potential of China's economy means that it will continue to be a key driver of world growth for decades to come.

"So [...] China's undergoing difficult change – but it's still a huge contributor to our economic future."

You get the sense that Osborne might prefer a Germany-sized economy in Europe that was not Germany. That would make Britain's decision about whether to stay in Europe easier. You could move China to Middle Europe.

Or, because that's against the laws of geography and physics, you could build physical and financial connections between the two countries. Did somebody mention a new Silk Road? Osborne had something to say about that, too:

"The mutual benefits of connecting our markets are clear – increased access to international capital for Chinese firms, unparalleled investment opportunities for Chinese and international investors, enhanced stability for both markets, and efficient allocation of resources – acting as the basis for sustainable economic growth.

"So I want to see our stockmarkets in London and Shanghai formally connected, with UK firms raising funds from Chinese savers, and Chinese firms listing in London.

"This week we've announced with the Chinese government and [the Shanghai] stock exchange a landmark feasibility study to look at how we could do this."

Well that should be interesting. You'll have Chinese firms raising capital in London, in renminbi-denominated bonds. As one commenter put it, you'll have "short term debt issued by the kinds of long-term strategic thinking sold in the capital City of short-term financial thinking". When you put it that way, it doesn't sound like a strategic partnership. It sounds like a miscalculation.

But wait! There's more. Here was Osborne's rousing finish as he spoke in Shanghai:

"I've travelled not just to Beijing for our formal economic and financial dialogue with the Chinese government, not just here to the financial centre of Shanghai, but on to Chengdu and even to Urumqi – far in the west. And I'm told I'm the first British government minister ever to do so.

"Because I want Britain to be connected to every part of this vast nation.

"And in my thousands of miles of travel this week, across four provinces, I could have chosen anywhere in China to give this message to the British and Chinese people.

"But I very deliberately chose to come here, to the Shanghai Stock Exchange, to the epicentre of the volatility in financial markets this summer, to say this:

"Whatever the headlines, regardless of the challenges, we shouldn't be running away from China.

"And my message is clear: through the ups and downs, let's stick together. Let's stick together to grow our economies; let's stick together to make Britain China's best partner in the West; let's stick together and create a golden decade for both of our countries.

"Britain and China: we'll stick together."

You can see it now. Xi Jinping and the Queen – best friends forever. China's president will sail up the Thames next month to discuss terms with Britain on its future 'sticking together'. You would expect a few more announcements about closer ties and a brighter future, etc.

For investors, this is the 'live' option. The future is coming whether you like it or not. It will involve China as the world's largest economy, and probably a partially gold-backed reserve currency, whether you like it or not. If you're realistic, you don't take a view on whether it should happen. You just figure out how to make it work for you. That's option one.

Believe in stocks for the long run and do nothing

The second option is simple. It won't take much time to discuss. It comes down to one word: believe.

By 'believe' I mean you can accept as an article of faith that, over time, the ownership of common stocks is the single best way for a wage-earner to become an investor and accumulate wealth from the earnings of a productive enterprise.

It even sounds comforting to say. And there's certainly an element of historical truth to it. This belief holds that it doesn't really pay to ask questions or make forecasts. You can't know the future. As an investor, trying to figure it out will cause you to over-trade, behave emotionally, and buy at the top while selling at the bottom.

Perhaps the best adherent to this belief system I've ever come across is Stephen Bland, the editor of The Dividend Letter. His investment belief system is based on buying the highest yielding UK-listed stocks across a diversified group of UK sectors, and never selling. Ever.

If you share this belief system, your next investment decision could be the last one you ever have to make. And you have to admit, there is a kind of comfort in that certainty. For better or worse, for richer or for poorer – heck even in death, you'll never part from these stocks. You simply collect cheques until you die, and fill the time in between living the life you want.

That's the theory anyway. In practice, it makes for what looks like some remarkably brave investment moves. For example, in the just-published Dividend Letter, Stephen recommended two oil stocks. Not because he liked them. Or thought oil was over-sold. Or took the reasonable view that Chinese demand would eventually recover and everything would be fine.

It's because they were the highest-yielding stocks on his list. Based on the system, they've gone into his latest High Yield Portfolio (there are six of them now). It's a simple strategy. And it's based on a simple belief: you can't do better than the market so don't even try.

If ownership of commons stocks makes you an owner of a business, and if your ownership entitles you to a piece of that business's after-tax earnings, then buy companies that pay out those earnings to shareholders. Leave the stock selection to Warren Buffett and the asset allocation to hedge funds. Believe, and enjoy your life.

Only the paranoid will survive the coming financial repression

The last investment approach is this: think. And in the interests of full disclosure I should say it's the approach I favour. Your quality of life is influenced by your standard of living. You can be happy without being rich. But if you want to be fully free, you have to be financially independent. And to do that requires thinking, doubt, scepticism, and a dash of paranoia.

If you think I'm exaggerating, let me point you to scandal that has wiped billions of dollars off the market capitalisation of Volkswagen. According to Marketwatch, the company has been accused of "manipulating the software in its diesel vehicles to fool testers into thinking the engines were much cleaner than they really were".

It turns out VW diesels belch more noxious fumes than they're legally allowed to. You can't arrest a car for breaking the law. But the recall and fines could cost VW at least $18bn, according to the Daily Telegraph. Given that the software manipulation goes back to 2009, the number could grow, with up to 11 million cars now under a cloud of suspicion.

Are you paranoid yet? There are two disturbing aspects to this. First, if you're a VW shareholder you just saw your company lose $30bn in market capitalisation. If it was a big part of your retirement portfolio, it's now a smaller part. And remember, there's never just one cockroach. Is this going on in the rest of the car industry too? You'll find out soon enough.

But consider the facts of what happened: manipulation in software prevented accurate information from being discovered by those who were looking for it.

How is this different, in principle, from what happens every day in the stockmarket? Quote-stuffing computer algorithms distort prices as a matter of course. Market prices don't communicate real information anymore, do they? They communicate noise. Or worse, they communicate disinformation about the true value of securities.

Maybe that is paranoid. But give the last few years in Europe – VW, BP, the Libor rigging scandal – it's hard not to reach the conclusion that a lot of financial actors around the world are flat-out lying. Some of them are getting caught. Some are still at the podium spouting the company line.

Tim Price called the liars out recently. That's always uncomfortable for some people, especially the liars. You can argue about whether it's right to ring alarm bells right now. If you're a believer, it doesn't matter. If you're living, you keep on living. If you believe, you keep on believing.

But if you're paranoid, and you've got your thinking cap on, you might be wondering what's next for investors. Tim's thought about that. Accordingly, let me close today's tome with something from one of the reports available to new subscribers to the London Investment Alert. It's Tim's new service, which I describe as alternative investment reporting for the thinking investor. Or what's really going on behind all the lies.

In the report, Tim explores the four strategies central banks use to delay the next financial crisis and assert more control over the economy and the financial system. They are: more quantitative easing, negative interest rates, currency wars, and 'helicopter money'.

The section on helicopter money, I think, is the most relevant to the current situation in Britain. When Jeremy Corbyn talks about "People's QE", he's talking about more than investing in infrastructure and building things. He's talking about printing money to give it to people. This is the definition of helicopter money.

Here's what Tim wrote about it:

"In a speech given on 21 November, 2002, remarks by then-governor of the Federal Reserve, Ben Bernanke, would make him famous/infamous. The title of his speech was Deflation: Making sure 'IT' doesn't happen here.

"By the way, even the title of the speech reveals the danger we're now in. Central banks have always considered deflation to be their main enemy. They measure deflation by falling prices. But what they're concerned about is what happened in the Great Depression: a contraction in the money supply as a result of bank failures.

"This is why the bailouts happened in 2008. Bankers successfully persuaded politicians that a collapse in credit would precipitate a collapse in the economy. 'Deflation' was the enemy because it evoked the ghost of the depression.

"Another way of thinking of 'deflation' is falling prices. For consumers, falling prices are OK. Things you buy every day get cheaper. The purchasing power of your cash gets stronger. For consumers, the right kind of deflation is good. Bernanke acknowledged this in the notes to his speech and called it 'supply side' deflation and admitted China might cause it, which it did.

"But what made Bernanke's speech infamous is that he referred to 'helicopter drop money'. He said the Fed could always avoid deflation (create inflation) by simply dropping money from helicopters. It was something economist Milton Friedman once suggested.

"Bernanke wasn't being serious. Dropping money on the public from helicopters—making it rain—is a metaphor. But the implicit point is that there is no theoretical limit to the amount of money a central bank can create. With a digital printing press, you press a few buttons and you have new trillions.

"In modern terms, and in the context of Financial Martial Law, helicopter money would come in the form of a new plastic card with a chip. You might get it in the post. Or you might be asked to come and turn in all your cash and collect your new card.

"The card would be loaded with credits, units, or some new kind of currency. Those credits would expire within 30 days. If you didn't spend them, you lost them. I'm just theorising here. But do you see what I mean? If you want to grow credit and people aren't borrowing and banks aren't lending, you have to take the logical next step.

"You have to put money in people's hands.

"And it can't be money they can save or hoard. It has to be money with a 'sell by' date. They must either use it, or lose it. That's when you've lost choice. You may feel richer, being given 'money' to spend. But if that's your only alternative, if you have no other recourse, no cash, no savings, no valuables, how rich are you?

"I know. It seems extreme. But that's why I'm calling it Financial Martial Law. It's not just the attack on your cash. It's the attack on your financial freedom. On your whole quality of life. And it's coming."

There you have it. Plenty to think about. More tomorrow. Until then.

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