Do you remember the crash of 1999?

Chris Robinson, an actor who appeared on “General Hospital”, certainly does. He invested $100,000 hoping to fund his kids’ college education and lost everything. He was left with nothing; well, apart from 20,000 stuffed toys in his garage. 1999 was the year when the barmy Beanie Baby bubble burst*.

History of bubbles

That was just one more in a long history of economic bubbles. An early bubble was the famous Dutch tulip bulb mania in the 1630s, when an inefficient market allowed the price of tulip bulbs to soar because garden centers hadn’t been invented yet. And if the Brits had been sniggering at the behaviour of those wacky Dutch, they got their comeuppance a hundred or so years later when they piled into the South Sea Company. At the time, many companies jumped on the bandwagon and set up during the South Sea bubble; one such company sold itself as, “carrying on an undertaking of great advantage; but nobody to know what it is.” ­ which must be one of the most cynical, or honest, company mission statements ever.

Since then the bubbles have kept coming, and popping. We’ve had bubbles in stocks, bonds, real estate, canals, railways, commodities, derivatives, almost anything that has a price.

However, despite bubbles being such a pervasive part of our economic lives there is remarkably little understanding of them.

Anatomy of bubbles

A simple definition of a bubble might be: an asset trading at a price far in excess of its intrinsic value. Sounds reasonable. But intrinsic value isn’t always easy to calculate, especially in today’s world of digital assets. Alternatively, jaundiced traders might define a bubble as merely an increasing asset price that you’re not invested in.

What causes bubbles?

The background conditions may include easy credit, loose regulations, and cross border investment, but what causes an actual bubble? There is no general agreement on this.

Some hold that they start with an economic or technological event that justifies some increase in asset price, but then emotion takes over. This theory would probably have been supported by Sir Isaac Newton who having invested in the South Sea Company famously said, “I can calculate the movement of the stars, but not the madness of men”. Years later John Maynard Keynes was of a similar mind when he commented, “Markets can remain irrational longer than you can remain solvent”.

So, bubbles are the result of irrationality?

Not necessarily, say some academics: bubbles may be argued to be perfectly rational, where investors at every point are fully compensated for the possibility that the bubble might collapse by higher returns. Recently, other academics have argued that bubbles are sociologically driven.

Can we control bubbles?

In theory, central banks can try to curb high levels of speculation through monetary policy actions that might include raising interest rates (sometimes referred to as taking the punch bowl away just as the party is getting good). Fine in theory, but difficult to finesse in practice ­ assuming the will is even there.

Even if we can control bubbles, should we?

The aftermath of some bubbles can have a very negative effect on the wider economy, for example the fall-out from the credit crunch in 2008. But, some bubbles, while they lose money for investors, leave behind an infrastructure that benefits wider society. For example, canals, railways, and the internet needed excess speculation to raise sufficient funds to build expensive infrastructure, that later generations benefited from.

Current and future bubbles

Today, thanks to quantitative easing by central banks, we have what some call the Everything Bubble, which includes stocks, real estate, fine art, corporate credit, auto and student loans. Discount brokerages in the U.S. have reported a surge in trading volumes, with millennial investors particularly active in cryptocurrency and cannabis investments[2] (the latter giving new relevance to the term joint stock companies).

So, currently, we’re likely to be more interested in which bubbles will burst first, than looking for new bubbles. But thinking further ahead what bubbles might we see in the future?

As The Economist recently pointed out, digital assets with no income streams are very hard to value. So, an obvious place to look for future bubbles will be in the universe of digital assets. For example, if online identities ever become tradable, they could be bubbleable. If the clever people at investment banks manage to securitise access to air and water, then air bubbles and water bubbles would be feasible, and likely.

At the beginning of this year California became the latest U.S. state to legalize recreational marijuana. According to Forbes, cannabis-related businesses constitute one of the fastest growing industries in the US, with the medical marijuana market alone expected to grow to $13 billion by 2020. There are still regulatory hurdles to overcome in the U.S., but as these are cleared away expect pot-heads, and prices, to get high and cannabis investments will add a new meaning to the term joint stock companies.

The FT recently reported that there are now over three million stock indices, which is 70 times as many quoted stocks in the world ­what might be called a bubble in bubble barometers[3]. In this rush to indexify everything, surely it is only a matter of time before there’s a dedicated Bubble Index, that measures the aggregate bubbliness of global assets. At which point, ETFs, options and futures can appear linked to that index, which could lead to a bubbles in bubbles ­a bubble bubble.

How to spot a bubble

Will we be able to predict these bubbles?

Yes, says Robert Shiller; no, says Eugene Fama. Shiller and Fama were co-winners of the Nobel prize for economics in 2013; suggesting, again, that economics is less a science and more an art ­ an art drawn in thick crayons by an 8-year old. Some traders would say, don’t bother trying to predict bubbles, just ride the trend.

If we did want to try to spot bubbles, we might start by observing that they tend to occur during long periods of low interest rates, leading to increased debt levels and investors chasing income. High asset prices are often justified by the four most dangerous words in investment: it’s different this time. And polite dinner conversations turn to, say, the relative merits of Bitcoin and Ripple. So, these are some warning signs if you want to protect your investment portfolio from bubbles. And avoid any asset called Old Face Teddy.

The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute”, Zac Bissonnette

An edited version of the above first appeared in Spectator Money.

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The Stock Market in April

Since 1970, the FTSE All-Share Index has fallen in April in only nine years. This is quite remarkable, and not surprisingly makes April the strongest month of the year for equities. The average return for the index in the month since 1970 is 2.6%, again this is the best performance of any month of the year by quite a margin. Although in recent years, the market’s performance in April has not been so stellar. Since 2000, the average return of the FTSE All-Share Index in April has been 1.8%, with positive month returns seen in 12 of the last 18 years. And it might be noted that the market actually fell in April of last year.

Monthly returns of FTSE All Share Index - April (1984-2017)

The market often gets off to a strong start in the month – the first trading day of April is the second strongest first trading day of all months in the year. The market then tends to be fairly flat for the middle two weeks and then rising strongly in the final week.

End of the strong half of the year

Investors need to make the most of April. After this month the market enters a six-month period when equities have tended to tread water (the Sell in May effect).


The FTSE 350 sectors that tend to be strong in April are: Industrial Engineering, General Retailers, and Oil & Gas Producers; while the weaker sectors are: Construction & Materials, Household Goods, and Media.


At the stock level, the five FTSE 350 shares with the best April volatility-adjusted returns over the past ten years are: JD Sports Fashion [JD.], Ashmore Group [ASHM], Renishaw [RSW], UDG Healthcare [UDG], and Weir Group [WEIR]. Just two FTSE 350 stocks have seen their shares rise in every April since 2007: JD Sports Fashion and Temple Bar Investment Trust. The FTSE 350 stocks with the weakest record in April have been: Balfour Beatty [BBY], BAE Systems [BA.], RELX [REL], Booker Group [BOK], and Pearson [PSON]. Since 2007 the shares of Balfour Beatty and RELX have seen positive returns in April in only three years.

FTSE 100 v S&P 500

This is the strongest month for the FTSE 100 relative to the S&P 500 (in sterling terms), the former out-performs the latter by an average of 1.3 percentage points in April ­ the UK index has out-performed the US index (in sterling terms) in April in 14 of the past 16 years.

Easter holiday

It’s Easter on 1st April so the LSE will be closed on the 2nd (Easter Monday). A famous anomaly in stock markets is that prices tend to be strong on the day preceding and the day following a holiday. This effect is strongest in the year around the Easter holiday.

Article first appeared in Money Observer

Further articles on the market in April.

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International markets 2018 1Q

The following charts plot the performance of a selection of world markets in the first quarter 2018. 

Domestic currency

International markets 2018 1Q


The returns are GBP-adjusted (i.e. these are returns for a GB pound investor).

International markets 2018 1Q [GBP]


The returns are USD-adjusted (i.e. these are returns for a US dollar investor).

International markets 2018 1Q [USD]

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The Stock Market in March

Since 1990 the market has had an average return of 0.2% in March, with returns positive in 54% of all years. This ranks March seventh among months of the year for market performance. Although as can be seen in the accompanying chart, negative returns have been seen in March with increasing frequency in recent years.

Monthly returns of FTSE All Share Index - March (1984-2017)

The general trend for the market in March is to rise for the first three weeks and then fall back in the final week – the last week of March has historically been one of the weakest weeks for the market in the whole year.

Small cap v large cap

Small cap stocks tend to outperform large cap stocks at the beginning of the year, and March marks the final month of the three-month period when the FTSE 250 strongly out-performs the FTSE 100. Since 1986 in March on average the FTSE 250 has out-performed the FTSE 100 by 0.8 percentage points.


The sectors that tend to be strong in March are: Chemicals, Industrial Engineering, Industrial Transportation, Oil Equipment, Services & Distribution, and Support Services. The Chemicals and Oil Equipment, Services & Distribution sectors have seen positive returns every March for the past 11 years. While the weak sectors in March have been: Banks, Fixed Line Telecommunications, Gas, Water & Multiutilities, Nonlife Insurance, and Pharmaceuticals & Biotechnology. The Banks sector has the worst record: it has seen positive returns in only three of the past 11 years.


For stocks, the FTSE 350 shares that have performed the best over the last ten years in March are: IWG [IWG], Clarkson [CKN], Senior [SNR], Intertek Group [ITRK], and Petrofac Ltd [PFC]. Clarkson, Intertek, and Petrofac shares have only been down in March once in the past 11 years. The weakest FTSE 350 shares in March have been Vectura Group [VEC], Lancashire Holdings Ltd [LRE], Kier Group [KIE], Renishaw [RSW], and HSBC Holdings [HSBA].


March is the busiest month of the year for FTSE 100 companies paying dividends. And it’s also a busy month for company announcements: the busiest for FTSE 250 companies in the year with 71 companies announcing their prelims this month (along with 24 FTSE 100 companies).

Aside from stocks, March has often been a weak month for gold and a strong month for oil.


It’s Good Friday at the end of the month. A famous anomaly in stock markets is that prices tend to be strong on the day preceding and the day following a holiday. This effect is strongest in the year around the Easter holiday.

Article first appeared in Money Observer

Further articles on the market in March.

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FTSE 100 and FTSE 250 Quarterly Review – March 2018

After market close on 28 February 2018 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 16 March 2018 and take effect from the start of trading on Monday, 19 March 2018.

FTSE 100

Joining: Royal Mail [RMG]

Leaving: Hammerson [HMSO]

FTSE 250


Baillie Gifford Japan Trust [BGFD]
Bakkavor Group [BAKK]
Charter Court Financial Services Group [CCFS]
ContourGlobal [GLO]
Games Workshop Group [GAW]
On The Beach Group [OTB]
Pantheon International [PIN]


AA [AA.]
Acacia Mining [ACA]
Brown (N.) Group [BWNG]
Dignity [DTY]
Hansteen Holdings [HSTN]
Vectura Group [VEC]

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Berkshire Hathaway 2017 Annual Report

The Berkshire Hathaway 2017 Annual Report has just been released (download from here).

Below is a word cloud generated from the Chairman’s (Warren Buffett) Letter to the shareholders in the report.

BRKH annual letter 2017 word cloud 3


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Chinese New Year 2018 – year of the dog

This coming Friday, 16 February 2018, will be the start of the Chinese New Year.

The following chart plots the average performance of the S&P 500 Index for each animal year since 1950. For example, Ox years started in 1961, 1973, 1985, 1997, 2009; and the average performance of the market in those (Chinese) years was +14.0%.

NB. The Chinese calendar is based on the lunar year cycle and so performance has been calculated for each lunar year – not the corresponding calendar year.

Chinese calendar and S&P 500 [2018]

The Chinese New Year starting this Saturday will be the Year of the dog!

This is very good news for investors, as since 1950 dog years have the strongest average returns of the S&P 500 Index of any of the Chinese zodiac animals. Over the last 50 or so years the average lunar year return for dog years has been an impressive 16.8%.

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Nikkei 225 performance in January

The following chart plots the month returns of the Nikkei 225 Index in January for the period 1980-2017.

Nikkei 225 performance in January [1980-2017]

In the 40 years from 1950 to 1989, the Nikkei 225 Index only fell in January in 6 years. After that, as can be seen in the above chart, the record became quite a bit more patchy. For example, in the 10 years since 2008, the Index has fallen over 8% in January four times.

Further analysis of the Nikkei 225 Index in January over different time periods can be seen in the following table.

Nikkei 225 in January [1980-2017]

In the 68 years from 1950 to 2017 the Index had an average month return in January of 2.5%, and saw positive returns in 69% of years. But since year 2000 this has dramatically changed (as was also the case of the US and UK markets). Since 2000, the Index has had an average return in January of -1.6%, the worst average return of any month in this period.

The following charts plots the cumulative returns for the 12 respective months since 1980 (for more explanation of this chart see here).

Nikkei 225 Index cumulative returns by month [1980-2017]

The cumulative portfolio for January has been highlighted in the above chart.

The cumulative performance of January peaked in 2001, at which point it was the best performing month in the year. Since 2001, the cumulative performance has dramatically under-performed that of other months.

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S&P 500 performance in January

The following chart plots the month returns of the S&P 500 Index for January for the period 1980-2017.

S&P 500 performance in January [1980-2017]

The characteristic of the market in January seems to have changed around the year 2000.

In the 20 years from 1980 to 1999 the S&P 500 index only fell in 5 years. But in the 18 years since 2000 the index has fallen in 10 years.

Further analysis of the S&P 500 Index in January over different periods can be seen in the following table.

S&P 500 in January [1980-2017]

In the 68 years from 1950 to 2017 the Index had an average month return in January of 0.9%, and saw positive returns in 59% of years. But since year 2000 this has dramatically changed, with an average month return of -1.1% and positive returns seen in only 44% of years.

Since 2000, January has the weakest record of performance for the S$P 500 Index.

The following chart plots the cumulative returns from 1980 for 12 portfolios, where each portfolio invests each year exclusively in just one of the 12 respective months. (and is in cash for the other 12 months of the year).

The best performing month over this period has been April, investing in just the month of April each year would have grown an investment of $100 in 1980 to $179 in 2017.

The worst month has been September (the bottom line in the following chart): a $100 investing just in the month of September would be worth $76 by 2017.


S&P 500 Index cumulative returns by month [1980-2017]

The cumulative portfolio for January has been highlighted in the above chart.

It can see that by year 2000, January was the strongest of all the months in the year, but that record changed after 2000. By 2017 the $100 would have grown to 130.

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Santa Rally 2017

The Santa Rally describes the tendency of the market to rise in the last two weeks of the year.

In 2017 the FTSE 100 Index had a return of +2.6% in the last two weeks of the year. So the Santa Rally effect held in 2017.

As can be seen in the following chart, the Santa Rally has only failed to deliver in two years since 2000.

Santa Rally [2000-2017]

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