Yesterday I had a chat with an interesting guy called Jim Rickards.
Rickards is a real iconoclast. He spent most of his career at the center of the global financial system. First he worked as a lawyer for the notorious Long Term Capital Management hedge fund, and after it blew up (along with 90% of Jim’s wealth) he went on to work as an advisor to the CIA and Citibank.
So he learned about the system from the inside. Now now he’s out to expose it. His books are about the cracks and lies and contradictions at the heart of the financial system.
Rickards flew in from the States yesterday morning to meet with Ben Traynor and David Stevenson, my esteemed colleagues here at Agora Financial UK. They’re putting the finishing touches on a project they’ve been working on for the last six months (that’s right, I was a tagalong).
So anyways – long story short – Rickards is a smart guy. At St Pancras Station in London we chatted about everything from paradigm shifts in physics, to the origins of the first world war, to the greatness of Keynes and the failings and Keynesians.
Then we talked about a subject dear to my heart. It’s called “the equity risk premium”.
I hope you’re interested, because you’re going to be hearing plenty more about it in this newsletter over the next few weeks!
The equity risk premium is a dead simple idea. It just means that stocks pay more than safer assets like bonds in the long run. The reason for this is that stocks are riskier than bonds – in other words, there’s a bigger chance that you might lose your money if you invest in them.
For ordinary investors, the equity risk premium is a godsend. It means that if you’re up for taking your cash out of the bank and taking a bit of risk, the market is willing to pay you handsomely for it.
Exactly how well does it pay? Well, look at the following chart. It shows the difference between leaving your money in bonds (this is the safe option – the equivalent of cash in the bank) and investing in stocks in the UK over 111 years.
The chart speaks for itself. Risk pays!
And this is just the start of it. There’s more good news. The chart does not account for smart stock selection, and it doesn’t account for a couple of other generous market “giveaways” I’ve uncovered.
In the next few days I’m going to talk a lot more about risk and market giveaways.