A few days (? weeks?) ago, this image made the rounds on Twitter:
It is taken from a BlackRock presentation, where they were trying to push the case for an investment in Bitcoin. You were most likely already familiar with the LHS graph, it is the sort of info doomsayers love to post regularly to remind you how unfortunate we are living in the World we live in.
In reality, moving your money away from the mattress and investing in the absolute riskless instrument, T-Bills, would have generated positive real returns.
source here
Ok ok ok
That’s true for the US and many other countries, but not for any country:
source: UBS 2024 Yearbook
The past has not been kind to many European investors willing to invest only in cash-like instruments. Someone might wonder why for example Italians are still so enamoured with (at least perceived) low-risk investments considering what happened not so long ago.
The difference between the saving and the investing mentality
My podcast co-host Vittorio calls it the “agricultural state of mind”. Italians have a huge saving culture. But they save like farmers: they build up resources for future rainy days. Their anxiety is sedated only if they can SEE (and touch) those reserves, which should go only one way, up.
They do not save to buy more efficient equipment, more time to research new techniques or even to diversify their risk with alternative return streams. Yep, investments. Because any investment means taking more risk!
Italian financial education (from the past) prioritizes visible liquidity, the current account balance, considered the true vehicle of wealth, what is set aside and that ‘does not change’ in value, and if it changes, it must do so only in excess, through gains or additional savings.
The focus is on the result, not the process. There is no probability thinking.
It should not be a surprise that your house is the second type of saving allowed in this framework. The house is tangible, it provides you shelter and therefore you can understand its value. It provides “an implied dividend” because you no longer have to pay rent. And since no one comes to appraise it daily, you can be fairly confident (sigh) that “past returns ARE a guarantee of future results”: its value is going up!
Unfortunately, very few are lucky enough to be able to buy their house without the help of a bank. As long as you have a mortgage, the house is not really yours; therefore, you have to repay that debt as fast as you can because it represents a huge risk. I mean, in this framework you are not repaying a debt, you are buying additional pieces of your house, which is great!
The third type of saving contemplated by the agricultural mindset is the capital-guaranteed instrument*. Even when that guarantee is not really there, like for Italian Government bonds or certificates issued by a bank. As in the infamous Arrested Development meme, obviously countries went bankrupt in the past, and banks wiped out other people’s savings, but it has never happened to ME. To MY country and/or MY bank.
“It is a DESERT!”
Thinking about farmers, reminded me of the sense of fate and inevitability embedded in their mentality. Disasters can happen and the farmer knows about it. But that’s their land. They were born there, they stay there. Like folks born at the base of an active volcano, Italian savers buy Italian Govies because they know better (home country bias anyone?), fooling themselves (“if Italy would default, the government would protect its own citizens“…as if there has been any instance in the past when the party in default could decide which creditor should receive better conditions) is more palatable than facing reality. And if the catastrophe happens, well it was meant to be, there was nothing that could have been done to prevent it.
It reminded me of this comedy bit Kris Abdelmessih posted a while ago in his substack (Turns out that lads who do not realise the perils of the “desert they live in” are despising people fleeing their actual desert).
These are the guys who think a single bond is riskless but the same bond, rolled up with others in a perpetual vehicle, suddenly becomes risky.
I have to mention that the agricultural state of mind is intertwined with Catholic principles. Again fate, unavoidable catastrophes sent by a higher force, embracing suffering. We are born to suffer. Any attempt to escape our fate is a devilish act. Therefore there is no acceptance of progress, science, the unfamiliar…ultimately, knowledge. Da fuck is probability thinking?!?
Inflation is a plague when we enter the supermarket but the thought of it is gone once we are outside. And anyway, there is nothing we can do about it. Want a higher salary? You have to change jobs and who knows what’s behind that door. Stocks? What about those regular 20% drawdowns?
Financial products are bought not sold
What about a basket of short-term corporate bonds with a 1% annual fee but a capital guarantee*? These products are not sold, they are bought. Savers WANT them. The agricultural mentality demands and capitalism delivers. It is as simple as that.
The European financial advisory industry has many issues but investors savers are not helping themselves. For the right (if you live and work in Italy, you have already enough risk exposure to the country) or the wrong (they do not get any fee) reason, Italian financial advisors have no incentive to suggest an allocation to Italian Govies. So imagine, Italian savers buy them in droves DESPITE the bad rap.
I am closer to the Italian scene but this is a pan-European issue. Here is Alan Smith (@AlanJLSmith) about UK:
– UK savers have over £430 billion held in cash accounts.
– 3 million people have more than £20,000 in Cash ISAs.
– 8.6 million people have more than £10,000 in cash deposit accounts.
– 20% were worried about losing money.
– 25% believe that investing is too complicated.
– 23% of people in the UK invest in the stock market vs. 61% in the US
– 55% of people believe that financial advice is only for the wealthy
He suggests a couple of factors that brought us here.
“A regulator and entire compliance industry who confuse ‘risk’ with perfectly normal short-term market volatility. They are not the same thing“. How regulation is written is def an issue but I would not put this at the forefront. Many savers that turned into investors got burned so much by legal-but-shitty products (high fees, high turnover) that they, and their circle, are comprehensibly scared and not willing to repeat the experience. There is no enforcement of transparency rules.
“A lack of education about the basic concepts of investing, starting from schools and universities.” The issue is so rooted in our culture that it needs something more drastic to be eradicated. Sure, more education is a great starting point but I am worried we need a shock therapy.
Born in the USA
A little trip to the other side of the pond and…we arrive at the opposite reality?!? Look at this list Charlie Bilello just posted: 11. Focus on Saving not Investing
What? Did we send to the New World all the lads with an entrepreneurial gene? Well, actually it makes sense. The European society was basically a bunch of families living on “passive income”, a ladder of increasingly rent-seekers that were too comfortable to even think about moving.
All the problems we are facing in Europe are related to this. The way we deal with personal finance topics is just one facet of it.
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