I saved too much money in the bank account when I was younger. I was working long hours, with an insecure, stressful job at Credit Suisse First Boston. I wanted to save money for a deposit on a house, but house prices were outpacing earnings. However much I saved, the housing market kept going against me. Even in the recession of 2003, house prices never fell much. Similarly in 2008 there was very little panic selling. And each time there was a recession, I lost my job. So I never reached even the bottom rung of the ladder in London.
But later I earned more money, for doing the same job. I don’t know why people earn more as they get older. Given that most scientific breakthroughs are made by people in their 20’s Einstein was 26 when he had his “miracle year” publishing on the photoelectric effect, Brownian motion, special relativity, and the equivalence of mass and energy. Most musicians are at their most creative in their 20’s. I can’t name a recent Rolling Stones or Bob Dylan album.
Young people are more productive – but get paid less
Many successful businesses are started by people in their 20’s, not just the tech wizzkids like Musk, Zuckerberg and Gates. But also more traditional businesses like Sir Richard Branson’s Virgin. Sir Jimmy Goldsmith went into business in his early 20’s. Charles Dunstone of Carphone Warehouse began selling mobile phones on Marylebone Road when he was 25 years old. Stelios started EasyJet when he was 28. There is a lot of evidence to suggest people in their 20’s are more productive – and yet in traditional hierarchical companies, they get paid less.
Then without having to do much, as workers get older, they get promoted and paid more. I worked a lot less hard in my 30’s, for a lot more money. Looking back I shouldn’t have worried about saving– and just trusted that as I got older, I would earn more doing the same job.
So that is the first reason – most work you get paid more as you get more experienced but less productive. But the second reason I wish I’d saved less is low interest rates. Central Banks around the world have kept interest rates at the lowest level they’ve been for several hundred years. Mervyn King, the former Governor of the Bank of England, explains the ultimate cause of these low interest rates in his new book. Some people are clearly saving too much, because interest rates are so low. If the government and Central Banks really wanted to encourage saving, they would raise interest rates.
Low interest rates harm savers. In lazy journalism the equation is normally made that old people are savers, and young people are borrowers. This is rubbish. There are many hugely indebted Buy to Let landlords in their 50’s and 60’s. And there are many people in 20’s trying hard to save for a deposit for a house. What is more, the older generation of borrowers have secured their loans against property, so they pay a lower rate of interest. Young people in debt rarely have property, so their debt is unsecured. They pay a much higher interest rate for any money they borrow.
Low interest rates and high house prices benefit the unproductive older generation
So low interest rates are a subsidy for an older generation, and a tax on young people. The average age of the First Time Buyer in London is 33 years old, and they need a deposit of £91,000 on to buy a flat (average price £367,000) according to figures published by Halifax.
The housing market seems like a pyramid scheme. When I was saving my money on deposit in the bank, the bank was taking my deposits and lending out my money to other people, who were then pushing up the price of houses, so that I couldn’t afford to buy.
But what if the pyramid becomes unstable because people don’t like being at the bottom of the structure? The marginal buyer decides they don’t like the rules of the game and they are not going to play. They might move to cities where the living costs are cheaper. Money will always follow creativity and vibrancy. Rather than people feeling obliged to come to the money, perhaps they should look for cheaper, less fashionable places to live, and inevitably their very act of doing this will make those areas fashionable. You can see this in Berlin, where Prenzlauer Berg is now too expensive for the young, and instead Wedding and Neukölln are the new Prenalauer Berg. Everywhere in London is expensive, but one of my younger, cooler friends has moved to Bristol. Some have left the country.
It is probably no coincidence that musicians write about bleak parts of the city, only for those districts to become “up and coming” a generation later. For instance Vauxhall and I (Morrissey), The Only Living Boy in New Cross (Carter and the Unstoppable Sex Machine), Mile End (Pulp). And I can’t leave Neukölln (David Bowie) off the list. I notice that the latest issue of Monocle surveys the best villages to live in. Perhaps some future band will write songs about villages like Brockford cum Wetheringsett.
What would I have done in retrospect?
To be honest I never felt the need to buy more clothes or live in a more expensive flat. I was saving money, but actually I enjoyed living in a six bedroom house in Bow, with a medical student, an Occupational Therapist, someone who worked in publishing, a school teacher from Australia, a fitness trainer from New Zealand and fashion student. The diversity of opinion and backgrounds did me a lot of good. It stopped me mixing with people who thought that money was the be-all and end-all.
We had some great parties
And we had some great parties. I wouldn’t have changed that.
But I would have saved less money in the bank. So I suppose I would have invested my money – but in things that I enjoy. I get significant intellectual pleasure understanding companies, and seeing the world through the eyes of how commerce works. History is taught about battles and kings, religious wars and the like. But most ordinary people were just trying to get by, make money without being skewered by some psychopath with a sword. Similarly I don’t find modern politics particularly interesting, because I don’t think modern politicians have much power. Instead much of the power lies with large corporations.
So I find looking at businesses a genuinely interesting way to understand the world. With that in mind, I would have spent more time understanding individual companies, and thinking about why I might, or might not buy their equity. I’d look for the stockmarket equivalent of a house in Neukölln or Vauxhall, a company in an unfashionable area to put my money, which in a decades time will be all the “gentrified”. And that’s what I would advise my younger self to do.
What is more – when it comes to new companies, you may have had an edge if you are in your twenties. Great investors like Buffett (who is almost 90 years old) are unlikely to understand disruptive technology as well you are. My fashion student house mate and I talked about whether people would buy clothes online. For a long time I was dismissive of this trend, because of the collapse of boo.com, the online fashion site which failed in 2000 – I had this belief that people might buy books online, but they wouldn’t buy clothes without trying them on. I thought that because Boo.com, the online fashion site, failed that proved my argument. Actually Boo.com failed because it was badly managed and wasted money. ASOS succeeded because it was well managed and in the right place at the right time. If anything ASOS might have been helped by Boo.com’s failure, because no one else thought that online fashion was a viable business, so there was little competition when they were starting out.
Of course buying shares is more risky than saving your money in the bank. ASOS listed its shares on the stock market just after 11 September 2001. They promptly fell from 24p a share to 8.5p a share. But it is also more rewarding, ASOS shares are currently worth £36. And they actually peaked in March 2014 at over £70. Instead of worrying about how I was going to afford a house, if I’d invested £5000 in ASOS at the IPO, and still held the shares, they’d be worth three quarters of the million pounds. In the extremely unlikely event I’d bought at the bottom and sold at the top I’d have made £4.4million from my original £5000.
Now – most shares will not do this. The average share may even lose money. But like Hollywood films, the average return is misleading. The distribution of returns is heavily skewed. Because the “blockbusters” like Star Wars and Titanic are orders of magnitude better than the average. And who is best placed to see what is likely to be a blockbuster? Probably not a fund manager sitting behind a desk reconciling the cashflow statement to the profit and loss. More likely someone who is seeing what their housemates are actually doing.
So I should have listened to my fashion student housemate. I would worry less about trying to save to afford a house in London. Instead, I would encourage my younger self to take his money out of the bank, and be braver, to save less and to invest more.