This past week, Investment Director Meagan Evans and I have been writing to you about an exciting new project, the Albert Park Investors Guild. Your regular Weekend Daily Reckoning editor, Callum Newman, is still jaunting around Spain with his girlfriend. So I’ll use this opportunity to summarise the week’s developments.
But first I’d like to reflect on Malaysian Airlines Flight MH17. The commercial airline was shot down over Ukraine yesterday, killing all 298 aboard. The passengers included 27 Australians and 154 Dutch. I single them out, not because the Malaysian, British and Indonesian passengers are any less deserving of our compassion. But because I hold a Dutch passport, and have spent the last five years in Australia.
The Ukrainian government blames the rebels. The rebels blame the Ukrainian air force. Hopefully, the true culprits will be identified and flayed alive. But whoever is to blame, this tragic incident highlights the volatile world we live in.
Will the mounting conflict in Ukraine or China’s simmering territorial disputes lead to all out war? I hope not. But if war does erupt, are your investments prepared for the outcome? I know this may sound like a shallow or even amoral question in the context of the devastation and loss of life a major regional war would bring. But there is nothing amoral about protecting your wealth. All wars eventually come to an end. And when they do, you still need money to live, and to retire.
My mate and your regular DR editor, Dan Denning, has prepared a special report on precisely this scenario. In it, he details why Australia is losing control of its future. And he provides a three part investment strategy you can use to protect — or even grow — your hard earned savings in the event Australia is drawn into a major conflict.
Now, as it’s Saturday, let’s shake off the ugly spectre of war with China and look at what they’ve been up to in the bond markets. According to the Wall Street Journal, ‘The Chinese government has increased its buying of U.S. Treasuries this year at the fastest pace since records began more than three decades ago… The yield on the 10-year U.S. Treasury note has fallen to 2.54%, from 3% at the end of 2013. Yields fall as prices rise.’
China now holds about $1.27 trillion in U.S. debt. The purchases have helped keep US interest rates low. This in turn is causing investors to seek higher returns around the globe, ramping up asset prices. Are they overstretched? Undoubtedly many are. But the right companies, in the right locations still offer good opportunities.
That takes me back to the Albert Park Investors Guild, and what Meagan and I have been writing about this past week.
After taking up my position as Managing Editor in October last year, it didn’t take me long to realise that I have access to one of the most intriguing and powerful networks of practical investment insight available anywhere on the planet. Port Phillip Publishing operates independently in Australia, but it’s a subsidiary of Agora Inc. And with that tie-in the knowledge passing across my desk every day literally criss-crosses the globe. It’s a unique network of more than 130 independently thinking investment experts.
The Albert Park Investors Guild represents the first time we’ve truly opened up our network for Aussie investors who want practical, alternative ideas to grow and preserve their wealth. Investors who may not have the time, experience, or money that would make one of our other publications a sensible investment.
As a Member of the Guild, you’re joining my personal network, built on a lifetime of world travel and work in business communities on three continents. You’re joining the networks of all the editors here at Port Philip Publishing. That’s several hundred years of combined experience in making and preserving money in financial markets. And you’re joining the Agora — what the ancient Greeks called the marketplace.
And the Guild is a private marketplace — of ideas. Once inside, you’re free to browse around the world of practical investment ideas until you find one that’s right for you.
Ultimately, we want to enable you to find true independence, freedom and prosperity. It’s more than just making better investment decisions. It’s about having an enjoyable and fulfilling life — and having the freedom to live how you want.
The finance industry will argue that you need to know what lies ahead before making any investment moves. They’ll tell you they have all the answers…for a ‘small’ fee. And if you pay them, they can tell you whether home values will go up or down. If interest rates will rise or fall. And how about the Australian dollar? You’ll need to know whether that’s over or undervalued before you even think about investing.
But who do you believe? Which analyst is consistently able to predict the future? None of them.
Earlier this week, we explained that you don’t have to believe any of them. And you don’t have to know what the future holds. In fact, accepting the unknown will make you a better investor.
In fact, forming a big picture view can make you a worse investor. Why? Because betting on a certain outcome leaves you open to the possibility of being wrong. And with every passing year, your odds of making the wrong bet only go up.
So what’s the secret? The first step is to only buy the best businesses out there. Those with proven track records. Businesses that won’t be wiped out if the tide turns against them.
Investing shouldn’t be exciting. If you want exciting, head to the casino. Or book an afternoon of skydiving. When you get that out of your system, you’ll be ready to get back to the more mundane task of sorting out your investments.
What you really want is a portfolio that isn’t going to keep you up at night. Invest well in the day, and you’ll rest well at night. You want to own a portfolio that is going to do well, regardless of what the market is doing.
If regular, dependable profits and funding a comfortable retirement is boring, then bring on boring!
We profiled the Guild’s portfolios for you on Tuesday. Importantly, we explained why we chose these three separate portfolios, and why they are the only three portfolios you ever need to bother with again.
We also dove into the Golden Rule for investors. ‘Don’t keep all your eggs in one basket’. It’s a stale analogy but an invaluable lesson. You shouldn’t keep all your eggs in two or three baskets, either. That way if any one basket fails, you’ll still have plenty of eggs for breakfast, and plenty more to hatch into new chickens, to make more eggs.
It’s all about having a portfolio that meets your retirement or income goals without taking on too much risk. The truth is, no matter the depth and quality of your research, the world is an uncertain place. To limit the unknowable, you spread your investments across different types of investments, or asset classes. In financial jargon, you’ll hear this strategy called asset allocation. Your investments are then further spread — or diversified — among those assets.
This blend of asset allocation and diversification is the single most important factor in whether you make or lose money as an investor.
This most basic lesson is lost on many fund managers and within the Self Managed Super Fund (SMSF) sector. If you look at the average SMSF, you’ll see that just ten stocks make up half of all Australian share investments.
- Commonwealth Bank
- Westpac Banking Group
- BHP Billiton
- Fortescue Metals
- ANZ Ltd
- Telstra Corp
- National Australian Bank
- Woodside Petroleum
This is not only lazy investing, it’s extremely risky. Just because these are popular stocks and even good companies, it doesn’t mean they form a well balanced portfolio when held together. How many banks do you count in this list? And what do you think will happen if the finance sector takes a hit?
This week we also shared our eight point guide for picking great stocks:
- It must be a cash rich business.
- A great business will survive and prosper through any threats and challenges.
- Before investing any of your money, always look for a quality management team.
- Make sure the business you’re investing in has low or declining debt.
- It should be an industry dominator with competitive advantages.
- And a good business at the right price.
- As well as a growing business.
- If the business has passed all these tests, make sure it is also profitable.
On Thursday we showed you a guaranteed way to lose 33% of your investment. How? By investing your money with mainstream fund managers.
That might sound a bit harsh or broad stroke, but in May 2013, six of Australia’s largest equity research houses tipped Newcrest Mining as a Buy. It’s Australia’s largest gold stock. Not one research house tipped it as a Sell.
So was Newcrest one of the best performing stocks on the market, as these experts predicted? Hardly. In fact Newcrest’s share price fell 33%!
That’s right. One of the most highly recommended picks by Australia’s leading research firms lost a third of its value. If you’d invested $10,000, you’d be down to $6,700 today. Just to get back to break even, you’d need Newcrest to double in price.
You might think it’s unfair to pull one bad stock from the pile. Everyone gets it wrong once in a while. But it’s not a mistake that happens only now and then. It happens again and again and again.
Consider the previous year — May 2012 to May 2013 — the results were even more shocking. The Buy recommendations of the prominent research houses would have lost you 10.1% of your investment. But their Sells would have gained 14.8%!
Once is unlucky. Twice is a pattern. But why does the mainstream investment industry get it so wrong so often?
You’ll never hear this from them, but making you money is not the main job of big research firms. In fact, the performance of their tips doesn’t really matter. What matters to the big firms is that they don’t do a lot worse than each other. They’re more concerned about relative performance with each other than your absolute investment returns. More than anything, they don’t want to risk being embarrassed. They don’t want to be viewed as risky or reckless. So they play it safe and recommend the same ideas as everyone else.
Most investors don’t see it that way, of course. They feel secure in the belief that not all of these brokers could be wrong so often. You’re seeing the herd mentality in action. Mainstream thinking and mainstream returns.
We also introduced you to our Australian board last week. And we highlighted two of our international board members who are recognised for their exceptional, low risk investment performance.
Alex Green serves as the Guild’s Asset Allocation expert. And Byron King is our Military Tech and Energy expert.
Both Alex and Byron are listed in the Hulbert Financial Digest honour roll.
From the Wall Street Journal:
‘For the past dozen years, the Hulbert Financial Digest has constructed an annual honor roll of those services that performed better than the average advisor in both the up and down phases of the three previous market cycles. Currently, only 12 have done so. The remainder does well only when the market is going their way. Those who focus on risky small cap growth stocks, for example, are near the top of the performance rankings when the market is rising and near the bottom when the market is falling. The goal isn’t to identify advisors who make the most money at all costs, but rather the ones whom risk-averse investors can live with through thick and thin. Still, it is worth noting that, over the past 15 years, the advisors making it onto each year’s honor roll on average over the subsequent 12 months went on to make 1.2 percentage points more a year than those who didn’t, while nevertheless incurring 25% less risk, as measured by volatility of returns. That is a winning combination.’
-The goal of the Hulbert Financial Digest’s honour roll isn’t to identify advisers who make the most money at all costs, but rather to distinguish the ones that risk-averse investors can live with in good times and in bad.
Alex Green comes in at number nine on the honour roll. His investment advice for The Oxford Club has netted an annualised gain of 8.4% since the March 2000 market highs. That’s a massive improvement over the roughly 3% annualised return the index offered over that same period.
Byron King does even better. His advice for Outstanding Investments has yielded an annualised gain of 11% since the market peaked in March 2000.
Imagine if you’d invested $10,000 in March 2000 and matched the index returns of 3%. Compounding your gains monthly, you’d have $15,212 in March 2014.
On the other hand, if you had invested using Byron King’s advice, you would have $46,320. That’s a difference of $31,108!
So what’s the secret to our Board Members’ success? Alex’s reply was simple. He invests in, ‘companies that do all the right things — increase sales, compound earnings at high rates, grow market share, improve operating margins, pay down debt and buy back shares, and post superb returns, regardless of what the economy or stock market is doing.’
Thanks Alex. Excellent advice.
In Friday’s DR, we had a look at superannuation. We asked whether you should put any extra savings into your super, or salary sacrifice as it’s often called. Tuesday’s release of the Financial System Inquiry Interim Report — or Murray inquiry — offered some relevant insight into why, in fact, you should not.
One of the recommendations made by the report is to mandate the use of ‘retirement income products’ like annuities. Annuities, by the way, pay out a stream of payments over time. If you think of your super as water in a bathtub, an annuity would be like allowing a fixed amount to trickle through into your cup each month.
Currently, you already have that choice. And it’s not a bad option if that suits your needs. But currently you also have the choice of dumping out the entire bathtub the day you reach the magic — and ever-changing — age when you’re allowed to access your super funds. It is your money, right? You worked your entire life for that payout. Whether you choose an annuity or a lump sum payment is no one’s business but your own.
Oh, and the government’s. They, of course, will be deciding how much water can trickle from your tub of savings into your cup each month.
The Murray inquiry findings, which directly relate to investors and retirees, in a nutshell:
- It found that as Australians retire they receive little advice on how they should manage their money and what investments are most suitable. The inquiry will consider rules to shift retirees into a default ‘investments’ option, encourage them to buy retirement income products, or even mandate that retirees own income products like annuities.
- The inquiry recognises the need for non-conflicted and affordable financial advice. To improve clarity, they recommend that if agents receive compensation for recommending an investment product, this activity should be referred to as ‘sales’ or ‘product information’ rather than advice.
- It recognises that the minimum standard of training and education of financial advisors needs to be raised and a public register of advisors be created.
- Details of investment products need to be better communicated with investors. The current lengthy documents are confusing and fail to help consumers understand financial products and services.
- Fees changed to manage superannuation are high due to limited competition. They see scope to reduce fees and improve after-fee returns. Introducing additional low fee options, like MySuper, plus a ban on borrowing to invest in super, were noted.
Fees paid to manage your superannuation are not just high; they are double the amount paid in other Western countries. And it’s costing Aussies $20 billion dollars each year, or an average of $1100 on each account. Reducing fees by just 0.38% will add 7%, or $40,000, to the average member’s superannuation account at retirement. This 0.38% cut would save members a total of $7 billion each year.
Don’t leave it to the industry to act in your best interests. Manage your own super. It’s not as hard as you may imagine, using diversified ETFs and managed funds, or following the recommendations of the Guild. If you have a ‘professionally’ managed super fund, don’t make extra contributions to it, especially if you are a long way from retirement. Avoid high cost investment products, uneducated advisors, or those with compensation misaligned with your interests.
This should give you a fair idea of what we’ve been writing about all week. If you want the full scoop, click here to visit the DR archives.
We’ll be back on Monday with one more full week from the Guild. We’ll share our best investment ideas and tell you why you should invest some of your money outside Australia. And we’ll show you the best way to do so. And Dan Denning will introduce you to the Guild’s international board.
Before heading off for your weekend activities, have a look at the video below. We shot it a few weeks ago to celebrate the 10 year anniversary of the Australian Markets and Money. It features your four regular editors, Dan Denning, Greg Canavan, Nick Hubble, and Vern Gowdie. And you’ll also get to hear from Meagan Evans and myself. The entire video is well worth your time. But if you just want to hear more about the Guild’s investment philosophies without watching the entire video, Meagan comes on at 23:15 minutes. And I’m on after Nick Hubble, at 30:55 minutes.
Click here to watch the video, or on the image below.
If you have any questions or suggestions, send them to firstname.lastname@example.org with the subject line ‘Albert Park Investors Guild’.
Have a great weekend.
Chairman, Albert Park Investors Guild