Do The Opposite

I sold my share portfolio last week. It’s just too risky – you know, Trump, China, interest rates, there’s just too much risk in the market at the moment. The whole lot I replied? Yep, the whole lot. I’ll get back in when it’s less risky.

This was the latest portfolio positioning for a (I think mid 40’s) gentlemen I met over the weekend through a mutual friend. What do you think he asks, you’re in finance, right?

I get this question all the time. As soon as people find out what I do – Where should I investment my money? Is the market going to crash? What do you think of the property market? I love discussing markets, so I’m happy to roll with the conversation. Financial history fascinates me, so too does the ongoing propensity of poor decision making by individuals.

People always want something to talk about. Whether it’s crypto-currency or trade-war, choose the rabbit hole you want to go down – you’re not short of them. As advisers, and in fact as investors, we need to be able to separate the conversation that is going on at kid’s birthday parties and bbqs, with what people are actually doing with their money.

The noise

People have been investing money for centuries. They’ve been doing so through good news and bad. This is one of my favourite charts. It plots the US stock market’s tumultuous history from 1896 to 2016 and highlights major events during this time – from the sinking of the Titanic to Brexit and everything in between. Notwithstanding the 121 major events, the chart proves once again that over the long-term, the stock market has risen as the drive for innovation and productivity trumps fear (click for larger image).

Source: Chris Kacher – MoKa Investors

It’s not the poor decision making by individuals that puzzles me, it’s seeing the evidence and proof that what you’re doing just doesn’t work, yet still doing it anyway is what puzzles me. It’s insanity as Albert Einstein once succinctly defined:

“The definition of insanity is doing the same thing over and over again, but expecting different results”

The average investor

There’s never one portfolio solution that will meet every investor’s objective. Whether you’re in your 70’s, seeking a regular and stable income, or whether you’re 45 trying to grow your asset base for your future, the two portfolio’s are going to look very different. The one thing that these two investors have in common however, is that (typically) they look for activity and complexity.

Staying the course, staying diversified, keeping your costs low is far too boring for these folk. And because it’s boring, they seek complexity and activity. Yet, the evidence suggests that because they’re doing the opposite of what they should, they lose money. And when I say they lose money, I mean they leave money on the table. They don’t generate the returns they should have generated should they have stayed the course. It’s as if you don’t even realise what you’re doing because you’re still generating some rate of return, albeit lower than what you should (but you never knew that).

Source: JP Morgan

Our industry thrives on these types of investors. And investors love hearing from the mouth piece that has a great story to tell. It’s a match made in heaven. For the most part of our industry (and I’m ashamed to say it), their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater.

In the pursuit of trying to beat the market, the average investor falls short – by a huge margin.

You have to understand one important thing, about the market and that is for every buyer, there is a seller. And every seller, there is a buyer. So when transactions take place, the only winner, net, is the man in the middle. The croupier in the gambling casino.

– Jack Bogle

The perils of market timing

He sold his share portfolio because the market was too risky, and he’ll get back in when the market is less risky. He may get the first part of this call right, but he then needs to get the second part right too – when does he get back in?

The best investors in the world can’t get this right. They can’t pick the winning stocks, they can’t pick the manager who picks the stocks to beat the market. What makes you think you can?

I recently shared this chart, and I think it’s timely to share again. Harvard University’s endowment has trailed the S&P 500 index for the last 1, 3, 5, and 10 years. This is the largest university endowment fund in the US with some of the smartest people too, you’d think the fund’s investment returns would be out of this world. Yet even the biggest and the best can’t beat the market over the short, medium, & long-term.

Source: Bloomberg

It’s crazy but true.

If you’ve ever attempted to time the market, you don’t need me to tell you how difficult, stressful, and time consuming it is. To efficiently time the market, you need to be right twice – selling at the top, and getting back in at the bottom. Rarely anyone can predict either – it’s almost impossible as skill, more possible with luck. You may not have “lost” money, but allow me to show you what you left on the table.

Historical data clearly shows that staying invested and following a consistent strategy produces larger returns over time than letting current events or market valuations drive your investment approach.

Here’s the performance of $10,000 invested between 1 January 1997, and 30 December 2016. The chart shows the return of an investor who stayed the course (7.68% pa), the investor who missed the 10 best days in the market (4% pa), 20 best days (1.57% pa), and so on, you get the picture. Missing the 10, 20, 30 best days over a 20 year period makes all the difference in the end – the margin for error is so small!

Source: JP Morgan

In summary

I know how difficult it can be. It’ tempting – the excitement, the thrill, the belief that you’re smarter or different to the millions of other investors trading on the same day. Yet the evidence is clear. Unless, your Warren Buffett or Jim Simons, don’t risk your family’s future by gambling away your wealth.

Next time your find yourself itching to do what you normally do, pause for a moment and maybe do what George Costanza once did – do the opposite.

Australia’s Property Market is a Speculative Bubble

Last week I attended an investment management conference in Melbourne. The day was lined up with asset managers providing the attendees with their point of view on markets – including the stock market, bond market, and of course, the property market. Most, if not all of the firms presenting were either equity or bond managers. I don’t believe there was a property manager presenting on the day. Yet, most managers spent a bit of time discussing the property market, and the gloomy outlook for this sector. The large debts, the level of construction, foreign buyers, I could go on.

That evening I also attended a property development forum, presented by two specialist groups, who talked about the current situation in the property market, providing a different point of view from the asset managers earlier on in the day. I guess this is what makes the market, right? One persons view compared to another.

Here’s where I think the property market is at.

We’ve been hearing the same call for years – the Australian property market is a speculative bubble…blah blah blah.

Sure, property prices aren’t cheap. In fact, they’re sitting a little above their long-term trend according to AMP.

All the reasons the equity and bond guys were giving at my presentation are well known. Ballooning debt levels, prices to income and rent ratios are high, and there are far too many cranes in Melbourne’s skyline (and yes, there is an index for this).

Unfortunately, in both my experience and readings, things are little more complex than this.

1. Ballooning debt

Household debt has been skyrocketing since the GFC, and after the RBA began cutting rates in 2012 (I guess you could argue debt has been skyrocketing since 1991). Yet the amount of interest paid by households is back down to levels not seen since 2004. Notwithstanding, this is a problem. How will this debt be reduced? Inflation? Wage growth?

2. It’s a bubble

When people refer to the US property bubble, I ask them which city they’re referring to. Yes, the US had a property meltdown, however not all cities we’re wiped out. New York fell 24.45%, Dallas down 7.53%, and Boston fell 16.38%. In fact, it wasn’t even the cities that had the largest growth pre-GFC that fell the most (refer LA and San Francisco). On average, prices in major cities fell around by one third of their value.

Similarly, when people talk to me about the Australian property bubble, I ask them which city/ies they’re referring to. In Australia, it’s largely been a story of Sydney and Melbourne.

Source: CoreLogic

This hasn’t always been the case (see chart below). Perth property prices we’re going bananas during the mining boom, yet they’ve been lagging ever since. Most cities circle around the national average, some over-performing, and some under-performing. Lack of affordability eventually encourages investment into other cities, as we’ve seen recently into Queensland and Tasmania.

3. We’re building too many dwellings stupid

It’s everyone’s greatest fear (or possibly greatest desire – a claim to fame perhaps?). The miraculous oversupply of property, more specifically in apartments. It’s expected that Victoria will be home to about 8 million people by 2050. And these people will want somewhere to live, surely. Based on these numbers, it may come as a surprise to most people, but we’re just now starting to build enough property to help support our growing population. Sure, we’re going to see periods of oversupply and periods of under-supply, which in turn will result in periods of price growth and periods of price declines. This is not unusual, the free market has been valuing assets this way for centuries.

Over the last 7 years, Victoria’s population has been growing well above the national average.

This is supporting vacancy rates remaining low. In Melbourne and Sydney, we’re seeing below average vacancy rates:

You think it’s bad now? Over the next 20 years, population growth is expected to surge. Here’s where they’ll grow the fastest:

These people are going to want somewhere to live. Here is where we’re going to see the largest growth in dwellings:

If you think there is a lot of development activity in the City of Melbourne, you haven’t seen anything yet. The city you and I know today, will not be around in the next 10-20 years. Here’s a great interactive site the City of Melbourne have up, and you can see what is constructed, what has commenced, and what has been applied for.

4. The banks are a proxy for the residential property market

Then why are you investing in the stock mister equity guy?

At the end of the day, it’s going to take one of two factors to bust (temporarily) this housing market – a rapid rise in rates, or a rise in unemployment. The consensus goes something like this…rates are rising, which will lead to higher unemployment, which will lead to loan defaults, which will lead to property price declines, which will lead to a banking collapse. Sounds reasonable. Luckily for us, this actually happened, so we can see what impact is actually had. Western Australia – mining boom collapse. Trade fell 25%, unemployment up to 6.50%, property prices fell 12%. Do you know what impact this had on Westpac’s lending losses – they doubled…from 0.02% to 0.04%.  If this scenario we’re replicated across the nation, bank profits would be cut by 0.60% (farrelly’s). Not really the Armageddon scenario that’s being painted.

5. Tighter lending standards will stop the price rises

It’s no secret, lending is tightening. This has created an opportunity for private/non-bank lenders to enter the market. The banks shouldn’t be expected to cater for every transaction that occurs. I was recently told by someone that Westpac (if WBC can do it, I’m sure most of not all lenders can) are now able to tell how much exposure they have to a single building even each purchaser took out their loan from a different Westpac branch/office. This enables the bank to limit their lending to one particular building/construction.

My expectation is that we’ll see in Australia what we’ve been seeing in the UK and US. That is, non-bank lenders growing as a proportion of all lending.

Currently you could lend senior money out and receive 10-12% pa. I do wonder though, what impact this will have on bank profits.

In summary:

We have an under-supply problem. Our population is growing at a rapid pace. We’re seeing them from all around the world, and they want somewhere to live. Here is the state of Victoria’s population and household projections to 2051. This report is used by decision makers in government to plan for our future. I suggest it’s something worth reviewing if you’re looking to invest in property. You should also check out the government’s online planning maps. Again, this may be useful if you’re looking to invest in property for the long-term.

Sure, the market isn’t cheap – this isn’t something new. The property market grows at above average rates, and is then followed by growth at below average rates. When rates eventually rise, my expectation is that we’ll see a decline in prices. Those that have over leveraged themselves will be forced to put the for sale sign out the front. The fact that most people have, and will continue to want to buy, live, and invest in property, will naturally create a safety net. Property prices can float sideways for long periods of time. They don’t always need to boom or bust, the outcome is not always binary.

As long as the music keeps playing (demand), we’ll all keep dancing. Australia does not have a property bubble.

The Unfair Advantage

What do you think will give you a larger portfolio value at 65: saving $12,000 pa for 10 years or $12,000 pa for 20 years?

Believe it or not, saving for 10 years is the answer – only if those 10 years are at the the early stages of your working life. An investor saving from the age of 35 for only 10 years (to 45) will end up with a larger portfolio balance at 65 when compared to an investor saving from the age of 45 until 65.

How is this even possible? Enter compound interest – earning interest on your principle balance then earning interest on interest, creates a snow ball effect until you’ve got a runaway train working in your favour. In fact, in those 10 extra years, the portfolio’s interest on interest is so great that it feeds on itself to a point where even two decades of regular contributions are unable to yield superior results.

Let’s take a look at an example I put together:

James saves $12,000 pa from age 35 to 45. At age 45, James stops contributing to his portfolio and simply let’s his portfolio grow organically until he reaches age 65. Jenny on the other hand, saves $12,000 pa from age 45 to 65. Both James and Jenny’s portfolios grow at an annualised rate of 7%.

Here are the results:

As you can see from the above chart, James’ portfolio is worth $732,902.59, and Jenny’s portfolio is worth $538,382.12. Even though James only saved for 10 years, his portfolio is worth over 36% more than Jenny’s.

Someone is sitting in the shade today because someone planted a tree a long time ago.

– Warren Buffett

The common feedback I hear when speaking to clients and investors, is that they wish they started saving earlier. Yet investors are forever playing catch up because they failed to plan ahead. To highlight how powerful compound interest is, and the impact it can have on your future life, I ran some more numbers:

Jenny saves $12,000 pa from age 35, and she does so until she reaches age 65. Her portfolio returns a conservative 7% pa. James on the other hand, decides to start saving at age 55, however, he doubles Jenny’s savings rate and saves $24,000 pa. He also decides to invest in riskier assets, and his portfolio generates double the return of Jenny’s, at 14% pa.

Here’s the chart:

Even though James doubles his saving and returns, his portfolio is dwarfed by that of Jenny’s. In fact, Jenny’s portfolio is worth over 120% more than James’.

They say there’s never a perfect time to have kids, I guess the same applies to saving for your future. The snowball effect that compound interest has, in my opinion, is completely underestimated my most people. The longer you go without putting in place a game plan, the more money you’re going to have to forego, and risk you’re going to have to take on just to play catch up. And if things go wrong at precisely the wrong time, just as they did for many retirees during the GFC, it’s going to blow your balance sheet to smithereens.

The point is, there is no amount too small to start investing so that you have a huge advantage in the years to come. Take the unfair advantage and get rich slow.


Investing Like The Greatest. Lessons Learned.

I’m going to ask you one question, and it’s quite simple. Are you betting with or against Warren Buffett?

It was in the year 2005 – Warren Buffett argued that active investment managers, in aggregate, and over a period of years, would underperform the returns achieved by rank amateurs who simply sat still.

His theory is this: The value of the stock-market is owned by the aggregate of it’s investors (the market). Investors simply holding their investments will receive the market return. Got it so far? Okay great. Now, enter active investment managers. The aim, to outsmart other investors – for a fee of course. The aggregate of investors still own the value of the stock market, less fees and expenses paid. It’s arithmetic – active investors must, in aggregate lose to passive investors. Nobel Prize winner, Eugene Fama describes this well in his 2009 essay. The killer is the massive fees levied by a variety of “helpers” (as described by Buffett), leaving their clients worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

In 2007, Buffett made a bet. He publicly offered to wager $500,000 that no investment pro could select a portfolio of hedge funds that would match the performance of an unmanaged S&P-500 index fund charging only token fees. He suggested a ten-year bet and named a low-cost Vanguard S&P fund as his contender. He then sat back and waited for what he describes as, “a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation.”

What followed was not the parade of fund managers that Buffett had expected, but the sound of silence. Eventually, one man, a gentleman by the name of Ted Seides of Protégé Partners, stepped up to the challenge. Protégé assembled an elite crew, loaded with brains, adrenaline and confidence.

Here’s the final score for the bet – and it was humiliating.

Source: Birkshire Hathaway

I don’t think the bet was made to shame hedge funds, or attack active investment management, rather, highlight two very important, yet simple investment lessons.

1) Costs matter – Buffett ends his footnote by saying, “Performance comes, performance goes. Fees never falter.” The more you pay in the world of investing and money management, the less you get. Most investors get this concept. It’s those that are working in the world of finance that are yet to work it out, or simply don’t want to recognise it. Upon Sinclair once wrote, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

2) Control your emotions – Markets go up, markets go down, and how you respond to the market’s heart-stopping rises and falls has a huge impact on your end return. Seizing opportunities when they present does not require a Harvard degree, rather, the ability to ignore the plethora of noise, speculation, and enthusiasm and focus on what really matters. Buffett refers to this as, “A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”

As the ‘Buffett Bet’ results were released, so too were the latest performance results for Harvard University endowment. The results are no different to the results of the Buffett Bet.

The Harvard University endowment is not only the largest university endowment fund in the US, it has some of the smartest people too. You’d think the fund’s investment returns would be out of this world. Yet even the biggest and the best can’t beat the market over the short, medium, & long-term.


Long a go, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Warren Buffett.

Buffett made a bet and he won. Which side of the bet are you on?